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Registration No. 2-94157/811-4146
As filed with the Securities and Exchange Commission
on October 4, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 34
--
and
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 35
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NASL SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of Principal Executive Offices)
----------------------------
James D. Gallagher, Esq.
General Counsel
North American Security Life Insurance Company
116 Huntington Avenue
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Copies to:
J. Sumner Jones, Esq.
Jones & Blouch L.L.P.
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007
The Registrant has registered an indefinite amount of its shares under
the Securities Act of 1933 pursuant to a declaration made in accordance with
paragraph (a)(1) of Rule 24f-2 under the Investment Company Act of 1940. The
notice required by such rule for the Registrant's most recent fiscal year was
filed on February 28, 1996.
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
----
on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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X on December 31, 1996 pursuant to paragraph (a)(2) of Rule 485
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NASL SERIES TRUST
CROSS REFERENCE TO ITEMS
REQUIRED BY RULE 404(a)
N-1A Item of Part A Caption in Prospectus
1. Cover Page
2. Synopsis
3. Financial Highlights; Management of the Trust
(Performance Data)
4. Synopsis; Investment Objectives, Policies and Risks
(Pacific Rim Emerging Markets Trust; Science &
Technology Trust; International Small Cap Trust;
Emerging Growth Trust; Pilgrim Baxter Growth Trust;
Small/Mid Cap Trust; International Stock Trust;
Worldwide Growth Trust; Global Equity Trust; Growth
Trust; Equity Trust; Common Stock Trust; Equity Index
Trust; Blue Chip Growth Trust; Value Trust;
International Growth and Income Trust; Growth and
Income Trust; Equity-Income Trust; Real Estate
Securities Trust, Balanced Trust; High Yield Trust;
Automatic Asset Allocation Trusts, Strategic Bond
Trust; Global Government Bond Trust; Investment Quality
Bond Trust; Capital Growth Bond Trust; U.S. Government
Securities Trust; Money Market Trust, The Lifestyle
Trusts); Risk Factors (Investment Restrictions
Generally; Foreign Securities; Lending Securities;
When-Issued Securities; Hedging Techniques); Appendix I
- Debt Security Ratings; Appendix II -Options, Futures
and Currency Transactions, Appendix III - Standard &
Poor's Disclaimers
5. Management of the Trust (Advisory Agreement;
Subadvisory Agreements; Expenses);
General Information (Custodian)
6. General Information (Shares of the Trust; Taxes;
Dividends)
7. General Information (Purchase and Redemption of Shares)
8. General Information (Purchase and Redemption of Shares)
9. Not Applicable
N-1A Item of Part B Caption in Part B
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Policies (Money Market Instruments);
Investment Restrictions; Portfolio Turnover
14. Management of the Trust (Compensation of Trustees)
<PAGE> 3
15. Organization of the Trust (Principal Holders of
Securities)
16. Investment Management Arrangements (The Advisory
Agreement; The Subadvisory Agreements)
17. Investment Management Arrangements (Portfolio Brokerage)
18. Organization of the Trust (Shares of the Trust)
19. Purchase and Redemption of Shares (Determination of Net
Asset Value)
20. Not Applicable
21. Not Applicable
22. Purchase and Redemption of Shares (Performance Data)
23. Financial Statements
<PAGE> 4
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 5
NASL SERIES TRUST
116 Huntington Avenue Boston, Massachusetts 02116
NASL Series Trust (the "Trust") is a no-load, open-end management
investment company, commonly known as a mutual fund. Shares of the Trust are
not offered directly to the public but are sold only to insurance companies and
their separate accounts as the underlying investment medium for variable
contracts ("contracts"). The Trust provides a range of investment objectives
through thirty-five separate investment portfolios, each of which issues its
own series of shares of beneficial interest. The names of those portfolios are
as follows:
PACIFIC RIM EMERGING MARKETS TRUST REAL ESTATE SECURITIES TRUST
SCIENCE & TECHNOLOGY TRUST BALANCED TRUST
INTERNATIONAL SMALL CAP TRUST AGGRESSIVE ASSET ALLOCATION
EMERGING GROWTH TRUST TRUST
PILGRIM BAXTER GROWTH TRUST HIGH YIELD TRUST
SMALL/MID CAP TRUST MODERATE ASSET ALLOCATION TRUST
INTERNATIONAL STOCK TRUST CONSERVATIVE ASSET ALLOCATION
WORLDWIDE GROWTH TRUST TRUST
GLOBAL EQUITY TRUST STRATEGIC BOND TRUST
GROWTH TRUST GLOBAL GOVERNMENT BOND TRUST
EQUITY TRUST CAPITAL GROWTH BOND TRUST
COMMON STOCK TRUST INVESTMENT QUALITY BOND TRUST
EQUITY INDEX TRUST U.S. GOVERNMENT SECURITIES TRUST
BLUE CHIP GROWTH TRUST MONEY MARKET TRUST
VALUE TRUST CONSERVATIVE LIFESTYLE TRUST
INTERNATIONAL GROWTH AND INCOME MODERATE LIFESTYLE TRUST
TRUST BALANCED LIFESTYLE TRUST
GROWTH AND INCOME TRUST GROWTH LIFESTYLE TRUST
EQUITY-INCOME TRUST AGGRESSIVE LIFESTYLE TRUST
The investment objectives and certain policies of each Trust are set
forth on the inside front cover. In pursuing their investment objectives, the
Strategic Bond and High Yield Trusts reserve the right to invest without
limitation, and the Investment Quality Bond and Equity-Income Trusts may invest
up to 20% and 10%, respectively, of their assets, in high yield (high risk)
securities, commonly known as "junk bonds" which also present a high degree of
risk. High-yielding, lower-quality securities involve comparatively greater
risks, including price volatility and risk of default in the timely payment of
interest and principal, than higher-quality securities. Although the Strategic
Bond Trust's Subadviser has the ability to invest up to 100% of the portfolio's
assets in lower-rated securities, the portfolio's Subadviser does not
anticipate investing in excess of 75% of the portfolio's assets in such
securities. Purchasers should carefully assess the risks associated with an
investment in the above-named Trusts. See "RISK FACTORS -- High Yield (High
Risk) Securities." AN INVESTMENT IN THE MONEY MARKET TRUST IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE
MONEY MARKET TRUST WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $10.00
PER SHARE.
This Prospectus sets forth concisely the information about the Trust
that a prospective purchaser of a contract should know before purchasing such a
contract. PLEASE READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
Additional information about the Trust has been filed with the Securities and
Exchange Commission and is available upon request and without charge by writing
the Trust at the above address or calling (617) 266-6008 and requesting the
"Statement of Additional Information for NASL Series Trust" dated the date of
this Prospectus (hereinafter "Statement of Additional Information"). The
Statement of Additional Information is incorporated by reference into this
Prospectus. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding registrants
that file electronically with the Commission. SHARES OF THE TRUST ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND THE
SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is December 31, 1996.
<PAGE> 6
The investment objectives and certain policies of each Trust are as
follows:
PACIFIC RIM EMERGING MARKETS TRUST -- The investment objective of the Pacific
Rim Emerging Markets Trust is to achieve long-term growth of capital. MAC
manages the Pacific Rim Emerging Markets Trust and seeks to achieve this
investment objective by investing in a diversified portfolio that is comprised
primarily of common stocks and equity-related securities of corporations
domiciled in countries in the Pacific Rim region.
SCIENCE & TECHNOLOGY TRUST -- The investment objective of the Science &
Technology Trust is long-term growth of capital. Current income is incidental
to the portfolio's objective. T. Rowe Price manages the Science & Technology
Trust
INTERNATIONAL SMALL CAP TRUST -- The investment objective of the International
Small Cap Trust is to seek long term capital appreciation. Founders manages
the International Small Cap Trust and will pursue this objective by investing
primarily in securities issued by foreign companies which have total market
capitalizations or annual revenues of $1 billion or less. These securities may
represent companies in both established and emerging economies throughout the
world.
EMERGING GROWTH TRUST -- The investment objective of the Emerging Growth Trust
is maximum capital appreciation. Warburg manages the Emerging Growth Trust and
will pursue this objective by investing primarily in a portfolio of equity
securities of domestic companies. The Emerging Growth Trust ordinarily will
invest at least 65% of its total assets in common stocks or warrants of
emerging growth companies that represent attractive opportunities for maximum
capital appreciation.
PILGRIM BAXTER GROWTH TRUST -- The investment objective of the Pilgrim Baxter
Growth Trust is capital appreciation. PBHG manages the Pilgrim Baxter Growth
Trust and seeks to achieve its objective by investing in companies believed by
PBHG to have an outlook for strong earnings growth and the potential for
significant capital appreciation.
SMALL/MID CAP TRUST -- The investment objective of the Small/Mid Cap Trust is
to seek long term capital appreciation. Alger manages the Small/Mid Cap Trust
and will pursue this objective by investing at least 65% of the portfolio's
total assets (except during temporary defensive periods) in small/mid cap
equity securities.
INTERNATIONAL STOCK TRUST -- The investment objective of the International
Stock Trust is long-term growth of capital. Price-Fleming manages the
International Stock Trust and seeks to attain this objective by investing
primarily in common stocks of established, non-U.S. companies.
WORLDWIDE GROWTH TRUST -- The investment objective of the Worldwide Growth
Trust is long-term growth of capital. Founders manages the Worldwide Growth
Trust and seeks to attain this objective by normally investing at least 65% of
its total assets in equity securities of growth companies in a variety of
markets throughout the world.
GLOBAL EQUITY TRUST -- The investment objective of the Global Equity Trust is
long-term capital appreciation. Morgan Stanley manages the Global Equity Trust
and intends to pursue this objective by investing primarily in equity
securities of issuers throughout the world, including U.S. issuers..
GROWTH TRUST -- The investment objective of the Growth Trust is to seek
long-term growth of capital. Founders manages the Growth Trust and will pursue
this objective by investing, under normal market conditions, at least 65% of
its total assets in common stocks of well-established, high-quality growth
companies that Founders believes have the potential to increase earnings faster
than the rest of the market.
2
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EQUITY TRUST -- The principal investment objective of the Equity Trust is
growth of capital. Current income is a secondary consideration although growth
of income may accompany growth of capital. FMTC manages the Equity Trust and
seeks to attain the foregoing objective by investing primarily in common stocks
of United States issuers or securities convertible into or which carry the
right to buy common stocks.
COMMON STOCK TRUST -- The investment objective of the Common Stock Trust is to
achieve intermediate and long-term growth through capital appreciation and
current income by investing in common stocks and other equity securities of
well established companies with promising prospects for providing an above
average rate of return. MAC manages the Common Stock Trust.
EQUITY INDEX TRUST -- The investment objective of the Equity Index Trust is to
achieve investment results which approximate the total return of publicly
traded common stocks in the aggregate, as represented by the Standard & Poor's
500 Composite Stock Price Index. MAC manages the Equity Index Trust.
BLUE CHIP GROWTH TRUST -- The primary investment objective of the Blue Chip
Growth Trust (prior to October 1, 1996, the "Pasadena Growth Trust") is to
provide long-term growth of capital. Current income is a secondary objective,
and many of the stocks in the portfolio are expected to pay dividends. T. Rowe
Price manages the Blue Chip Growth Trust.
VALUE TRUST -- The investment objective of the Value Trust is to realize an
above-average total return over a market cycle of three to five years,
consistent with reasonable risk. MAS manages the Value Trust and seeks to
attain this objective by investing primarily in common and preferred stocks,
convertible securities, rights and warrants to purchase common stocks, ADRs and
other equity securities of companies with equity capitalizations usually
greater than $300 million.
INTERNATIONAL GROWTH AND INCOME TRUST -- The investment objective of the
International Growth and Income Trust is to seek long-term growth of capital
and income. The portfolio is designed for investors with a long-term
investment horizon who want to take advantage of investment opportunities
outside the United States.
GROWTH AND INCOME TRUST -- The investment objective of the Growth and Income
Trust is to provide long-term growth of capital and income consistent with
prudent investment risk. Wellington Management manages the Growth and Income
Trust and seeks to achieve the Trust's objective by investing primarily in a
diversified portfolio of common stocks of U.S. issuers which Wellington
Management believes are of high quality.
EQUITY-INCOME TRUST -- The investment objective of the Equity-Income Trust
(prior to December 31, 1996, the "Value Equity Trust") is to provide
substantial dividend income and also long term capital appreciation. T. Rowe
Price manages the Equity-Income Trust and seeks to attain this objective by
investing primarily in dividend-paying common stocks, particularly of
established companies with favorable prospects for both increasing dividends
and capital appreciation.
REAL ESTATE SECURITIES TRUST -- The investment objective of the Real Estate
Securities Trust is to achieve a combination of long-term capital appreciation
and satisfactory current income by investing in real estate related equity and
debt securities. MAC manages the Real Estate Securities Trust.
BALANCED TRUST -- The investment objective of the Balanced Trust is current
income and capital appreciation. Founders is the manager of the Balanced Trust
and seeks to attain this objective by investing in a balanced portfolio of
common stocks, U.S. and foreign government obligations and a variety of
corporate fixed-income securities.
3
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HIGH YIELD TRUST -- The investment objective of the High Yield Trust is to
realize an above-average total return over a market cycle of three to five
years, consistent with reasonable risk. MAS manages the High Yield Trust and
seeks to attain this objective by investing primarily in high yield debt
securities, including corporate bonds and other fixed-income securities.
AUTOMATIC ASSET ALLOCATION TRUSTS (AGGRESSIVE, MODERATE AND CONSERVATIVE) --
The investment objective of each of the Automatic Asset Allocation Trusts is to
obtain the highest potential total return consistent with a specified level of
risk tolerance -- aggressive, moderate and conservative. The amount of each
portfolio's assets invested in each category of securities is dependent upon
the judgment of FMTC as to what percentages of each portfolio's assets in each
category will contribute to the limitation of risk and the achievement of its
investment objective.
STRATEGIC BOND TRUST -- The investment objective of the Strategic Bond Trust
is to seek a high level of total return consistent with preservation of
capital. The Strategic Bond Trust seeks to achieve its objective by giving its
Subadviser, SBAM, broad discretion to deploy the Strategic Bond Trust's assets
among certain segments of the fixed-income market as SBAM believes will best
contribute to the achievement of the portfolio's objective.
GLOBAL GOVERNMENT BOND TRUST -- The investment objective of the Global
Government Bond Trust is to seek a high level of total return by placing
primary emphasis on high current income and the preservation of capital.
Oechsle International manages the Global Government Bond Trust and intends to
pursue this objective by investing primarily in a selected global portfolio of
high-quality, fixed-income securities of foreign and U.S. governmental entities
and supranational issuers.
CAPITAL GROWTH BOND TRUST -- The investment objective of the Capital Growth
Bond Trust is to achieve growth of capital by investing in medium-grade or
better debt securities, with income as a secondary consideration. MAC manages
the Capital Growth Bond Trust. The Capital Growth Bond Trust differs from most
"bond" funds in that its primary objective is capital appreciation, not income.
INVESTMENT QUALITY BOND TRUST -- The investment objective of the Investment
Quality Bond Trust is to provide a high level of current income consistent with
the maintenance of principal and liquidity. Wellington Management manages the
Investment Quality Bond Trust and seeks to achieve the Trust's objective by
investing primarily in a diversified portfolio of investment grade corporate
bonds and U.S. Government bonds with intermediate to longer term maturities.
U.S. GOVERNMENT SECURITIES TRUST -- The investment objective of the U.S.
Government Securities Trust is to obtain a high level of current income
consistent with preservation of capital and maintenance of liquidity. SBAM
manages the U.S. Government Securities Trust and seeks to attain its objective
by investing a substantial portion of its assets in debt obligations and
mortgage backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and derivative securities such as collateralized
mortgage obligations backed by such securities.
MONEY MARKET TRUST -- The investment objective of the Money Market Trust is to
obtain maximum current income consistent with preservation of principal and
liquidity. MAC manages the Money Market Trust and seeks to achieve this
objective by investing in high quality, U.S. dollar denominated money market
instruments.
CONSERVATIVE LIFESTYLE TRUST -- The investment objective of the Conservative
Lifestyle Trust is to provide a high level of current income with some
consideration also given to growth of capital. NASL Financial seeks to achieve
this objective by investing approximately 80% of the Lifestyle Trust's assets
in Underlying Portfolios which invest primarily in fixed income securities and
approximately 20% of its assets in Underlying Portfolios which invest primarily
in equity securities.
4
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MODERATE LIFESTYLE TRUST -- The investment objective of the Moderate Lifestyle
Trust is to provide a balance between a high level of current income and growth
of capital with a greater emphasis given to high income. NASL Financial seeks
to achieve this objective by investing approximately 60% of the Lifestyle
Trust's assets in Underlying Portfolios which invest primarily in fixed income
securities and approximately 40% of its assets in Underlying Portfolios which
invest primarily in equity securities.
BALANCED LIFESTYLE TRUST -- The investment objective of the Balanced Lifestyle
Trust is to provide a balance between a high level of current income and growth
of capital with a greater emphasis given to capital growth. NASL Financial
seeks to achieve this objective by investing approximately 40% of the Lifestyle
Trust's assets in Underlying Portfolios which invest primarily in fixed income
securities and approximately 60% of its assets in Underlying Portfolios which
invest primarily in equity securities.
GROWTH LIFESTYLE TRUST -- The investment objective of the Growth Lifestyle
Trust is to provide long term growth of capital with consideration also given
to current income. NASL Financial seeks to achieve this objective by investing
approximately 20% of the Lifestyle Trust's assets in Underlying Portfolios
which invest primarily in fixed income securities and approximately 80% of its
assets in Underlying Portfolios which invest primarily in equity securities.
AGGRESSIVE LIFESTYLE TRUST -- The investment objective of the Aggressive
Lifestyle Trust is to provide long term growth of capital. Current income is
not a consideration. NASL Financial seeks to achieve this objective by
investing 100% of the Lifestyle Trust's assets in Underlying Portfolios which
invest primarily in equity securities.
5
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NASL SERIES TRUST
TABLE OF CONTENTS
<TABLE>
<S> <C>
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pacific Rim Emerging Markets Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Science & Technology Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Small Cap Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emerging Growth Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pilgrim Baxter Growth Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small/Mid Cap Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Stock Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Worldwide Growth Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Equity Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Index Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Blue Chip Growth Trust (formerly, "Pasadena Growth Trust") . . . . . . . . . . . . . . . . . . . . . .
Value Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Growth and Income Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth and Income Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-Income Trust (formerly, "Value Equity Trust") . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Securities Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balanced Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High Yield Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automatic Asset Allocation Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Government Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Growth Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Quality Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US Government Securities Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money Market Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Lifestyle Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Restrictions Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Investment Restrictions on Borrowing and Foreign Investing . . . . . . . . . . . . . . . . .
High Yield Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Sovereign Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lending Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase Agreements and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage Dollar Rolls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedging and Other Strategic Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advisory Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subadvisory Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
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<TABLE>
<S> <C>
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix I - Debt Security Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix II - Strategic Bond and Investment Quality Bond Trust Debt Ratings . . . . . . . . . . . . . . . . .
Appendix III - Standard & Poor's Disclaimers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
-----------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST, THE ADVISER, THE SUBADVISERS OR
THE PRINCIPAL UNDERWRITER OF THE CONTRACTS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
7
<PAGE> 12
SYNOPSIS
NASL Series Trust (the "Trust") is a series trust, which means that it
has a number of portfolios, each with a stated investment objective which it
pursues through separate investment policies. Currently, there are thirty-five
such portfolios: the Pacific Rim Emerging Markets Trust, the Science &
Technology Trust, the International Small Cap Trust, the Emerging Growth Trust,
the Pilgrim Baxter Growth Trust, the Small/Mid Cap Trust, the International
Stock Trust, the Worldwide Growth Trust, the Global Equity Trust, the Growth
Trust, the Equity Trust, the Common Stock Trust, the Equity Index Trust, the
Blue Chip Growth Trust, the Value Trust, the International Growth and Income
Trust, the Growth and Income Trust, the Equity-Income Trust, the Real Estate
Securities Trust, the Balanced Trust, the Aggressive Asset Allocation Trust,
the High Yield Trust, the Moderate Asset Allocation Trust, the Conservative
Asset Allocation Trust, the Strategic Bond Trust, the Global Government Bond
Trust, the Capital Growth Bond Trust, the Investment Quality Bond Trust, the
U.S. Government Securities Trust, the Money Market Trust, the Conservative
Lifestyle Trust, the Moderate Lifestyle Trust, the Balanced Lifestyle Trust,
the Growth Lifestyle Trust and the Aggressive Lifestyle Trust. The investment
objective of each of the thirty-five portfolios is set forth below in the
description of each portfolio.
In addition to the risks inherent in any investment in securities,
certain portfolios of the Trust are subject to particular risks associated with
investing in foreign securities, lending portfolio securities, investing in
when-issued securities and hedging techniques employed through the use of
futures contracts, options on futures contracts, forward currency contracts and
various options. See "RISK FACTORS."
The investment adviser of the Trust is NASL Financial Services, Inc.
("NASL Financial" or the "Adviser"). The Trust currently has fourteen
Subadvisers who manage all of the portfolios except for the five Lifestyle
Trusts:
<TABLE>
<CAPTION>
SUBADVISER SUBADVISER TO
-------------
<S> <C>
Fred Alger Management, Inc. ("Alger") Small/Mid Cap Trust
Founders Asset Management, Inc. ("Founders") Growth Trust
Worldwide Growth Trust
Balanced Trust
International Small Cap Trust
Oechsle International Advisors, L.P. Global Government Bond Trust
("Oechsle International")
Fidelity Management Trust Company Equity Trust
("FMTC") Conservative Asset Allocation Trust
Moderate Asset Allocation Trust
Aggressive Asset Allocation Trust
Wellington Management Company Growth and Income Trust
("Wellington Management") Investment Quality Bond Trust
Salomon Brothers Asset Management U.S. Government Securities Trust
("SBAM") Strategic Bond Trust
J.P. Morgan Investment Management Inc. International Growth and Income Trust
("J.P. Morgan")
</TABLE>
8
<PAGE> 13
<TABLE>
<S> <C>
T. Rowe Price Associates, Inc. Science & Technology Trust
("T. Rowe Price") Blue Chip Growth Trust
Equity-Income Trust
Rowe Price-Fleming International, Inc. International Stock Trust
("Price-Fleming")
Morgan Stanley Asset Management Inc. Global Equity Trust
("Morgan Stanley")
Miller Anderson & Sherrerd, LLP ("MAS") Value Trust
High Yield Trust
Warburg Pincus Counsellors, Inc. ("Warburg") Emerging Growth Trust
Pilgrim Baxter & Associates, Ltd. ("PBHG") Pilgrim Baxter Growth Trust
Manufacturers Adviser Corporation ("MAC") Pacific Rim Emerging Markets Trust
Common Stock Trust
Real Estate Securities Trust
Equity Index Trust
Capital Growth Bond Trust
Money Market Trust
</TABLE>
The Adviser receives a fee from the Trust computed separately for each
portfolio, except for the Lifestyle Trusts, as indicated in the expense table
below. The Subadviser of each portfolio receives a fee from the Adviser
computed separately for each portfolio, which fee is paid out of the advisory
fee and is not an additional charge to the portfolio or its shareholders. See
"Management of the Trust."
The Trust currently serves as the underlying investment medium for
sums invested in annuity and variable life contracts issued by North American
Security Life Insurance Company ("Security Life"), First North American Life
Assurance Company ("FNAL") and The Manufacturers Life Insurance Company of
America ("Manulife America"). The portfolios that are available for investment
by Manulife America contractholders are as follows: the Pacific Rim Emerging
Markets, Real Estate Securities, Equity Index, Capital Growth Bond, Money
Market, International Stock, Blue Chip Growth, Balanced, Equity, Equity-Income,
Growth and Income, U.S. Government, Aggressive Asset Allocation, Moderate
Asset Allocation and Conservative Asset Allocation Trusts. The Trust may,
however, be used for other purposes in the future, such as funding annuity
contracts issued by other insurance companies. Security Life is controlled by
The Manufacturers Life Insurance Company ("Manulife"), a mutual life insurance
company based in Toronto, Canada. FNAL is a wholly-owned subsidiary of
Security Life and Manulife America is a wholly owned subsidiary of Manulife.
Currently, the Trust has three shareholders, Security Life, FNAL and Manulife
America. Trust shares are not offered directly to and may not be purchased
directly by members of the public. Consequently, as of the date of this
Prospectus, the terms "shareholder" and "shareholders" in this Prospectus refer
to Security Life, Manulife America and FNAL.
Certain contract values will vary with the investment performance of
the portfolios of the Trust. Because contract owners will allocate their
investments among the portfolios, prospective purchasers should carefully
consider the information about the Trust and its portfolios presented in this
Prospectus before purchasing such a contract.
The Trust is a no-load, open-end management investment company
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, and each of the portfolios, except the Global Government
Bond Trust, the Emerging Growth Trust and the five Lifestyle Trusts, is
9
<PAGE> 14
diversified for purposes of the Investment Company Act of 1940. See "Global
Government Bond Trust," "Emerging Growth Trust" and "The Lifestyle Trusts."
Information about the performance of each portfolio of the Trust is
contained in the Trust's annual report to shareholders which may be obtained
without charge.
10
<PAGE> 15
[FINANCIAL HIGHLIGHTS TO BE PROVIDED BY AMENDMENT]
11
<PAGE> 16
INVESTMENT OBJECTIVES AND POLICIES
Each portfolio has a stated investment objective which it pursues
through separate investment policies. The differences in objectives and
policies among the portfolios can be expected to affect the return of each
portfolio and the degree of market and financial risk to which each portfolio
is subject.
The investment objectives of each portfolio represent fundamental
policies of each such portfolio and may not be changed without the approval of
the holders of a majority of the outstanding shares of the portfolio. Except
for certain investment restrictions, the policies by which a portfolio seeks to
achieve its investment objectives may be changed by the Trustees of the Trust
without the approval of the shareholders.
The following is a description of the investment objectives and
policies of each portfolio. More complete descriptions of the money market
instruments and certain other instruments in which the Trust may invest and of
the options, futures, currency and other derivative transactions that certain
portfolios may engage in are set forth in the Statement of Additional
Information. A more complete description of the debt security ratings used by
the Trust assigned by Moody's Investors Service, Inc. ("Moody's") or Standard
and Poor's Corporation ("S&P") is included in Appendix I to this Prospectus.
PACIFIC RIM EMERGING MARKETS TRUST
The investment objective of the Pacific Rim Emerging Markets Trust is
to achieve long-term growth of capital. MAC manages the Pacific Rim Emerging
Markets Trust and seeks to achieve this investment objective by investing in a
diversified portfolio that is comprised primarily of common stocks and
equity-related securities of corporations domiciled in countries in the Pacific
Rim region. Current income from dividends and interest will not be an
important consideration in the selection of portfolio securities.
In pursuit of its investment objective, the Pacific Rim Emerging
Markets Trust will vary the geographical distribution of its investments based
upon the continuous evaluation of political, economic and market trends
throughout the world. Investments will be shifted among the world's capital
markets in accordance with the ongoing analyses of trends and developments
affecting such markets and securities. The Pacific Rim Emerging Markets Trust
will invest primarily in companies domiciled in potentially all countries of
the Pacific Rim region. As used herein, the countries of the Pacific Rim
region are India, Pakistan, Japan, Hong Kong, Singapore, Malaysia, Thailand,
Indonesia, Australia, South Korea, Taiwan, Philippines, New Zealand and China.
The Pacific Rim Emerging Markets Trust will, under normal conditions,
invest at least 65% of its net assets in common stocks and equity-related
securities of established larger-capitalization non-U.S. companies that have
attractive long-term prospects for growth of capital. Equity-related securities
in which the portfolio may invest include: preferred stocks, warrants and
securities convertible into or exchangeable into common stocks.
The Pacific Rim Emerging Markets Trust may, for defensive purposes,
invest all or a portion of its assets in non-convertible fixed income
securities denominated in U.S. and non-U.S. dollars. These non-convertible
fixed income securities will include debt of corporations, foreign governments
and supranational organizations. The portfolio may also maintain a portion of
its assets in cash or short term debt securities pending the selection of
certain long-term investments.
The Pacific Rim Emerging Markets Trust will be subject to special
risks as a result of its ability to invest up to 100% of its total assets in
foreign securities. These risks are described under the caption "RISK FACTORS
- --Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Pacific Rim Emerging Markets Trust may also purchase and sell the
following equity-related financial instruments: exchange-listed call and put
options on equity indices, over-the-counter
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<PAGE> 17
("OTC") and exchange-listed equity index futures, OTC and exchange-listed call
and put options on various currencies in the portfolio, and OTC foreign
currency futures contracts on various currencies in the portfolio. The
Statement of Additional Information contains a description of these strategies
and of certain risks associated therewith.
SCIENCE & TECHNOLOGY TRUST
The investment objective of the Science & Technology Trust is
long-term growth of capital. Current income is incidental to the portfolio's
objective. T. Rowe Price manages the Science & Technology Trust
The Science & Technology Trust will invest at least 65% of its total
assets in the common stocks of companies expected to benefit from the
development, advancement, and use of science and technology. Industries likely
to be represented in the portfolio include computers and peripheral products,
software, electronic components and systems, telecommunications, media and
information services, pharmaceuticals, hospital supply and medical devices,
biotechnology, environmental services, chemicals and synthetic materials, and
defense and aerospace. Investments may also include companies that should
benefit from the commercialization of technological advances even if they are
not directly involved in research and development.
Most of the assets of the Science & Technology Trust will be invested
in U.S. common stocks. However, the portfolio may also purchase other types of
securities, for example, foreign securities, convertible stocks and bonds, and
warrants, when considered consistent with the portfolio's investment objective
and program. The portfolio will hold a certain portion of its assets in U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
For temporary, defensive purposes, the portfolio may invest without limitation
in such securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments and serves as a
short-term defense during periods of unusual market volatility.
Stock selection for the portfolio is not based on company size but
rather on an assessment of the company's fundamental prospects. As a result,
holdings can range from small companies developing new technologies or pursuing
scientific breakthroughs to large, blue chip firms with established track
records of developing and marketing such advances.
Companies in the rapidly changing fields of science and technology
face special risks. For example, their products or services may not prove
commercially successful or may become obsolete quickly. Therefore, a portfolio
of these stocks will likely be more volatile in price than one with broader
diversification that includes investments in more economic sectors. The level
of risk will be increased to the extent that the portfolio has significant
exposure to smaller or unseasoned companies (those with less than a three-year
operating history). Small companies often have limited product lines, markets,
or financial resources, and they may depend on a small group of inexperienced
managers. The securities of small companies may be subject to more abrupt or
erratic market declines than securities of larger companies or the market
averages in general.
The Science & Technology Trust may also engage in a variety of
investment management practices, such as buying and selling futures and
options. The portfolio may invest up to 10% of its total assets in hybrid
instruments, which are a type of high-risk derivative which can combine the
characteristics of securities, futures and options. For example, the principal
amount, redemption or conversion terms of a security could be related to the
market price of some commodity, currency or securities index. Such securities
may bear interest or pay dividends at below market (or even relatively nominal)
rates. The Statement of Additional Information contains a fuller description
of such instruments and the risks associated therewith.
The Science & Technology Trust will be subject to special risks as a
result of its ability to invest up to 30% of its total assets in foreign
securities. These include nondollar-denominated securities traded outside of
the U.S. and dollar-denominated securities of foreign issuers traded in the
U.S. (such as ADRs).These risks are described under the caption "RISK FACTORS
- --Foreign Securities" in this
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<PAGE> 18
Prospectus. Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "GENERAL INFORMATION --Taxes" in
this Prospectus.
Use of Hedging and Other Strategic Transactions
The Science & Technology Trust is currently authorized to use all of
the various investment strategies referred to under "Hedging and Other
Strategic Transactions." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith.
INTERNATIONAL SMALL CAP TRUST
The investment objective of the International Small Cap Trust is to
seek long term capital appreciation. Founders manages the International Small
Cap Trust and will pursue this objective by investing primarily in securities
issued by foreign companies which have total market capitalizations (present
market value per share multiplied by the total number of shares outstanding) or
annual revenues of $1 billion or less. These securities may represent
companies in both established and emerging economies throughout the world.
At least 65% of the portfolio's total assets will normally be invested
in foreign securities representing a minimum of three countries (other than the
United States). The portfolio may invest in larger foreign companies or in U.S.
based companies if, in Founders' opinion, they represent better prospects for
capital appreciation.
The International Small Cap Trust may invest a significant portion of
its assets in the securities of small companies. Small companies are those
which are still in the developing stages of their life cycles and are
attempting to achieve rapid growth in both sales and earnings. Investments in
small companies involve greater risk than is customarily associated with more
established companies. These companies often have sales and earnings growth
rates which exceed those of large companies. Such growth rates may be
reflected in more rapid share price appreciation. However, smaller companies
often have limited operating histories, product lines, markets or financial
resources, and they may be dependent upon one-person management. These
companies may be subject to intense competition from larger entities, and the
securities of such companies may have limited marketability and may be subject
to more abrupt or erratic movements in price than securities of larger
companies or the market averages in general. Therefore, the net asset value of
the International Small Cap Trust may fluctuate more widely than the popular
market averages. Accordingly, an investment in the portfolio may not be
appropriate for all investors.
The International Small Cap Trust will invest primarily in equity
securities but may also invest in convertible securities, preferred stocks,
bonds, debentures and other corporate obligations when Founders believes that
these investments offer opportunities for capital appreciation. Current income
will not be a substantial factor in the selection of these securities. The
portfolio will only invest in bonds, debentures and corporate
obligations--other than convertible securities and preferred stock--rated
investment-grade (Baa or higher by Moody's or BBB or higher by S&P) at the time
of purchase or, if unrated, of comparable quality in the opinion of Founders.
Convertible securities and preferred stocks purchased by the Portfolio may be
rated in medium and lower categories by Moody's or S&P (Ba or lower by Moody's
and BB or lower by S&P) but will not be rated lower than B. The portfolio may
also invest in unrated convertible securities and preferred stocks in instances
in which Founders believes that the financial condition of the issuer or the
protection afforded by the terms of the securities limits risk to a level
similar to that of securities rated in categories no lower than B. At no time
will the portfolio have more than 5% of its total assets invested in any
fixed-income securities which are unrated or are rated below investment grade
either at the time of purchase or as a result of a reduction in rating after
purchase. The portfolio is not required to dispose of debt securities whose
ratings are downgraded below these ratings subsequent to the portfolio's
purchase of the securities, unless such a disposition is necessary to reduce
the portfolio's holdings of such securities to less than 5% of its total
assets. See "RISK FACTORS - High Yield (High Risk) Securities." A description
of the ratings used by Moody's and S & P is set forth in Appendix I to the
Prospectus.
The International Small Cap Trust may invest up to 100% of its assets
temporarily in the following securities if Founders determines that it is
appropriate for purposes of enhancing liquidity or
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<PAGE> 19
preserving capital in light of prevailing market or economic conditions: cash,
cash equivalents, U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, and negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions. The portfolio may also acquire certificates of deposit and
bankers' acceptances of banks which meet criteria established by the Trust's
Trustees. When the portfolio is in a defensive position, the opportunity to
achieve capital growth will be limited, and, to the extent that this assessment
of market conditions is incorrect, the portfolio will be foregoing the
opportunity to benefit from capital growth resulting from increases in the
value of equity investments and may not achieve its investment objective.
Foreign Securities. The portfolio may invest up to 100% of its total
assets in foreign securities and will be subject to special risks as a result
of these investments. These risks are described under the caption "RISK
FACTORS -- Foreign Securities" in this Prospectus. Moreover, substantial
investments in foreign securities may have adverse tax implications as
described under "GENERAL INFORMATION -Taxes" in this Prospectus. In order to
comply with limitations imposed by the State of California Insurance
Department, the International Small Cap Trust will comply with the restrictions
regarding foreign investments set forth under "Risk Factors - Additional
Investment Restrictions on Borrowing and Foreign Investing."
Foreign investments of the International Small Cap Trust may include
securities issued by companies located in countries not considered to be major
industrialized nations. Such countries are subject to more economic, political
and business risk than major industrialized nations, and the securities they
issue and of issuers located in such countries are expected to be more volatile
and more uncertain as to payments of interest and principal. The secondary
market for such securities is expected to be less liquid than for securities of
major industrialized nations. Such countries may include (but are not limited
to) Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Chile, China,
Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Ecuador, Egypt,
Finland, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy,
Jordan, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, North Korea,
Norway, Pakistan, Paraguay, Peru, Philippines, Poland, Portugal, Singapore,
Slovak Republic. South Africa, South Korea, Spain, Sri Lanka, Sweden,
Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela, Vietnam and the
countries of the former Soviet Union. Investments of the Portfolio may include
securities created through the Brady Plan, a program under which heavily
indebted countries have restructured their bank debt into bonds. See "OTHER
INSTRUMENTS--High Yield Foreign Sovereign Debt Securities" in the Statement of
Additional Information.
Since the International Small Cap Trust's assets will be invested
primarily in foreign securities and since substantially all of the portfolio's
revenues will be received in foreign currencies, the portfolio's net asset
values will be affected by changes in currency exchange rates. The portfolio
will pay dividends in dollars and will incur currency conversion costs.
Use of Hedging and Other Strategic Transactions. The International
Small Cap Trust is currently authorized to use all of the various investment
strategies referred to under "RISK FACTORS -- Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
EMERGING GROWTH TRUST
The investment objective of the Emerging Growth Trust is maximum
capital appreciation. Warburg manages the Emerging Growth Trust and will pursue
this objective by investing primarily in a portfolio of equity securities of
domestic companies.
The Emerging Growth Trust ordinarily will invest at least 65% of its
total assets in common stocks or warrants of emerging growth companies that
represent attractive opportunities for maximum capital appreciation. Emerging
growth companies are small- or medium-sized companies that have passed their
start-up phase and that show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time.
The Emerging Growth Trust is classified as a non-diversified
investment company under the 1940 Act, which means that portfolio is not
limited by the 1940 Act in the proportion of its assets that
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<PAGE> 20
it may invest in the obligations of a single issuer. As a non-diversified
investment company, the portfolio may invest a greater proportion of its assets
in the obligations of a small number of issuers and, as a result, may be
subject to greater risk with respect to portfolio securities. To the extent
that the portfolio assumes large positions in the securities of a small number
of issuers, its return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
Although under current market conditions the Emerging Growth Trust
expects to invest in companies having stock market capitalizations of up to
approximately $500 million, the portfolio may invest in emerging growth
companies without regard to their market capitalization. Emerging growth
companies generally stand to benefit from new products or services,
technological developments or changes in management and other factors and
include smaller companies experiencing unusual developments affecting their
market value. These "special situation companies" include companies that are
involved in the following: an acquisition or consolidation; a reorganization; a
recapitalization; a merger, liquidation, or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; litigation which, if resolved favorably, would improve the value of
the company's stock; or a change in corporate control.
The Emerging Growth Trust may invest up to 20% of its total assets in
investment grade debt securities (other than money market obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by
Warburg. Because the market value of debt obligations can be expected to vary
inversely to changes in prevailing interest rates, investing in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline. The success of such a strategy is dependent upon
Warburg's ability to accurately forecast changes in interest rates. The market
value of debt obligations may also be expected to vary depending upon, among
other factors, the ability of the issuer to repay principal and interest, any
change in investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined to be
of comparable quality by Warburg. Bonds rated in the fourth highest grade may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the portfolio, an issue of securities may cease to be rated or
its rating may be reduced below the minimum required for purchase by the
portfolio. Neither event will require sale of such securities, although Warburg
will consider such event in its determination of whether the portfolio should
continue to hold the securities.
When Warburg believes that a defensive posture is warranted, the
Emerging Growth Trust may invest temporarily without limit in investment grade
debt obligations and in domestic and foreign money market obligations,
including repurchase agreements.
The Emerging Growth Trust is authorized to invest, under normal market
conditions, up to 20% of its total assets in domestic and foreign short-term
(one year or less remaining to maturity) and medium-term (five years or less
remaining to maturity) money market obligations and for temporary defensive
purposes may invest in these securities without limit. These instruments
consist of obligations issued or guaranteed by the U.S. government or a foreign
government, their agencies or instrumentalities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loans and similar institutions) that are
high quality investments or, if unrated, deemed by Warburg to be high quality
investments; commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Investing in securities of emerging growth and small-sized companies
may involve greater risks since these securities may have limited marketability
and, thus, may be more volatile. Because small- and medium-sized companies
normally have fewer shares outstanding than larger companies, it may be more
difficult for the Emerging Growth Trust to buy or sell significant amounts of
such shares without an unfavorable impact on prevailing prices. In addition,
small- and medium-sized companies are typi-
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<PAGE> 21
cally subject to a greater degree of changes in earnings and business prospects
than are larger, more established companies. There is typically less publicly
available information concerning small- and medium-sized companies than for
larger, more established ones. Securities of issuers in "special situations"
also may be more volatile, since the market value of these securities may
decline in value if the anticipated benefits do not materialize. Although
investing in securities of emerging growth companies or "special situations"
offers potential for above-average returns if the companies are successful, the
risk exists that the companies will not succeed and the prices of the
companies' shares could significantly decline in value. Therefore, an
investment in the portfolio may involve a greater degree of risk than an
investment in other mutual funds that seek capital appreciation by investing in
better-known, larger companies.
The Emerging Growth Trust will be subject to certain risks as a result
of its ability to invest up to 20% of its total assets in the securities of
foreign issuers. These risks are described under the caption "RISK FACTORS
- --Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions The Emerging Growth
Trust is currently authorized to use all of the investment strategies referred
to under "Hedging and Other Strategic Transactions." However, it is not
presently contemplated that any of these strategies will be used to a
significant degree by the portfolio.
PILGRIM BAXTER GROWTH TRUST
The investment objective of the Pilgrim Baxter Growth Trust is capital
appreciation. PBHG manages the Pilgrim Baxter Growth Trust and seeks to achieve
its objective by investing in companies believed by the Subadviser to have an
outlook for strong earnings growth and the potential for significant capital
appreciation.
The Pilgrim Baxter Growth Trust will normally be as fully invested as
practicable in common stocks and securities convertible into common stocks,
but also may invest up to 5% of its assets in warrants and rights to purchase
common stocks. In the opinion of the Subadviser, there may be times when the
shareholders' interests are best served and the investment objective is more
likely to be achieved by having varying amounts of the portfolio's assets
invested in convertible securities.
Under normal market conditions, the Pilgrim Baxter Growth Trust will
invest at least 65% of its total assets in common stocks and convertible
securities of small and medium sized growth companies (market capitalization or
annual revenues up to $2 billion). The average market capitalizations or annual
revenues of holdings in the portfolio may, however, fluctuate over time as a
result of market valuation levels and the availability of specific investment
opportunities. In addition, the portfolio may continue to hold securities of
companies whose market capitalizations or annual revenues grow above $2 billion
subsequent to purchase, if the company continues to satisfy the other
investment policies of the portfolio.
The Subadviser tries to keep the portfolio fully invested at all times
However, for temporary defensive purposes, when the Subadviser determines that
market conditions warrant, each portfolio may invest up to 100% of its assets
in cash and money market instruments (consisting of securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
certificates of deposit, time deposits and bankers' acceptances issued by banks
or savings and loan associations having net assets of at least $500 million as
stated on their most recently published financial statements; commercial paper
rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization ("NRSRO"); repurchase agreements
involving such securities; and, to the extent permitted by applicable law and
the portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent the portfolio is
invested in temporary defensive instruments, it will not be pursuing its
investment objective.
The Subadviser's investment process in managing the assets of the
Pilgrim Baxter Growth Trust is both quantitative and fundamental, and is
extremely focused on quality earnings growth. In seeking to identify investment
opportunities for the portfolio, the Subadviser begins by creating a universe
of
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rapidly growing companies with market capitalizations within the parameters
described above and that possess certain quality characteristics. Using
proprietary software and research models that incorporate important attributes
of successful growth, such as positive earnings surprises, upward earnings
estimate revisions, and accelerating sales and earnings growth, the Subadviser
creates a universe of growing companies. Then, using fundamental research, the
Subadviser evaluates each company's earnings quality and assesses the
sustainability of the company's current growth trends. Through this highly
disciplined process, the Subadviser seeks to construct an investment portfolio
that possesses strong growth characteristics.
While the Subadviser intends to invest in small and medium
capitalization companies that have strong balance sheets and that the
Subadviser's research indicates should exceed consensus earnings expectations,
any investment in small and medium capitalization companies involves greater
risk and price volatility than that customarily associated with investments in
larger, more established companies. This increased risk may be due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and frequent lack of management depth. The securities of
small and medium capitalization companies are often traded in the
over-the-counter market, and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities of
small and medium capitalization companies are likely to be less liquid, and
subject to more abrupt or erratic market movements, than securities of larger,
more established companies
Securities will be sold when the Subadviser believes that anticipated
appreciation is no longer probable, alternative investments offer superior
appreciation prospects, or the risk of a decline in market price is too great.
Because of its policy with respect to the sales of investments, the Pilgrim
Baxter Growth Trust may from time to time realize short-term gains or losses.
The portfolio will likely have somewhat greater volatility than the stock
market in general, as measured by the S&P 500 Index.
Normally, the Pilgrim Baxter Growth Trust will purchase only
securities traded in the United States or Canada on registered exchanges or in
the over-the-counter market. The Portfolio may invest up to 15% of its total
assets in securities of foreign issuers (including ADRs). To the extent the
portfolio invests in foreign securities, it will be subject to certain risks as
described under the caption "RISK FACTORS --Foreign Securities" in this
Prospectus.
Use of Hedging and Other Strategic Transactions
The Pilgrim Baxter Growth Trust is currently authorized to use all of
the investment strategies referred to under "Hedging and Other Strategic
Transactions." With the exception of forward foreign currency contracts,
however, it is not presently contemplated that any of these strategies will be
used to a significant degree by the portfolio. The Statement of Additional
Information contains a description of these strategies and certain risks
associated therewith.
SMALL/MID CAP TRUST
The investment objective of the Small/Mid Cap Trust is to seek long
term capital appreciation. Alger manages the Small/Mid Cap Trust and will
pursue this objective by investing at least 65% of the portfolio's total assets
(except during temporary defensive periods) in small/mid cap equity securities.
As used in this Prospectus, small/mid cap equity securities are equity
securities of companies that, at the time of purchase, have "total market
capitalization" -- present market value per share multiplied by the total
number of shares outstanding -- between $500 million and $5 billion. The
portfolio may invest up to 35% of its total assets in equity securities of
companies that, at the time of purchase, have total market capitalization of $5
billion or greater and in excess of that amount (up to 100% of its assets )
during temporary defensive periods.
The Small/Mid Cap Trust seeks to achieve its investment objective by
investing in equity securities, such as common or preferred stocks, or
securities convertible into or exchangeable for equity securities, including
warrants and rights. The portfolio will invest primarily in companies whose
securities are traded on domestic stock exchanges or in the over-the-counter
market.
The Small/Mid Cap Trust may invest a significant portion of its assets
in the securities of small companies. Small companies are those which are
still in the developing stages of their life cycles and will
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attempt to achieve rapid growth in both sales and earnings. Investments in
small companies involve greater risk than is customarily associated with more
established companies. These companies often have sales and earnings growth
rates which exceed those of large companies. Such growth rates may be
reflected in more rapid share price appreciation. However, smaller companies
often have limited operating histories, product lines, markets or financial
resources, and they may be dependent upon the management of only a few people.
These companies may be subject to intense competition from larger entities, and
the securities of such companies may have limited marketability and may be
subject to more abrupt or erratic movements in price than securities of larger
companies or the market averages in general. Therefore, the net asset values
of the Small/Mid Cap Trust may fluctuate more widely than the popular market
averages. Accordingly, an investment in the portfolio may not be appropriate
for all investors.
In order to afford the portfolio the flexibility to take advantage of
new opportunities for investments in accordance with its investment objectives,
it may hold up to 15% of its net assets (up to 100% of their assets during
temporary defensive periods) in money market instruments, bank and thrift
obligations, obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities, foreign bank obligations and obligations of
foreign branches of domestic banks, variable rate master demand notes and
repurchase agreements. When the portfolio is in a defensive position, the
opportunity to achieve capital growth will be limited, and, to the extent that
this assessment of market conditions is incorrect, the portfolio will be
foregoing the opportunity to benefit from capital growth resulting from
increases in the value of its investments and may not achieve its investment
objective.
Foreign Securities. The portfolio may invest up to 20% of its total
assets in foreign securities and will be subject to certain risks as a result
of these investments. These risks are described under the caption "RISK
FACTORS -- Foreign Securities" in this Prospectus. Moreover, substantial
investments in foreign securities may have adverse tax implications as
described under "GENERAL INFORMATION -Taxes" in this Prospectus. The portfolio
may also purchase American Depository Receipts ("ADRs") or U.S.
dollar-denominated securities of foreign issuers that are not included in the
20% foreign securities limitation. See "RISK FACTORS - Foreign Securities" in
this Prospectus for a description of ADRs.
Use of Hedging and Other Strategic Transactions. The Small/Mid Cap
Trust is currently authorized to use all of the various investment strategies
referred to under "RISK FACTORS -- Hedging and Other Strategic Transactions".
The Statement of Additional Information contains a description of these
strategies and of certain risks associated therewith.
INTERNATIONAL STOCK TRUST
The investment objective of the International Stock Trust is long-term
growth of capital. Price-Fleming manages the International Stock Trust and
seeks to attain this objective by investing primarily in common stocks of
established, non-U.S. companies. The portfolio expects to invest substantially
all of its assets outside the U.S. and to diversify broadly among countries
throughout the world -- developed, newly industrialized, and emerging. The
portfolio will invest in at least three countries outside the United States.
The International Stock Trust expects to invest substantially all of
its assets in common stocks. However, the portfolio may also invest in a
variety of other equity-related securities, such as preferred stocks, warrants
and convertible securities, as well as corporate and governmental debt
securities, when considered consistent with the portfolio's investment
objectives and program. Under normal market conditions, the portfolio's
investment in securities other than common stocks is limited to no more than
35% of total assets. However, for temporary defensive purposes, the portfolio
may invest all or a significant portion of its assets in U.S. Government and
corporate debt obligations. The portfolio will not purchase any debt security
which at the time of purchase is rated below investment grade. This would not
prevent the portfolio from retaining a security downgraded to below investment
grade after purchase.
The International Stock Trust will hold a certain portion of its
assets in U.S. and foreign dollar-denominated money market securities,
including repurchase agreements, in the two highest rating categories, maturing
in one year or less. For temporary, defensive purposes, the portfolio may
invest without limitation in such securities. This reserve position provides
flexibility in meeting redemptions,
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expenses, and the timing of new investments and serves as a short-term defense
during periods of unusual market volatility.
Price-Fleming uses a "bottom-up" approach to stock selection based on
fundamental research. A company's prospects for achieving and sustaining
above-average, long-term earnings growth is generally the Subadviser's primary
focus. However, valuation factors, such as price/earnings, price/cash flow, and
price/book are also important considerations. In conjunction with identifying
potential stocks for investment, external factors are also reviewed. For
example, a country's or region's political, economic, and financial status help
shape the outlook for individual stocks and also affect decisions regarding the
prudent level of overall exposure to particular areas.
It is the present intention of Price-Fleming to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Europe (for example, United Kingdom, Germany,
Hungary, Poland, Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, Latin America, and such other areas and countries as
Price-Fleming may determine from time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors. In
analyzing companies for investment, Price-Fleming ordinarily looks for one or
more of the following characteristics: an above-average earnings growth per
share; high return on invested capital; healthy balance sheet; sound financial
and accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in
their market place.
While current dividend income is not a prerequisite in the selection
of International Stock Trust companies, the companies in which the portfolio
invests normally will have a record of paying dividends, and will generally be
expected to increase the amounts of such dividends in future years as earnings
increase. It is expected that the portfolio's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
The International Stock Trust may purchase the securities of certain
foreign investment portfolios or trusts called passive foreign investment
companies. Such trusts have been the only or primary way to invest in certain
countries. In addition to bearing their proportionate share of the trust's
expenses (management fees and operating expenses), shareholders will also
indirectly bear similar expenses of such trusts. Capital gains on the sale of
such holdings are considered ordinary income regardless of how long the
portfolio held its investment. In addition, the portfolio may be subject to
corporate income tax and an interest charge on certain dividends and capital
gains earned from these investments, regardless of whether such income and
gains are distributed to shareholders. To avoid such tax and interest, the
portfolio intends to treat these securities as sold on the last day of its
fiscal year and recognize any gains for tax purposes at that time; losses will
not be recognized. Such gains will be considered ordinary income, which the
portfolio will be required to distribute even though it has not sold the
security.
The International Stock Trust may also engage in a variety of
investment management practices, such as buying and selling futures and options
and engaging in foreign currency exchange contracts. The portfolio may invest
up to 10% of its total assets in hybrid instruments, which are a type of
high-risk derivative which can combine the characteristics of securities,
futures and options. For example, the principal amount, redemption or
conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. The Statement
of Additional Information contains a fuller description of such instruments and
the risks associated therewith.
The International Stock Trust will be subject to special risks as a
result of its ability to invest up to 100% of its total assets in foreign
securities. These include non-dollar-denominated securities traded
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outside of the U.S. and dollar-denominated securities of foreign issuers traded
in the U.S. (such as ADRs). These risks are described under the caption "RISK
FACTORS --Foreign Securities" in this Prospectus. Moreover, substantial
investments in foreign securities may have adverse tax implications as
described under "GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The International Stock Trust is currently authorized to use all of
the various investment strategies referred to under "Hedging and Other
Strategic Transactions." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith.
WORLDWIDE GROWTH TRUST
The investment objective of the Worldwide Growth Trust is long-term
growth of capital. Founders manages the Worldwide Growth Trust and seeks to
attain this objective by normally investing at least 65% of its total assets in
equity securities of growth companies in a variety of markets throughout the
world.
The Worldwide Growth Trust will emphasize common stocks of both
emerging and established growth companies that generally have proven
performance records and strong market positions. The portfolio's holdings will
usually consist of investments in companies in various countries throughout the
world, but it will always invest at least 65% of its total assets in three or
more countries. The portfolio will not invest more than 25% of its total assets
in the securities of any one foreign country.
The Worldwide Growth Trust has the ability to purchase securities in
any foreign country as well as in the United States. Foreign investments of
the portfolio may include securities issued by companies located in countries
not considered to be major industrialized nations. Such countries are subject
to more economic, political and business risk than major industrialized
nations, and the securities they issue are expected to be more volatile and
more uncertain as to payments of interest and principal. Investments of the
portfolio may include securities created through the Brady Plan, a program
under which heavily indebted countries have restructured their bank debt into
bonds.
Since the Worldwide Growth Trust's assets will be invested primarily
in foreign securities and since substantially all of the portfolio's revenues
will be received in foreign currencies, the portfolio's net asset values will
be affected by changes in currency exchange rates. The portfolio will pay
dividends in dollars and will incur currency conversion costs.
The Worldwide Growth Trust may invest in convertible securities,
preferred stocks, bonds, debentures, and other corporate obligations when
Founders believes that these investments offer opportunities for capital
appreciation. Current income will not be a substantial factor in the selection
of these securities.
The portfolio will only invest in bonds, debentures, and corporate
obligations -- other than convertible securities and preferred stocks -- rated
investment grade (BBB or higher) at the time of purchase or, if unrated, of
comparable quality in the opinion of Founders. Convertible securities and
preferred stocks purchased by the portfolio may be rated in medium and lower
categories by Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P),
but will not be rated lower than B. The portfolio may also invest in unrated
convertible securities and preferred stocks in instances in which Founders
believes that the financial condition of the issuer or the protection afforded
by the terms of the securities limits risk to a level similar to that of
securities eligible for purchase by the portfolio rated in categories no lower
than B. At no time will the portfolio have more than 5% of its total assets
invested in any fixed-income securities which are unrated or are rated below
investment grade either at the time of purchase or as a result of a reduction
in rating after purchase. The portfolio is not required to dispose of debt
securities whose ratings are downgraded below these ratings subsequent to the
portfolio's purchase of the securities, unless such a disposition is necessary
to reduce the portfolio's holdings of such securities to less than 5% of its
total assets. See "RISK FACTORS -- High Yield (High Risk) Securities." A
description of the ratings used by Moody's and S&P is set forth in Appendix I
to the Prospectus.
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Up to 100% of the assets of the Worldwide Growth Trust may be invested
temporarily in U.S. Government obligations, commercial paper, bank obligations,
repurchase agreements, and negotiable U.S. dollar-denominated obligations of
domestic and foreign branches of U.S. depository institutions, U.S. branches of
foreign depository institutions, and foreign depository institutions, in cash,
or in other cash equivalents, if Founders determines it to be appropriate for
purposes of enhancing liquidity or preserving capital in light of prevailing
market or economic conditions. The portfolio may also acquire certificates of
deposit and bankers' acceptances of banks which meet criteria established by
the Trust's Trustees. While the portfolio is in a defensive position, the
opportunity to achieve capital growth will be limited, and, to the extent that
this assessment of market conditions is incorrect, the portfolio will be
foregoing the opportunity to benefit from capital growth resulting from
increases in the value of equity investments.
The Worldwide Growth Trust may invest in the securities of small and
medium-sized companies. The Subadviser considers small and medium-sized
companies to be those which are still in the developing stages of their life
cycles and are attempting to achieve rapid growth in both sales and earnings.
Investments in small and medium-sized companies involve greater risk than is
customarily associated with more established companies. These companies often
have sales and earnings growth rates which exceed those of large companies.
Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating
histories, product lines, markets, or financial resources, and they may be
dependent upon one-person management. These companies may be subject to
intense competition from larger entities, and the securities of such companies
may have limited marketability and may be subject to more abrupt or erratic
movements in price than securities of larger companies or the market averages
in general. Therefore, the net asset value of the Worldwide Growth Trust's
shares may fluctuate more widely than the popular market averages.
The Worldwide Growth Trust will be subject to special risks as a
result of its ability to invest up to 100% of its total assets in foreign
securities. These risks are described under the caption "RISK FACTORS --Foreign
Securities" in this Prospectus. Moreover, substantial investments in foreign
securities may have adverse tax implications as described under "GENERAL
INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Worldwide Growth Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
GLOBAL EQUITY TRUST
The investment objective of the Global Equity Trust is long-term
capital appreciation. Morgan Stanley manages the Global Equity Trust and seeks
to attain this objective by investing primarily in common and preferred stocks,
convertible securities, rights and warrants to purchase common stocks, American
and Global Depository Receipts and other equity securities of issuers
throughout the world, including issuers in the U.S. and emerging market
countries.
Under normal circumstances, at least 65% of the value of the total
assets of the Global Equity Trust will be invested in equity securities and at
least 20% of the value of the portfolio's total assets will be invested in the
common stocks of U.S. issuers. The portfolio may also invest in money market
instruments. Although the portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in equity securities that are
traded over-the-counter or that are not admitted to listing on a stock
exchange or dealt in on a regulated market. As a result of the absence of a
public trading market, such securities may pose liquidity risks.
The Subadviser's approach is oriented to individual stock selection
and is value driven. In selecting stocks for the portfolio, the Subadviser
initially identifies those stocks that it believes to be undervalued in
relation to the issuer's assets, cash flow, earnings and revenues, and then
evaluates the future value of such stocks by running the results of an in-depth
study of the issuer through a dividend discount model. In selecting
investments, the Subadviser utilizes the research of a number of sources,
including Morgan Stanley Capital International, an affiliate of the Subadviser
located in Geneva, Swit-
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zerland. Portfolio holdings are regularly reviewed and subjected to fundamental
analysis to determine whether they continue to conform to the Subadviser's
value criteria. Equity securities which no longer conform to such investment
criteria will be sold. Although the portfolio will not invest for short-term
trading purposes, investment securities may be sold from time to time without
regard to the length of time they have been held.
The Global Equity Trust may engage in forward foreign currency
exchanges and when-issued or delayed delivery securities.
The Global Equity Trust will be subject to special risks as a result
of its ability to invest up to 100% of its total assets in foreign securities.
These risks, including the risks of the possible increased likelihood of
expropriation or the return to power of a communist regime which would
institute policies to expropriate, nationalize or otherwise confiscate
investments, are described under the caption "RISK FACTORS --Foreign
Securities" in this Prospectus. Moreover, substantial investments in foreign
securities may have adverse tax implications as described under "GENERAL
INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Global Equity Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." With the exception of currency transactions, however, it is not
presently anticipated that any of these strategies will be used to a
significant degree by the portfolio. The Statement of Additional Information
contains a description of these strategies and of certain risks associated
therewith.
GROWTH TRUST
The investment objective of the Growth Trust is to seek long-term
growth of capital. Founders manages the Growth Trust and will pursue this
objective by investing, under normal market conditions, at least 65% of its
total assets in common stocks of well-established, high-quality growth
companies that Founders believes have the potential to increase earnings faster
than the rest of the market. These companies tend to have strong performance
records, solid market positions and reasonable financial strength, and have
continuous operating records of three years or more.
The Growth Trust may invest in convertible securities, preferred
stocks, bonds, debentures and other corporate obligations when Founders
believes that these investments offer opportunities for capital appreciation.
Current income will not be a substantial factor in the selection of these
securities. The Growth Trust will only invest in bonds, debentures and
corporate obligations--other than convertible securities and preferred
stock--rated investment-grade (Baa or higher by Moody's and BBB or higher by
S&P) or, if unrated, of comparable quality in the opinion of Founders at the
time of purchase. Convertible securities and preferred stocks purchased by the
Trust may be rated in medium and lower categories by Moody's or S&P (Ba or
lower by Moody's and BB or lower by S&P) but will not be rated lower than B.
The Growth Trust may also invest in unrated convertible securities and
preferred stocks in instances in which Founders believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities rated in
categories no lower than B. At no time will the portfolio have more than 5% of
its total assets invested in any fixed-income securities which are unrated or
are rated below investment grade either at the time of purchase or as a result
of a reduction in rating after purchase. The portfolio is not required to
dispose of debt securities whose ratings are downgraded below these ratings
subsequent to the portfolio's purchase of the securities, unless such a
disposition is necessary to reduce the portfolio's holdings of such securities
to less than 5% of its total assets. See "RISK FACTORS - High Yield
Securities."
The Growth Trust may invest up to 100% of its assets temporarily in
the following securities if Founders determines that it is appropriate for
purposes of enhancing liquidity or preserving capital in light of prevailing
market or economic conditions: cash, cash equivalents, U.S. government
obligations, commercial paper, bank obligations, repurchase agreements, and
negotiable U.S. dollar-denominated obligations of domestic and foreign
branches of U.S. depository institutions, U.S. branches of foreign depository
institutions, and foreign depository institutions. The portfolio may also
acquire certificates of deposit and bankers' acceptances of banks which meet
criteria established by the Trust's Trustees.
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When the Growth Trust is in a defensive position, the opportunity to achieve
capital growth will be limited, and, to the extent that this assessment of
market conditions is incorrect, the Growth Trust will be foregoing the
opportunity to benefit from capital growth resulting from increases in the
value of equity investments and may not achieve its investment objective.
Foreign Securities. The Growth Trust may invest without limit in ADRs
and up to 30% of its total assets in foreign securities (other than ADRs), with
no more than 25% invested in any one foreign country. The Growth Trust will be
subject to certain risks as a result of these investments. These risks are
described under the caption "RISK FACTORS -- Foreign Securities" in this
Prospectus. Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "GENERAL INFORMATION -Taxes" in
this Prospectus.
Use of Hedging and Other Strategic Transactions. The Growth Trust is
currently authorized to use all of the various investment strategies referred
to under "RISK FACTORS -- Hedging and Other Strategic Transactions." The
Statement of Additional Information contains a description of these strategies
and of certain risks associated therewith.
EQUITY TRUST
The principal investment objective of the Equity Trust is growth of
capital. Current income is a secondary consideration although growth of income
may accompany growth of capital.
FMTC manages the Equity Trust and seeks to attain the foregoing
objective by investing primarily in common stocks of United States issuers or
securities convertible into or which carry the right to buy common stocks. It
may also invest to a limited degree, normally not in excess of 15% of the value
of the Equity Trust's total assets, in non-convertible preferred stocks and
debt securities. Portfolio securities may be selected with a view toward
either short-term or long-term capital growth. When in FMTC's opinion market
or economic conditions warrant a defensive posture, the Equity Trust may place
any portion of its assets in investment grade debt securities (i.e., the four
highest bond ratings assigned by Moody's or S&P), preferred stocks, Government
securities or cash. The fourth highest category of investment grade bonds has
some speculative characteristics and instruments with such ratings are subject
to greater fluctuations in value than more highly rated instruments as economic
conditions change. The Equity Trust is not required to dispose of such
instruments in the event they are downgraded. It may also maintain amounts in
cash or short-term debt securities pending selection of investments in
accordance with its policies.
The Equity Trust will invest primarily in securities listed on
national securities exchanges, but from time to time it may also purchase
securities traded in the "over the counter" market. The Equity Trust will be
subject to certain risks as a result of its ability to invest up to 20% of its
assets in foreign securities. These risks are described under the caption
"Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under "Taxes"
in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Equity Trust is currently authorized to use all of the various
investment strategies referred to under "RISK FACTORS -- Hedging and Other
Strategic Transactions." However, it is not presently anticipated that any of
these strategies will be used to a significant degree by the portfolio. The
Statement of Additional Information contains a description of these strategies
and of certain risks associated therewith.
COMMON STOCK TRUST
The investment objective of the Common Stock Trust is to achieve
intermediate and long-term growth through capital appreciation and current
income by investing in common stocks and other equity securities of well
established companies with promising prospects for providing an above average
rate of return. MAC manages the Common Stock Trust.
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In pursuit of its objective, the Common Stock Trust will invest
principally in common stocks or in securities convertible into common stocks or
carrying rights or warrants to purchase common stock or to participate in
earnings. In selecting investments, emphasis will be placed on companies with
good financial resources, strong balance sheet, satisfactory rate of return on
capital, good industry position, superior management skills, and earnings that
tend to grow consistently. The Trust's investments are not limited to any
particular type or size of company, but high-quality growth stocks are
emphasized.
Investments will be made primarily in securities listed on national
securities exchanges, but the Trust may purchase securities traded in the
United States over-the-counter market. When, in the opinion of management,
market or economic conditions warrant a defensive posture, the Trust may place
all or a portion of its assets in fixed-income securities. The Trust may also
maintain a portion of its assets in cash or short-term debt securities pending
selection of particular long-term investments. The Trust may purchase
securities on a forward-commitment, when-issued or delayed-delivery basis.
The Common Stock Trust will be subject to certain risks as a result of
its ability to invest up to 100% of its total assets in the following types of
foreign securities: (i) U.S. dollar denominated obligations of foreign branches
of U.S. banks, (ii) securities represented by ADRs listed on a national
securities exchange or traded in the U.S. over-the-counter market, (iii)
securities of a corporation organized in a jurisdiction other than the U.S. and
listed on the New York Stock Exchange or NASDAQ or (iv) securities denominated
in U.S. dollars but issued by non U.S. issuers and issued under U.S. federal
securities regulations (for example, U.S. dollar denominated obligations issued
or guaranteed as to principal or interest by the Government of Canada or any
Canadian Crown agency). These risks are described under the caption "RISK
FACTORS --Foreign Securities" in this Prospectus. Moreover, substantial
investments in foreign securities may have adverse tax implications as
described under "GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions The Common Stock
Trust does not presently use any of the investment strategies referred to under
"Hedging and Other Strategic Transactions."
EQUITY INDEX TRUST
The investment objective of the Equity Index Trust is to achieve
investment results which approximate the total return of publicly traded common
stocks in the aggregate, as represented by the Standard & Poor's 500 Composite
Stock Price Index (the "Index"). MAC manages the Equity Index Trust.
The Equity Index Trust is designed to provide an economical and
convenient means of maintaining a widely diversified investment in the United
States equity market as part of an overall investment strategy. The portfolio
uses the Index as its standard performance comparison because it represents
more than 70% of the total market value of all publicly traded common stocks in
the United States and is widely viewed among investors as representative of the
performance of publicly traded common stocks in the United States.
The Index is composed of 500 selected common stocks, over 95% of which
are listed on the New York Stock Exchange. The Index is an unmanaged index of
common stock prices. The performance of the Index is based on changes in the
prices of stocks comprising the Index and assumes the reinvestment of all
dividends paid on such stocks. Taxes, brokerage, commissions and other fees are
disregarded in computing the level of the Index. Standard & Poor's selects the
stocks to be included in the Index on a proprietary basis but does incorporate
such factors as the market capitalization and trading activity of each stock
and its adequacy as representative of stocks in a particular industry group.
Stocks in the Index are weighted according to their market capitalization
(i.e., the number of shares outstanding multiplied by the stock's current
price).(1)
- --------------------
(1) "Standard & Poor's(R)", "S&P 500(R)", "S&P(R)", "Standard & Poor's 500(R)
and "500" are trademarks of McGraw-Hill, Inc.
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The Index fluctuates in value with changes in the market value of the
500 stocks included in the Index at any point in time. An investment in the
Equity-Index Trust involves risks similar to the risks of investing directly in
the stocks included in the Index.
The Subadviser will not attempt to "manage" the Equity Index Trust in
the traditional portfolio management sense which generally involves the buying
and selling of securities based upon investment analysis of economic, financial
and market factors. Instead, the portfolio, utilizing a "passive" or
"indexing" investment approach, attempts to duplicate the performance of the
Index. The adverse financial situation of a company will not directly result
in its elimination from the portfolio unless, of course, the company in
question is removed from the Index. Conversely, the projected superior
financial performance of a company would not normally lead to an increase in
the portfolio's holdings of the company. Under normal circumstances, the net
assets of the Equity Index Trust will be invested in any combination of the
following investments: 1) representative common stocks, 2) Standard &
Poor's 500 Futures Contracts and 3) Standard & Poor's Depository Receipts (R).
With regard to the portion of the Equity Index Trust invested in
common stocks, the method used to select investments for the portfolio involves
investing in common stocks in approximately the order of their respective
market value weightings in the Index, beginning with those having the highest
weightings. For diversification purposes, the portfolio can purchase stocks
with smaller weightings in order to represent other sectors of the Index. The
portfolio will invest only in those stocks, and in such amounts, as its
Subadviser deems necessary and appropriate in order for the portfolio to
approximate the performance of the Index.
There is no minimum or maximum number of stocks included in the Index
which the Equity Index Trust must hold. Under normal circumstances, it is
expected that the portion of the portfolio invested in stocks would hold
between 300 and 500 different stocks included in the Index. The portfolio may
compensate for the omission of a stock that is included in the Index, or for
purchasing stocks in other than the same proportion that they are represented
in the Index, by purchasing stocks that are believed to have characteristics
that correspond to those of the omitted stocks. The portfolio may invest in
short-term debt securities to maintain liquidity or pending investment in
stocks or Standard & Poor's Stock Index Futures Contracts (S&P 500 Futures
Contracts).
Tracking error is measured by the difference between the total return
for the Index and the total return for the portfolio after deductions of fees
and expenses. All tracking error deviations are reviewed to determine the
effectiveness of investment policies and techniques. Tracking error is reviewed
at least weekly and more frequently if such a review is indicated by
significant cash balance changes, market conditions or changes in the
composition of the Index. If deviation accuracy is not maintained, the Equity
Index Trust will rebalance its composition by selecting securities which, in
the opinion of the Subadviser, will provide a more representative sampling of
the capitalization of the securities in the Index as a whole or a more
representative sampling of the sector diversification in the Index.
S&P licenses certain trademarks and trade names to the Trust but
disclaims any responsibility or liability to the Trust and its shareholders.
See Appendix III for such disclaimer.
Use of Hedging and Other Strategic Transactions The Equity Index
Trust may (i) invest any portion of its net assets in S&P 500 Futures
Contracts until the portfolio reaches $25 million in net assets and (ii) once
the portfolio reaches $25 million in net assets, invest no more than 20% of its
net assets in S&P 500 Futures Contracts. A description of this investment
strategy appears under "RISK FACTORS --Hedging and Other Strategic
Transactions" below in this Prospectus and under "Hedging and Other Strategic
Transactions" in the Statement of Additional Information.
BLUE CHIP GROWTH TRUST
The primary investment objective of the Blue Chip Growth Trust (prior
to October 1, 1996, the "Pasadena Growth Trust") is to provide long-term growth
of capital. Current income is a secondary objective, and many of the stocks in
the portfolio are expected to pay dividends. T. Rowe Price manages the Blue
Chip Growth Trust.
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The portfolio will invest at least 65% of its total assets in the
common stocks of large and medium-sized blue chip companies, as defined by T.
Rowe Price. These companies will be well established in their industries and
have the potential for above-average growth in earnings.
In identifying blue chip companies, T. Rowe Price will generally take
the following into consideration:
*Leading market positions. Blue chip companies often have leading
market positions that are expected to be maintained or enhanced over
time. Strong positions, particularly in growing industries, can give
a company pricing flexibility as well as the potential for good unit
sales. These factors, in turn, can lead to higher earnings growth and
greater share price appreciation.
*Seasoned management teams. Seasoned management teams with a track
record of providing superior financial results are important for a
company's long-term growth prospects. T. Rowe Price analysts will
evaluate the depth and breadth of a company's management experience.
*Strong financial fundamentals. Companies should demonstrate faster
earnings growth than their competitors and the market in general; high
profit margins relative to competitors; strong cash flow; a healthy
balance sheet with relatively low debt; and a high return on equity
with a comparatively low dividend payout ratio.
Most of the assets of the portfolio will be invested in U.S. common
stocks. However, the portfolio may also purchase other types of securities,
for example, foreign securities, convertible stocks and bonds, and warrants,
when considered consistent with the portfolio's investment objective and
program. Investments in convertible securities, preferred stocks and debt
securities are limited to 25% of total assets. The portfolio will hold a
certain portion of its assets in U.S. and foreign dollar-denominated money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. For temporary, defensive purposes,
the portfolio may invest without limitation in such securities. This reserve
position provides flexibility in meeting redemptions, expenses, and the timing
of new investments and serves as a short-term defense during periods of unusual
market volatility.
T. Rowe Price analysts evaluate the growth prospects of companies and
the industries in which they operate. This approach seeks to identify companies
with strong market franchises in industries that appear to be strategically
poised for long-term growth. The investment approach reflects T. Rowe Price's
belief that the combination of solid company fundamentals (with emphasis on the
potential for above-average growth in earnings) along with a positive outlook
for the overall industry will ultimately reward investors with a higher stock
price. While primary emphasis is placed on a company's prospects for future
growth, the portfolio will not purchase securities that, in T. Rowe Price's
opinion, are overvalued considering the underlying business fundamentals. In
the search for substantial capital appreciation, the portfolio looks for stocks
attractively priced relative to their anticipated long-term value.
The Blue Chip Growth Trust may invest in debt securities of any type
without regard to quality or rating. Such securities would be purchased in
companies which meet the investment criteria for the portfolio. The total
return and yield of lower-quality (high-yield/high-risk) bonds, commonly
referred to as "junk" bonds, can be expected to fluctuate more than the total
return and yield of higher-quality, shorter-term bonds, but not as much as
common stocks. Junk bonds (those rated below BBB or in default) are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The portfolio will not purchase a
noninvestment-grade debt security (or junk bond) if immediately after such
purchase the portfolio would have more than 5% of its total assets invested in
such securities. See "RISK FACTORS -- High Yield (High Risk) Securities" for
further information.
The Blue Chip Growth Trust may also engage in a variety of investment
management practices, such as buying and selling futures and options. The
portfolio may invest up to 10% of its total assets in hybrid instruments, which
are a type of high-risk derivative which can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of
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a security could be related to the market price of some commodity, currency or
securities index. Such securities may bear interest or pay dividends at below
market (or even relatively nominal) rates. The Statement of Additional
Information contains a fuller description of such instruments and the risks
associated therewith.
The Blue Chip Growth Trust will be subject to special risks as a
result of its ability to invest up to 20% of its total assets in foreign
securities. These include nondollar-denominated securities traded outside of
the U.S. and dollar-denominated securities of foreign issuers traded in the
U.S. (such as ADRs). These risks are described under the caption "RISK FACTORS
- --Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Blue Chip Growth Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
VALUE TRUST
The investment objective of the Value Trust is to realize an
above-average total return over a market cycle of three to five years,
consistent with reasonable risk. MAS manages the Value Trust and seeks to
attain this objective by investing primarily in common and preferred stocks,
convertible securities, rights and warrants to purchase common stocks, ADRs and
other equity securities of companies with equity capitalizations usually
greater than $300 million.
Under normal circumstances, the Value Trust will invest at least 65%
of its total assets in equity securities. The portfolio may also invest in
obligations issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities, corporate bonds, foreign bonds, zero coupons, repurchase
agreements, cash equivalents, foreign currencies, investment company securities
and derivatives, including when-issued or delayed delivery securities, forward
foreign currency exchange contracts, futures, options and swaps. See
"INVESTMENT POLICIES -- Other Instruments" and "HEDGING AND OTHER STRATEGIC
TRANSACTIONS" in the Statement of Additional Information.
The Subadviser's approach is to select equity securities which are
deemed to be undervalued relative to the stock market in general as measured by
the Standard & Poor's 500 Index, based on value measures such as price/earnings
ratios and price/book ratios, as well as fundamental research. While capital
return will be emphasized somewhat more than income return, the Value Trust's
total return will consist of both capital and income returns. Stocks that are
deemed to be under-valued in the marketplace have, under most market
conditions, provided higher dividend income returns than stocks that are deemed
to have long-term earnings growth potential which normally sell at higher
price/earnings ratios.
The Value Trust may invest without limit in ADRs and up to 5% of its
total assets in foreign equities excluding ADRs. The risks associated with
foreign securities are described under the caption "RISK FACTORS --Foreign
Securities" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Value Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
INTERNATIONAL GROWTH AND INCOME TRUST
The investment objective of the International Growth and Income Trust
is to seek long-term growth of capital and income. The portfolio is designed
for investors with a long-term investment horizon who want to take advantage of
investment opportunities outside the United States.
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J.P. Morgan manages the International Growth and Income Trust and will
seek to achieve the portfolio's objective by investing, under normal
circumstances, at least 65% of its total assets in equity securities of foreign
issuers, consisting of common stocks and other securities with equity
characteristics such as preferred stock, warrants, rights and convertible
securities. The portfolio will focus primarily on the common stock of
established companies based in developed countries outside the United States.
Such investments will be made in at least three foreign countries. The
portfolio invests in securities listed on foreign or domestic securities
exchanges and securities traded in foreign or domestic over-the-counter
markets, and may invest in certain restricted or unlisted securities. See
"RISK FACTORS -- Foreign Securities." Under normal circumstances, the
International Growth and Income Trust expects to invest primarily in equity
securities. However, the portfolio may invest up to 35% of its assets in debt
obligations of corporate or sovereign or supranational organizations rated A or
higher by Moody's or S&P, or if unrated, of equivalent credit quality as
determined by the Subadviser. See "Global Government Bond Trust" for further
information on supranational organizations. Under normal circumstances, the
portfolio will be invested approximately 85% in equity securities and 15% in
these fixed income securities. This allocation, however, may change over time.
J.P. Morgan may allocate the portfolio's investment in these asset classes in a
manner consistent with the portfolio's investment objective and current market
conditions. Using a variety of analytical tools, J.P. Morgan assesses the
relative attractiveness of each asset class and determines an optimal
allocation between them. Yields on non-U.S. equity securities tend to be lower
than those on equity securities of U.S. issuers. Therefore, current income
from the portfolio may not be as high as that available from a portfolio of
U.S. equity securities.
In pursuing the International Growth and Income Trust's objective,
J.P. Morgan will actively manage the assets of the portfolio through country
allocation and stock valuation and selection. Based on fundamental research,
quantitative valuation techniques and experienced judgment, J.P. Morgan uses a
structured decision-making process to allocate the portfolio primarily across
the developed countries of the world outside the United States. This universe
is typically represented by the Morgan Stanley Europe, Australia and Far East
Index (the "EAFE Index").
Using a dividend discount model and based on analysts' industry
expertise, securities within each country are ranked within economic sectors
according to their relative value. Based on this valuation, J.P. Morgan
selects the securities which appear the most attractive for the portfolio.
J.P. Morgan believes that under normal market conditions, economic sector
weightings generally will be similar to those of the relevant equity index.
Finally, J.P. Morgan actively manages currency exposure, in
conjunction with country and stock allocation, in an attempt to protect and
possibly enhance the International Growth and Income Trust's market value.
Through the use of forward currency exchange contracts, J.P. Morgan will adjust
the portfolio's foreign currency weightings to reduce its exposure to
currencies that the Subadviser deems unattractive and, in certain
circumstances, increase exposure to currencies deemed attractive, as market
conditions warrant, based on fundamental research, technical factors and the
judgment of a team of experienced currency managers.
The International Growth and Income Trust intends to manage its
investment portfolio actively in pursuit of its investment objective. The
portfolio does not expect to trade in securities for short-term profits;
however, when circumstances warrant, securities may be sold without regard to
the length of time held. See "GENERAL INFORMATION -- Taxes." To the extent
the portfolio engages in short-term trading, it may incur increased transaction
costs.
The International Growth and Income Trust may also invest in
securities on a when-issued or delayed delivery basis, enter into repurchase
agreements, loan its portfolio securities and purchase certain privately placed
securities. See "RISK FACTORS."
The International Growth and Income Trust may make money market
investments pending other investments or settlement or for liquidity purposes.
In addition, when J.P. Morgan believes that investing for defensive purposes is
appropriate, such as during periods of unusual or unfavorable market or
economics conditions, up to 100% of the portfolio's assets may be temporarily
invested in money market instruments. The money market investments permitted
for the portfolio include obligations of the U.S.
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Government and its agencies and instrumentalities, other debt securities,
commercial paper, bank obligations and repurchase agreements, as described
below under "Money Market Trust."
The International Growth and Income Trust will be subject to special
risks as a result of its ability to invest up to 100% of its assets in foreign
securities. These risks are described under the captions "RISK FACTORS --
Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"GENERAL INFORMATION -- Taxes" in this Prospectus. The ability to diversify
its investments among the equity markets of different countries may, however,
reduce the overall level of market risk to the extent it may reduce the
portfolio's exposure to a single market. In order to comply with limitations
imposed by the State of California Insurance Department, the International
Growth and Income Trust will comply with the restrictions regarding foreign
investments set forth under "Risk Factors - Additional Investment Restrictions
on Borrowing and Foreign Investing."
Use of Hedging and Other Strategic Transactions
The International Growth and Income Trust is currently authorized to
use all of the various investment strategies referred to under "RISK FACTORS
- -- Hedging and Other Strategic Transactions." With the exception of currency
transactions, however, it is not presently anticipated that any of these
strategies will be used to a significant degree by the portfolio. The
Statement of Additional Information contains a description of these strategies
and of certain risks associated therewith.
GROWTH AND INCOME TRUST
The investment objective of the Growth and Income Trust is to provide
long-term growth of capital and income consistent with prudent investment risk.
Wellington Management manages the Growth and Income Trust and seeks to
achieve the Trust's objective by investing primarily in a diversified portfolio
of common stocks of U.S. issuers which Wellington Management believes are of
high quality. Wellington Management believes that high quality is evidenced by
a leadership position within an industry, a strong or improving balance sheet,
relatively high return on equity, steady or increasing dividend payout and
strong management skills. The Trust's investments will primarily emphasize
dividends paying stocks of larger companies. The Trust may also invest in
securities convertible into or which carry the right to buy common stocks,
including those convertible securities issued in the Euromarket, preferred
stocks and debt securities. When market or financial conditions warrant a
temporary defensive posture, the Trust may, in order to reduce risk and achieve
attractive total investment return, invest up to 100% of its assets in
securities which are authorized for purchase by the Investment Quality Bond
Trust (excluding non-investment grade securities) or the Money Market Trust.
The Subadviser expects that under normal market conditions the Growth and
Income Trust will consist primarily of equity securities.
Investments will be selected on the basis of fundamental analysis to
identify those securities that, in Wellington Management's judgment, provide
the potential for long-term growth of capital and income. Fundamental analysis
involves assessing a company and its business environment, management, balance
sheet, income statement, anticipated earnings and dividends and other related
measures of value. When selecting securities of issuers domiciled outside of
the United States, Wellington Management will also monitor and evaluate the
economic and political climate and the principal securities markets of the
country in which each company is located.
The Growth and Income Trust will invest primarily in securities listed
on national securities exchanges, but from time to time it may also purchase
securities traded in the "over the counter" market.
The Growth and Income Trust will be subject to certain risks as a
result of its ability to invest up to 20% of its assets in foreign securities.
These risks are described under the caption "Foreign Securities" in this
Prospectus. Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Taxes" in this Prospectus.
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Use of Hedging and Other Strategic Transactions
The Growth and Income Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." However, it is not presently anticipated that any of these
strategies will be used to a significant degree by the portfolio. The
Statement of Additional Information contains a description of these strategies
and of certain risks associated therewith.
EQUITY-INCOME TRUST
The investment objective of the Equity-Income Trust (prior to December
31, 1996, the "Value Equity Trust") is to provide substantial dividend income
and also long term capital appreciation. T. Rowe Price manages the
Equity-Income Trust and seeks to attain this objective by investing primarily
in dividend-paying common stocks, particularly of established companies with
favorable prospects for both increasing dividends and capital appreciation.
Under normal circumstances, the Equity-Income Trust will invest at
least 65% of total assets in the common stocks of established companies paying
above-average dividends. T. Rowe Price believes that income can be a
significant contributor to total return over time and expects the portfolio's
yield to be above that of the Standard & Poor's 500 Stock Index.
The Equity-Income Trust will generally consider companies with the
following characteristics:
-- Established operating histories;
-- Above-average current dividend yield relative to the average yield
of the S&P 500;
-- Low price/earnings ratios relative to the S&P 500;
-- Sound balance sheets and other financial characteristics;
-- Low stock price relative to a company's underlying value as
measured by assets, earnings, cash flow, or business franchises.
The Equity-Income Trust will tend to take a "value" approach and
invest in stocks and other securities that appear to be temporarily undervalued
by various measures, such as price/earnings ratios. Value investors seek to
buy a stock (or other security) when its price is low in relation to what they
believe to be its real worth or future prospects. By identifying companies
whose stocks are currently out of favor, value investors hope to realize
significant appreciation as other investors recognize the stock's intrinsic
value and the price rises accordingly. Finding undervalued stocks requires
considerable research to identify the particular stock, to analyze the
company's underlying financial condition and prospects, and to assess the
likelihood that the stock's underlying value will be recognized by the market
and reflected in its price.
The Equity-Income Trust may also purchase other types of securities,
for example, foreign securities, preferred stocks, convertible stocks and
bonds, and warrants, when considered consistent with the portfolio's investment
objective and program. The portfolio will hold a certain portion of its assets
in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, the portfolio may invest
without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments
and serves as a short-term defense during periods of unusual market volatility.
The Equity-Income Trust may also invest in debt securities of any type
including municipal securities without regard to quality or rating. The total
return and yield of lower-quality (high-yield/high-risk) bonds, commonly
referred to as "junk" bonds, can be expected to fluctuate more than the total
return and yield of higher-quality, shorter-term bonds, but not as much as
common stocks. Junk bonds (those rated below BBB or in default) are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The portfolio will not
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purchase a noninvestment-grade debt security (or junk bond) if immediately
after such purchase the portfolio would have more than 10% of its total assets
invested in such securities.
The Equity-Income Stock Trust may also engage in a variety of
investment management practices, such as buying and selling futures and
options. The portfolio may invest up to 10% of its total assets in hybrid
instruments, which are a type of high-risk derivative which can combine the
characteristics of securities, futures and options. For example, the principal
amount, redemption or conversion terms of a security could be related to the
market price of some commodity, currency or securities index. Such securities
may bear interest or pay dividends at below market (or even relatively nominal)
rates. The Statement of Additional Information contains a fuller description of
such instruments and the risks associated therewith.
The Equity-Income Trust will be subject to special risks as a result
of its ability to invest up to 25% of its total assets in foreign securities.
These include nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). These risks are described under the caption "RISK FACTORS --Foreign
Securities" in this Prospectus. Moreover, substantial investments in foreign
securities may have adverse tax implications as described under "GENERAL
INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Equity-Income Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
REAL ESTATE SECURITIES TRUST
The investment objective of the Real Estate Securities Trust is to
achieve a combination of long-term capital appreciation and satisfactory
current income by investing in real estate related equity and debt securities.
MAC manages the Real Estate Securities Trust and seeks to attain this objective
by investing principally in real estate investment trust equity and debt
securities and other securities issued by companies which invest in real estate
or interests therein.
The Real Estate Securities Trust may also purchase the common stocks,
preferred stocks, convertible securities and bonds of companies operating in
industry groups relating to the real estate industry. This would include
companies engaged in the development of real estate, building and construction,
and other market segments related to real estate. The portfolio will not
invest directly in real property nor will it purchase mortgage notes directly.
Under normal circumstances, at least 65% of the value of the Real
Estate Securities Trust's total assets will be invested in real estate related
equity and debt securities. When, in the opinion of the Subadviser, market or
economic conditions warrant a defensive posture, the portfolio may place all or
a portion of its assets in fixed-income securities which may or may not be real
estate debt related securities. The portfolio may also maintain a portion of
its assets in cash or short-term debt securities pending selection of
particular long-term investments. The portfolio may purchase securities on a
forward-commitment, when-issued or delayed-delivery basis. For a discussion of
these securities, please see the discussion under "When-Issued Securities
("Forward Commitments") below.
The Real Estate Securities Trust will be subject to certain risks as a
result of its ability to invest up to 100% of its total assets in the following
types of foreign securities: (i) U.S. dollar denominated obligations of foreign
branches of U.S. banks, (ii) securities represented by ADRs listed on a
national securities exchange or traded in the U.S. over-the-counter market,
(iii) securities of a corporation organized in a jurisdiction other than the
U.S. and listed on the New York Stock Exchange or NASDAQ or (iv) securities
denominated in U.S. dollars but issued by non U.S. issuers and issued under
U.S. federal securities regulations (for example, U.S. dollar denominated
obligations issued or guaranteed as to principal or interest by the Government
of Canada or any Canadian Crown agency). These risks are described under the
caption "RISK FACTORS --Foreign Securities" in this Prospectus. Moreover,
substantial investments in foreign securities may have adverse tax implications
as described under "GENERAL INFORMATION --Taxes" in this Prospectus.
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Use of Hedging and Other Strategic Transactions The Real Estate
Securities Trust does not presently use any of the investment strategies
referred to under "Hedging and Other Strategic Transactions."
BALANCED TRUST
The investment objective of the Balanced Trust is current income and
capital appreciation. Founders is the manager of the Balanced Trust and seeks
to attain this objective by investing in a balanced portfolio of common stocks,
U.S. and foreign government obligations and a variety of corporate fixed-income
securities.
Normally, the Balanced Trust will invest a significant percentage (up
to 75%) of its total assets in common stocks, convertible corporate
obligations, and preferred stocks. The portfolio emphasizes investment in
dividend-paying common stocks with the potential for increased dividends, as
well as capital appreciation. The portfolio also may invest in
non-dividend-paying companies if, in Founders' opinion, they offer better
prospects for capital appreciation.
The Balanced Trust may invest in convertible securities, preferred
stocks, bonds, debentures, and other corporate obligations when Founders
believes that these investments offer opportunities for capital appreciation.
Current income is also a factor in the selection of these securities.
The Balanced Trust will maintain a minimum of 25% of its total assets
in fixed-income, investment-grade securities rated Baa or higher by Moody's or
BBB or higher by S&P. There is, however, no limit on the amount of straight
debt securities in which the portfolio may invest. Up to 5% of the Balanced
Trust's total assets may be invested in lower-grade (Ba or less by Moody's, BB
or less by S&P) or unrated straight debt securities, generally referred to as
junk bonds, where Founders determines that such securities present attractive
opportunities. The portfolio will not invest in securities rated lower than B.
Securities rated B generally lack characteristics of a desirable investment and
are deemed speculative with respect to the issuer's capacity to pay interest
and repay principal over a long period of time.
The Balanced Trust may also invest in convertible corporate
obligations and preferred stocks. Convertible securities and preferred stocks
purchased by the portfolio may be rated in medium and lower categories by
Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P) but will not be
rated lower than B. The portfolio may also invest in unrated convertible
securities and preferred stocks in instances in which Founders believes that
the financial condition of the issuer or the protection afforded by the terms
of the securities limits risk to a level similar to that of securities eligible
for purchase by the portfolio rated in categories no lower than B. At no time
will the portfolio have more than 5% of its total assets invested in any
fixed-income securities which are unrated or are rated below investment grade
either at the time of purchase or as a result of a reduction in rating after
purchase. The portfolio is not required to dispose of debt securities whose
ratings are downgraded below these ratings subsequent to the portfolio's
purchase of the securities, unless such a disposition is necessary to reduce
the portfolio's holdings of such securities to less than 5% of its total
assets. See "RISK FACTORS -- High Yield (High Risk) Securities." A description
of the ratings used by Moody's and S&P is set forth in Appendix I to the
Prospectus.
Up to 100% of the assets of the Balanced Trust may be invested
temporarily in U.S. Government obligations, commercial paper, bank obligations,
repurchase agreements, and negotiable U.S. dollar-denominated obligations of
domestic and foreign branches of U.S. depository institutions, U.S. branches of
foreign depository institutions, and foreign depository institutions, in cash,
or in other cash equivalents, if Founders determines it to be appropriate for
purposes of enhancing liquidity or preserving capital in light of prevailing
market or economic conditions. The portfolio may also acquire certificates of
deposit and bankers' acceptances of banks which meet criteria established by
the Trust's Board of Trustees. While the portfolio is in a defensive position,
the opportunity to achieve capital growth will be limited, and, to the extent
that this assessment of market conditions is incorrect, the portfolio will be
foregoing the opportunity to benefit from capital growth resulting from
increases in the value of equity investments.
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The Balanced Trust may invest without limit in ADRs and up to 30% of
its total assets in foreign securities (other than ADRs). The portfolio will
not invest more than 25% of its total assets in the securities of any one
country.
The Balanced Trust will be subject to special risks as a result of its
ability to invest up to 30% of its total assets in foreign securities,
excluding ADRs. These risks are described under the caption "RISK FACTORS
- --Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Balanced Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
HIGH YIELD TRUST
The investment objective of the High Yield Trust is to realize an
above-average total return over a market cycle of three to five years,
consistent with reasonable risk. MAS manages the High Yield Trust and seeks to
attain this objective by investing primarily in high yield debt securities,
including corporate bonds and other fixed-income securities.
The High Yield Trust expects to achieve its objective through
maximizing current income, although the portfolio may seek capital growth
opportunities when consistent with its objective. The portfolio's average
weighted maturity ordinarily will be greater than five years. Under normal
circumstances, the portfolio will invest at least 65% of the value of its
total assets in high yield debt securities.
High yield securities are generally considered to include corporate
bonds, preferred stocks and convertible securities rated Ba through C by
Moody's or BB through D by S&P, and unrated securities considered to be of
equivalent quality. Securities rated less than Baa by Moody's or BBB by S&P's
are classified as non-investment grade securities and are commonly referred to
as junk bonds or high yield securities. Such securities carry a high degree of
risk and are considered speculative by the major credit rating agencies.
While such securities offer high yields, they also normally carry with
them a greater degree of risk than securities with higher ratings. Lower-rated
bonds are considered speculative by traditional investment standards. High
yield securities may be issued as a consequence of corporate restructuring or
similar events. Also, high yield securities are often issued by smaller, less
credit worthy companies, or by highly leveraged (indebted) firms, which are
generally less able than more established or less leveraged firms to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial and business position of the issuing corporation when compared to
investment grade bonds. The risks posed by securities issued under such
circumstances are substantial. If a security held by the portfolio is
down-graded, the portfolio may retain the security. See "RISK FACTORS -- High
Yield (High Risk) Securities." A description of the ratings used by Moody's and
S&P is set forth in Appendix I to the Prospectus.
The Subadviser's approach is to use equity and fixed-income valuation
techniques and analyses of economic and industry trends to determine portfolio
structure. Individual securities are selected and monitored by fixed-income
portfolio managers who specialize in credit analysis of fixed-income securities
and use in-depth financial analysis to uncover opportunities in undervalued
issues. The Subadviser seeks to invest in high yield securities based on the
Subadviser's analysis of economic and industry trends and individual security
characteristics. The Subadviser conducts credit analysis for each security
considered for investment to evaluate its attractiveness relative to its risk.
A high level of diversification is also maintained to limit credit exposure to
individual issuers.
One of two primary components of the Subadviser's fixed-income
strategy is value investing, whereby the Subadviser seeks to identify
undervalued sectors and securities through analysis of credit quality, option
characteristics and liquidity. Quantitative models are used in conjunction with
judgment
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and experience to evaluate and select securities with embedded put or call
options which are attractive on a risk- and option-adjusted basis. Successful
value investing will permit a portfolio to benefit from the price appreciation
of individual securities during periods when interest rates are unchanged.
The other primary component of the Subadviser's fixed-income
investment strategy is maturity and duration management. The maturity and
duration structure of a portfolio investing in fixed-income securities is
actively managed in anticipation of cyclical interest rate changes. Adjustments
are not made in an effort to capture short-term, day-to- day movements in the
market, but instead are implemented in anticipation of longer term shifts in
the levels of interest rates. Adjustments made to shorten portfolio maturity
and duration are made to limit capital losses during periods when interest
rates are expected to rise. Conversely, adjustments made to lengthen maturity
are intended to produce capital appreciation in periods when interest rates are
expected to fall. The foundation for maturity and duration strategy lies in
analysis of the U.S. and global economies, focusing on levels of real interest
rates, monetary and fiscal policy actions, and cyclical indicators.
At times it is anticipated that greater than 50% of High Yield Trust's
assets may be invested in mortgage-backed securities. These include securities
which represent pools of mortgage loans made by lenders such as commercial
banks, savings and loan associations, mortgage bankers and others. The pools
are assembled by various Governmental, Government-related and private
organizations. It is expected that the portfolio's primary emphasis will be in
mortgage-backed securities issued by the various Government-related
organizations. However, the portfolio may invest, without limit, in
mortgage-backed securities issued by private issuers when the Subadviser deems
that the quality of the investment, the quality of the issuer, and market
conditions warrant such investments. Securities issued by private issuers will
be rated investment grade by Moody's or Standard & Poor's or be deemed by the
Subadviser to be of comparable investment quality. It is not anticipated that
greater than 25% of a portfolio's assets will be invested in mortgage pools
comprised of private organizations. See "INVESTMENT POLICIES -- Other
Instruments" in the Statement of Additional Information for a description of
these investments and of certain risks associated therewith.
The High Yield Trust will invest in foreign bonds and other fixed
income securities denominated in foreign currencies, where, in the opinion of
the Subadviser, the combination of current yield and currency value offer
attractive expected returns. Foreign securities in which the portfolio may
invest include emerging market securities. The Subadviser's approach to
emerging markets investing is based on the Subadviser's evaluation of both
short-term and long-term international economic trends and the relative
attractiveness of emerging markets and individual emerging market securities.
Emerging markets describes any country which is generally considered to be an
emerging, or developing country by the international financial community such
as the International Bank for Reconstruction and Development (more commonly
known as the World Bank) and the International Finance Corporation. Securities
available to the portfolio also include securities created through the Brady
Plan, a program under which heavily indebted countries have restructured their
bank debt into bonds.
The High Yield Trust will be subject to special risks as a result of
its ability to invest up to 100% of its total assets in foreign securities,
including emerging market securities. These risks, including the risks of the
possible increased likelihood of expropriation or the return to power of a
communist regime which would institute policies to expropriate, nationalize or
otherwise confiscate investments, are described under the caption "RISK FACTORS
- --Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The High Yield Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
AUTOMATIC ASSET ALLOCATION TRUSTS
There are three Automatic Asset Allocation Trusts - Aggressive,
Moderate and Conservative. The investment objective of each of the Automatic
Asset Allocation Trusts is to obtain the highest potential
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total return consistent with a specified level of risk tolerance -- aggressive,
moderate and conservative. The Automatic Asset Allocation Trusts are designed
for:
* The investor who wants to maximize total return potential, but lacks
the time, temperament or expertise to do so effectively;
* The investor who does not want to monitor the financial markets in
order to make periodic exchanges among portfolios;
* The investor who wants the opportunity to improve on the return of an
income-oriented investment program, but wants to take advantage of the
risk management features of an asset allocation program; and
* Retirement program fiduciaries who have a responsibility to limit risk
in a meaningful way, while seeking the highest potential total return.
Each of the Automatic Asset Allocation Trusts may invest in a
combination of equity, fixed-income and money market securities. The amount of
each portfolio's assets invested in each category of securities is dependent
upon the judgment of FMTC as to what percentages of each portfolio's assets in
each category will contribute to the limitation of risk and the achievement of
its investment objective. Unlike many asset allocation and timing services
offered by competitors, the Automatic Asset Allocation Trusts permit FMTC to
reallocate each portfolio's assets among the categories of securities
"automatically," without a delay for a request or response by the shareholder,
whenever, in the Subadviser's judgment, market or economic changes warrant such
a reallocation. FMTC reserves complete discretion to determine the
allocations among the categories of securities.
The investor chooses an Automatic Asset Allocation Trust by
determining which risk tolerance level most closely corresponds to the
investor's individual planning needs, objectives and comfort. Generally, the
higher the portfolio's level of risk tolerance, the higher is the expected
total return for the portfolio over the long-term and under favorable market
conditions. Over the long-term, it is expected that the total return of the
Aggressive Asset Allocation Trust will exceed that of the Moderate Asset
Allocation Trust and that the total return of the Moderate Asset Allocation
Trust will exceed that of the Conservative Asset Allocation Trust, although
there is no assurance that this will be the case. Moreover, as a general
matter, the higher the risk tolerance of a portfolio, the greater is the
expected volatility of the portfolio. In adverse market conditions, it is
expected that the losses will be greater in the Aggressive Asset Allocation
Trust than in the Moderate Asset Allocation Trust and greater in the Moderate
Asset Allocation Trust than in the Conservative Asset Allocation Trust,
although again there is no assurance that this will be the case.
FMTC attempts to limit the maximum amount of decline in value each
portfolio incurs under very adverse market conditions, to define the level of
risk tolerance -- aggressive, moderate or conservative. Very adverse market
conditions are defined as a substantial increase in long-term interest rates
accompanied by a similarly substantial decline in one or more commonly-followed
stock market indices over a three year period. Of course, FMTC cannot predict
with certainty when adverse market conditions will arise. Consequently, FMTC
must manage each of the Automatic Asset Allocation Trusts under all market
conditions with a view toward limiting risk and portfolio decline should very
adverse market conditions arise. For example, since the Conservative Asset
Allocation Trust has the lowest risk tolerance level, its assets under all
market conditions will be invested less aggressively (i.e., with greater
emphasis on fixed-income securities and money market instruments) than those of
the other Automatic Asset Allocation Trusts. In addition, when market
conditions deteriorate (the probability of very adverse market conditions
rises), FMTC will give greater emphasis to fixed-income securities and money
market instruments in an effort to limit overall declines in portfolio value.
An investor should select an Automatic Asset Allocation Trust
depending on his or her objective in terms of balancing the potential long-term
total returns of a portfolio against limiting risk and portfolio declines in
very adverse market conditions. There can be no assurance that actual declines
in portfolio value will not exceed the percentage limitations set forth below
in the description of each portfolio.
THE AGGRESSIVE ASSET ALLOCATION TRUST
The investment objective of the Aggressive Asset Allocation Trust is
to seek the highest total return consistent with an aggressive level of risk
tolerance. This Trust attempts to limit the decline in
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portfolio value in very adverse market conditions to 15% in any three year
period. This Trust will tend to invest a greater portion of its assets in
equity and foreign securities than the Moderate and Conservative Asset
Allocation Trusts and a lower percentage of its assets in fixed-income
securities and money market instruments than such Trusts. FMTC will invest
the Aggressive Asset Allocation Trust's assets to attempt to produce a total
return competitive with that of equity funds, while at the same time exposing
the Trust's assets to less risk than the typical aggressive equity fund by
allocating a portion of the portfolio's assets to fixed-income securities and
money market instruments. There can be no assurance that FMTC will be able to
attain this objective.
THE MODERATE ASSET ALLOCATION TRUST
The investment objective of the Moderate Asset Allocation Trust is to
seek the highest total return consistent with a moderate level of risk
tolerance. This Trust attempts to limit the decline in portfolio value in very
adverse market conditions to 10% over any three year period. The amount of the
Moderate Asset Allocation Trust's assets invested in each category of
securities will depend on the judgment of FMTC as to what relative portions of
the portfolio's assets in each category will contribute to the achievement of
its objective. Generally, it will place greater emphasis on equity and foreign
securities than the Conservative Asset Allocation Trust but more emphasis on
fixed-income securities and money market instruments than the Aggressive Asset
Allocation Trust. FMTC will invest the Moderate Asset Allocation Trust's
assets to attempt to give the portfolio a substantial participation in
favorable equity and bond markets, although the expected total return will not
necessarily exceed the best returns available from either of those markets.
THE CONSERVATIVE ASSET ALLOCATION TRUST
The investment objective of the Conservative Asset Allocation Trust is
to seek the highest total return consistent with a conservative level of risk
tolerance. This Trust attempts to limit the decline in portfolio value in very
adverse market conditions to 5% over any three year period. This Trust will
tend to invest a greater portion of its assets in fixed-income securities and
money market instruments than the Moderate and Aggressive Asset Allocation
Trusts and a lower percentage of its assets in equity and foreign securities
than such Trusts. FMTC will attempt to invest the Conservative Asset
Allocation Trust's assets in order to produce a higher total return than that
which is available from a bond or a money market portfolio alone, although
there can be no assurance that FMTC will be able to attain this objective.
The types and characteristics of equity securities to be purchased by
the Automatic Asset Allocation Trusts are set forth above in the discussion of
investment objectives and policies for the Equity Trust; the types and
characteristics of the fixed-income securities to be purchased are set forth in
the discussion of investment objectives and policies for the Investment Quality
Bond (the Automatic Asset Allocation Trusts may not invest in below investment
grade securities except as noted below) and U.S. Government Securities Trusts;
and the types and characteristics of the money market securities to be
purchased are set forth in the discussion of investment objectives of the Money
Market Trust. Potential investors should review the discussion therein in
considering an investment in shares of the Automatic Asset Allocation Trusts.
The Aggressive Asset Allocation Trust and the Moderate Asset
Allocation Trust may each invest up to 10% of their assets in domestic and
foreign high yield corporate and government debt securities, commonly known as
"junk bonds" (i.e., rated "Ba" or below by Moody's or "BB" or below by S & P,
or if unrated, of comparable quality as determined by FMTC. Domestic and
foreign high yield debt securities involve comparatively greater risks,
including price volatility and risk of default in the payment of interest and
principal, than higher quality securities. See "RISK FACTORS -- High Yield
(High Risk) Securities" for further information.
Use of Hedging and Other Strategic Transactions
The Automatic Asset Allocation Trusts are currently authorized to use
all of the various investment strategies referred to under "Hedging and Other
Strategic Transactions." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith. The
Aggressive Asset Allocation
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Trust may invest up to 35% of its assets, the Moderate Asset Allocation Trust
may invest up to 25% of its assets and the Conservative Allocation Trust may
invest up to 15% of its assets in securities issued by foreign entities and/or
denominated in foreign currencies. The Automatic Asset Allocation Trusts will
be subject to certain risks as a result of their ability to invest in foreign
securities. These risks are described under the caption "Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities
may have adverse tax implications as described under "Taxes" in this
Prospectus. In order to comply with limitations imposed by the State of
California Insurance Department, the Aggressive and Moderate Asset Allocation
Trusts will comply with the restrictions regarding foreign investments set
forth under "Risk Factors - Additional Investment Restrictions on Borrowing and
Foreign Investing."
STRATEGIC BOND TRUST
The investment objective of the Strategic Bond Trust is to seek a high
level of total return consistent with preservation of capital.
The Strategic Bond Trust seeks to achieve its objective by giving its
Subadviser, SBAM, broad discretion to deploy the Strategic Bond Trust's assets
among certain segments of the fixed-income market as SBAM believes will best
contribute to the achievement of the portfolio's objective. At any point in
time, the Subadviser will deploy the portfolio's assets based on the
Subadviser's analysis of current economic and market conditions and the
relative risks and opportunities present in the following market segments: U.S.
Government obligations, investment grade domestic corporate debt, high yield
(high risk) corporate debt securities, mortgage backed securities and
investment grade and high yield international debt securities. The Subadviser
is an affiliate of Salomon Brothers Inc ("SBI"), and in making investment
decisions is able to draw on the research and market expertise of SBI with
respect to fixed-income securities.
In pursuing its investment objective, the Strategic Bond Trust may
invest without limitation in high yield (high risk) securities. High yield
securities, commonly known as "junk bonds", also present a high degree of risk.
High-yielding, lower-quality securities involve comparatively greater risks,
including price volatility and the risk of default in the timely payment of
interest and principal, than higher-quality securities. Due to the risks
inherent in certain of the securities in which the Strategic Bond Trust may
invest, an investment in the portfolio should not be considered as a complete
investment program and may not be appropriate for all investors. See "Risk
Factors--High Yield (High Risk) Securities."
The Subadviser will determine the amount of assets to be allocated to
each type of security in which it invests based on its assessment of the
maximum level of total return that can be achieved from a portfolio which is
invested in these securities without incurring undue risks to principal value.
In making this determination, the Subadviser will rely in part on quantitative
analytical techniques that measure relative risks and opportunities of each
type of security based on current and historical economic, market, political
and technical data for each type of security, as well as on its own assessment
of economic and market conditions both on a global and local (country) basis.
In performing quantitative analysis, the Subadviser will employ prepayment
analysis and option adjusted spread technology to evaluate mortgage securities,
mean variance optimization models to evaluate international debt securities,
and total rate of return analysis to measure relative risks and opportunities
in other fixed-income markets. Economic factors considered will include
current and projected levels of growth and inflation, balance of payment status
and monetary policy. The allocation of assets to international debt securities
will further be influenced by current and expected currency relationships and
political and sovereign factors. The portfolio's assets may not always be
allocated to the highest yielding securities if the Subadviser feels that such
investments would impair the portfolio's ability to preserve shareholder
capital. The Subadviser will continuously review this allocation of assets and
make such adjustments as it deems appropriate. The portfolio does not plan to
establish a minimum or a maximum percentage of the assets which it will invest
in any particular type of fixed-income security.
In addition, the Subadviser will have discretion to select the range
of maturities of the various fixed-income securities in which the portfolio
invests. Such maturities may vary substantially from time to time depending on
economic and market conditions.
The types and characteristics of the U.S. Government obligations,
mortgage-backed securities, investment grade corporate debt securities and
investment grade international debt securities to be
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purchased are set forth in the discussion of investment objectives and policies
for the Investment Quality Bond, U.S. Government Securities and Global
Government Bond Trusts, and in the section entitled "Other Investments" in the
Statement of Additional Information; and the types and characteristics of the
money market securities to be purchased are set forth in the discussion of
investment objectives of the Money Market Trust. Potential investors should
review the discussion therein in considering an investment in shares of the
Strategic Bond Trust. As described below, the Strategic Bond Trust may also
invest in high yield domestic and foreign debt securities.
The Strategic Bond Trust will be subject to special risks as a result
of its ability to invest up to 100% of its assets in foreign securities. These
risks are described under the captions "Risk Factors--High Yield (High Risk)
Securities" and "Foreign Securities" in this Prospectus. Moreover, substantial
investments in foreign securities may have adverse tax implications as
described under "Taxes" in this Prospectus. The ability to spread its
investments among the fixed-income markets in a number of different countries
may, however, reduce the overall level of market risk to the extent it may
reduce the Strategic Bond Trust's exposure to a single market. In order to
comply with limitations imposed by the State of California Insurance
Department, the Strategic Bond Trust will comply with the restrictions
regarding foreign investments set forth under "Risk Factors - Additional
Investment Restrictions on Borrowing and Foreign Investing."
The Strategic Bond Trust currently intends to invest substantially all
of its assets in fixed-income securities. In order to maintain liquidity,
however, the Strategic Bond Trust may invest up to 20% of its assets in
high-quality short-term money market instruments. If at some future date, in
the opinion of the Subadviser, adverse conditions prevail in the market for
fixed-income securities, the Strategic Bond Trust for temporary defensive
purposes may invest its assets without limit in high-quality short-term money
market instruments.
As discussed above, the Strategic Bond Trust may invest in U.S.
dollar-denominated securities issued by domestic issuers that are rated below
investment grade or of comparable quality. Although the Subadviser does not
anticipate investing in excess of 75% of the portfolio's assets in domestic and
developing country debt securities that are rated below investment grade, the
portfolio may invest a greater percentage in such securities when, in the
opinion of the Subadviser, the yield available from such securities outweighs
their additional risks. By investing a portion of the portfolio's assets in
securities rated below investment grade, as well as through investments in
mortgage securities and international debt securities, as described below, the
Subadviser expects to provide investors with a higher yield than a high-quality
domestic corporate bond fund while at the same time presenting less risk than a
fund that invests principally in securities rated below investment grade.
Certain of the debt securities in which the portfolio may invest may have, or
be considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's or S&P (i.e., rated C by
Moody's or CCC or lower by S&P). See "Risk Factors--High Yield (High Risk)
Securities--General."
In light of the risks associated with high yield corporate and
sovereign debt securities, the Subadviser will take various factors into
consideration in evaluating the credit worthiness of an issue. For corporate
debt securities, these will typically include the issuer's financial resources,
its sensitivity to economic conditions and trends, the operating history of the
issuer, and the experience and track record of the issuer's management. For
sovereign debt instruments, these will typically include the economic and
political conditions within the issuer's country, the issuer's overall and
external debt levels and debt service ratios, the issuer's access to capital
markets and other sources of funding, and the issuer's debt service payment
history. The Subadviser will also review the ratings, if any, assigned to the
security by any recognized rating agencies, although the Subadviser's judgment
as to the quality of a debt security may differ from that suggested by the
rating published by a rating service. The Strategic Bond Trust's ability to
achieve its investment objective may be more dependent on the Subadviser's
credit analysis than would be the case if it invested in higher quality debt
securities.
A description of the ratings used by Moody's and S&P is set forth in
Appendix I to this Prospectus.
In addition to the types of international debt securities as set forth
in the discussion of investment objectives and policies of the Global
Government Bond Trust, the Strategic Bond Trust may also invest in
international debt securities that are below investment grade.
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The high yield sovereign debt securities in which the Strategic Bond
Trust may invest are U.S. dollar-denominated and non-dollar-denominated debt
securities issued or guaranteed by governments or governmental entities of
developing and emerging countries. The Subadviser expects that these countries
will consist primarily of those which have issued or have announced plans to
issue Brady Bonds, but the portfolio is not limited to investing in the debt of
such countries. Brady Bonds are debt securities issued under the framework of
the Brady Plan, an initiative announced by U.S. Treasury Secretary Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness. The Subadviser anticipates that the
portfolio's initial investments in sovereign debt will be concentrated in Latin
American countries, including Mexico and Central and South American and
Caribbean countries. The Subadviser expects to take advantage of additional
opportunities for investment in the debt of North African countries, such as
Nigeria and Morocco, Eastern European countries, such as Poland and Hungary,
and Southeast Asian countries, such as the Philippines. Sovereign governments
may include national, provincial, state, municipal or other foreign governments
with taxing authority. Governmental entities may include the agencies and
instrumentalities of such governments, as well as state-owned enterprises.
Use of Hedging and Other Strategic Transactions
The Strategic Bond Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." With the exception of currency transactions, however, it is not
presently anticipated that any of these strategies will be used to a
significant degree by the portfolio. The Statement of Additional Information
contains a description of these strategies and of certain risks associated
therewith.
GLOBAL GOVERNMENT BOND TRUST
The investment objective of the Global Government Bond Trust is to
seek a high level of total return by placing primary emphasis on high current
income and the preservation of capital. Oechsle International manages the
Global Government Bond Trust and intends to pursue this objective by investing
primarily in a selected global portfolio of high-quality, fixed-income
securities of foreign and U.S. governmental entities and supranational issuers.
Oechsle International will select the Global Government Bond Trust's
assets from among countries and in currency denominations where opportunities
for total return are expected to be the most attractive. Fundamental economic
strength, credit quality, and currency and interest rate trends will be the
principal determinants of the various country and sector weightings within the
Global Government Bond Trust. The Global Government Bond Trust may
substantially invest in one or more countries but intends to have represented
in its portfolio securities from a number of different countries, although
there is no limit on the value of the portfolio's assets that may be invested
in any one country or in assets denominated in any one country's currency.
Moreover, the Global Government Bond Trust may for temporary defensive purposes
choose to invest substantially all its assets in U.S. securities or cash and
cash items.
The Global Government Bond Trust, unlike the other portfolios of the
Trust, is non-diversified for purposes of the Investment Company Act of 1940.
Due to its status as non-diversified, the Global Government Bond Trust is not
subject to the general limitation under the Investment Company Act of 1940 that
it not invest more than 5% of its total assets in the securities of a single
issuer. The Global Government Bond Trust has elected non-diversified status so
that it may invest more than 5% of its assets in the obligations of a foreign
government and this practice may expose the Global Government Bond Trust to
increased financial and market risks. While non-diversified for purposes of
the Investment Company Act of 1940, the Global Government Bond Trust remains
subject to certain diversification requirements imposed under the Internal
Revenue Code which are described under the caption "Taxes" in this Prospectus.
The Global Government Bond Trust will generally invest at least 65% of
its assets in the following investments: (i) debt obligations issued or
guaranteed by the U.S. government or one of its agencies or political
subdivisions; (ii) debt obligations issued or guaranteed by a foreign sovereign
government or one of its agencies or political subdivisions; (iii) debt
obligations issued or guaranteed by
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supranational organizations. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the "World Bank"), the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development Bank.
Such supranational issued instruments may be denominated in multi-national
currency units. Investments in multi-currency, debt securities will be limited
to those assigned within the four highest bond ratings by Moody's or S&P or, if
not rated, that are of equivalent investment quality as determined by Oechsle
International. The Global Government Bond Trust may also invest up to 35% of
its assets in (i) corporate debt securities assigned within the three highest
bond ratings by Moody's or S&P or, if not rated, that are of equivalent
investment quality as determined by Oechsle International, (ii) preferred
stocks and (iii) securities convertible into or exercisable for common stocks.
In addition, the Global Government Bond Trust will hold short-term cash
reserves (money market instruments maturing in a period of thirteen months or
less) as Oechsle International believes is advisable to maintain liquidity or
for temporary defensive purposes. Reserves may be held in any currency deemed
attractive by Oechsle International.
Oechsle International intends to invest in fixed-income securities in
countries where the combination of fixed-income market returns and exchange
rate movements is judged to be attractive. Oechsle International will actively
manage the Global Government Bond Trust's maturity structure according to its
interest rate outlook for each foreign economy. In response to rising interest
rates and falling prices, the Global Government Bond Trust may invest in
securities with shorter maturities to protect its principal value. Conversely,
when certain interest rates are falling and prices are rising, the Global
Government Bond Trust may invest in securities with longer maturities to take
advantage of higher yields and to seek capital appreciation. The Global
Government Bond Trust will seek to invest in countries having favorable
currency and interest rate trends. Investments in countries where the currency
trend is unfavorable may be made when the currency risk can be minimized
through hedging. The Global Government Bond Trust does not intend to invest in
longer-term fixed income securities in countries where the fixed income market
is fundamentally unattractive, regardless of the currency trend, but may invest
in short-term fixed income securities in such countries.
Use of Hedging and Other Strategic Transactions
The Global Government Bond Trust is currently authorized to use all of
the various investment strategies referred to under "Hedging and Other
Strategic Transactions." With the exception of currency transactions, however,
it is not presently anticipated that any of these strategies will be used to a
significant degree by the portfolio. The Statement of Additional Information
contains a description of these strategies and of certain risks associated
therewith. The Global Government Bond Trust will be subject to special risks
as a result of its ability to invest up to 100% of its assets in foreign
securities. These risks are described under the caption "Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities
may have adverse tax implications as described under "Taxes" in this
Prospectus. The ability to spread its investments among the fixed-income
markets in a number of different countries may, however, reduce the overall
level of market risk to the extent it may reduce the Global Government Bond
Trust's exposure to a single market. In order to comply with limitations
imposed by the State of California Insurance Department, the Global Government
Bond Trust will comply with the restrictions regarding foreign investments set
forth under "Risk Factors - Additional Investment Restrictions on Borrowing and
Foreign Investing."
CAPITAL GROWTH BOND TRUST
The investment objective of the Capital Growth Bond Trust is to
achieve growth of capital by investing in medium-grade or better debt
securities, with income as a secondary consideration. MAC manages the Capital
Growth Bond Trust.
The Capital Growth Bond Trust differs from most "bond" funds in that
its primary objective is capital appreciation, not income. Opportunities for
capital appreciation will usually exist only when the levels of prevailing
interest rates are falling. During periods when MAC expects interest rates to
decline, the portfolio will invest primarily in intermediate-term and long-term
corporate and government debt securities. However, during periods when the
Subadviser expects interest rates to rise or believes that market or economic
conditions otherwise warrant such action, the portfolio may invest sub-
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stantially all of its assets in short-term debt securities to preserve capital
and maintain income. The portfolio may also maintain a portion of its assets
temporarily in cash or short-term debt securities pending selection of
particular long-term investments.
The Capital Growth Bond Trust will be carefully positioned in relation
to the term of debt obligations and the anticipated movement of interest rates.
It is contemplated that at least 75% of the value of the portfolio's total
investment in corporate debt securities, excluding commercial paper, will be
represented by debt securities which have, at the time of purchase, a rating
within the four highest grades as determined by Moody's (Aaa, Aa, A or Baa),
S&P's (AAA, AA, A or BBB), or Fitch's Investors Service ("Fitch's") (AAA, AA, A
or BBB) and debt securities of banks and other issuers which, although not
rated as a matter of policy by either Moody's, S&P's, or Fitch's, are
considered by the Subadviser to have investment quality comparable to
securities receiving ratings within such four highest grades. Although the
portfolio does not intend to acquire or hold debt securities of below
investment-grade quality, shareholders should note that even bonds of the
lowest categories of investment-grade quality may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher-grade bonds. It should be further noted
that should an obligation in the portfolio drop below investment grade, the
portfolio will make every effort to dispose of it promptly so long as to do so
would not be detrimental to the portfolio.
Government obligations in which the Capital Growth Bond Trust may
invest include those of foreign governments provided they are denominated in
U.S. dollars. The portfolio may purchase securities on a forward-commitment,
when-issued or delayed-delivery basis.
The Capital Growth Bond Trust may purchase corporate debt securities
which carry certain equity features, such as conversion or exchange rights or
warrants for the acquisition of stock of the same or a different issuer or
participations based on revenues, sales, or profits. The portfolio will not
exercise any such conversion, exchange or purchase rights if, at the time, the
value of all equity interests so owned would exceed 10% of the value of the
portfolio's total assets.
The Capital Growth Bond Trust will be subject to certain risks as a
result of its ability to invest up to 100% of its total assets in the following
types of foreign securities: (i) U.S. dollar denominated obligations of foreign
branches of U.S. banks, (ii) securities represented by American Depository
Receipts listed on a national securities exchange or traded in the U.S.
over-the-counter market, (iii) securities of a corporation organized in a
jurisdiction other than the U.S. and listed on the New York Stock Exchange or
NASDAQ ("Interlisted Securities") or (iv) securities denominated in U.S.
dollars but issued by non U.S. issuers and issued under U.S. federal
securities regulations (for example, U.S. dollar denominated obligations issued
or guaranteed as to principal or interest by the Government of Canada or any
Canadian Crown agency). These risks are described under the caption "RISK
FACTORS --Foreign Securities" in this Prospectus. Moreover, substantial
investments in foreign securities may have adverse tax implications as
described under "GENERAL INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions The Capital Growth
Bond Trust is currently authorized to use all of the investment strategies
referred to under "Hedging and Other Strategic Transactions." However, it is
not presently contemplated that any of these strategies will be used to a
significant degree by the portfolio.
INVESTMENT QUALITY BOND TRUST
The investment objective of the Investment Quality Bond Trust is to
provide a high level of current income consistent with the maintenance of
principal and liquidity.
Wellington Management manages the Investment Quality Bond Trust and
seeks to achieve the Trust's objective by investing primarily in a diversified
portfolio of investment grade corporate bonds and U.S. Government bonds with
intermediate to longer term maturities. Investment management will emphasize
sector analysis, which focuses on relative value and yield spreads among
security types and among quality, issuer, and industry sectors, call protection
and credit research. Credit research on corporate bonds is based on both
quantitative and qualitative criteria established by Wellington
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Management, such as an issuer's industry, operating and financial profiles,
business strategy, management quality, and projected financial and business
conditions. Wellington Management will attempt to maintain a high, steady and
possibly growing income stream.
At least 65% of the Investment Quality Bond Trust's assets will be
invested in:
(1) marketable debt securities of domestic issuers and of foreign
issuers (payable in U.S. dollars) rated at the time of purchase "A" or better
by Moody's or S&P or, if unrated, of comparable quality as determined by
Wellington Management;
(2) securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities, including mortgage
backed securities (described below under U.S. Government Securities Trust); and
(3) cash and cash equivalent securities which are authorized for
purchase by the Money Market Trust.
The balance of the Investment Quality Bond Trust's investments may
include: domestic and foreign debt securities rated below "A" by Moody's and
S&P (and unrated securities of comparable quality as determined by Wellington
Management), preferred stocks, convertible securities (including those issued
in the Euromarket) and securities carrying warrants to purchase equity
securities, privately placed debt securities, asset-backed securities and
privately issued mortgage securities. At least 65% of the Investment Quality
Bond Trust's assets will be invested in bonds and debentures.
In pursuing its investment objective, the Investment Quality Bond
Trust may invest up to 20% of its assets in domestic and foreign high yield
(high risk) corporate and government debt securities, commonly known as "junk
bonds" (i.e., rated "Ba" or below by Moody's or "BB" or below by S&P, or if
unrated, of comparable quality as determined by Wellington Management). The
high yield sovereign debt securities in which the portfolio will invest are
described above under "Strategic Bond Trust." No minimum rating standard is
required for a purchase by the portfolio. Domestic and foreign high yield debt
securities involve comparatively greater risks, including price volatility and
risk of default in the payment of interest and principal, than higher-quality
securities. See "RISK FACTORS -- High Yield (High Risk) Securities and
"Foreign Sovereign Debt Securities."
The Investment Quality Bond Trust may also invest in debt securities
carrying the fourth highest quality rating ("Baa" by Moody's or "BBB" by S&P)
and unrated securities of comparable quality as determined by Wellington
Management. While such securities are considered as investment grade and are
viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories
and such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. For example, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. While the Investment Quality Bond Trust may only invest up to 20%
of its assets in bonds rated below "Baa" by Moody's or "BBB" by S&P (or, if
unrated, of comparable quality as determined by Wellington Management) at the
time of investment, it is not required to dispose of bonds owned that may be
downgraded causing the portfolio to exceed this 20% maximum.
Use of Hedging and Other Strategic Transactions
The Investment Quality Bond Trust is currently authorized to use all
of the various investment strategies referred to under "Hedging and Other
Strategic Transactions." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith .
The Investment Quality Bond Trust will be subject to certain risks as a result
of its ability to invest up to 20% of its assets in foreign securities. These
risks are described under the caption "Foreign Securities" in this Prospectus.
Moreover, substantial investments in foreign securities may have adverse tax
implications as described under "Taxes" in this Prospectus.
U.S. GOVERNMENT SECURITIES TRUST
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The investment objective of the U.S. Government Securities Trust is to
obtain a high level of current income consistent with preservation of capital
and maintenance of liquidity. SBAM manages the U.S. Government Securities
Trust and seeks to attain its objective by investing a substantial portion of
its assets in debt obligations and mortgage backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
derivative securities such as collateralized mortgage obligations backed by
such securities. The portfolio may also invest a portion of its assets in the
types of securities in which the Investment Quality Bond Trust may invest.
At least 80% of the total assets of the U.S. Government Securities
Trust will be invested in:
(1) mortgage backed securities guaranteed by the Government National
Mortgage Association that are supported by the full faith and credit
of the U.S. Government and which are the "modified pass-through" type
of mortgage backed security ("GNMA Certificates"). Such securities
entitle the holder to receive all interest and principal payments due
whether or not payments are actually made on the underlying mortgages;
(2) U.S. Treasury obligations;
(3) obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government which are backed by their own credit and may not
be backed by the full faith and credit of the U.S. Government;
(4) mortgage backed securities guaranteed by agencies or instrumentalities
of the U.S. Government which are supported by their own credit but not
the full faith and credit of the U.S. Government, such as the Federal
Home Loan Mortgage Corporation and the Federal National Mortgage
Association; and
(5) collateralized mortgage obligations issued by private issuers for
which the underlying mortgage backed securities serving as collateral
are backed (i) by the credit alone of the U.S. Government agency or
instrumentality which issues or guarantees the mortgage backed
securities, or (ii) by the full faith and credit of the U.S.
Government.
The mortgage backed securities in which the U.S. Government Securities
Trust invests represent participating interests in pools of residential
mortgage loans which are guaranteed by the U.S. Government, its agencies or
instrumentalities. However, the guarantee of these types of securities runs
only to the principal and interest payments and not to the market value of such
securities. In addition, the guarantee only runs to the portfolio securities
held by the U.S. Government Securities Trust and not the purchase of shares of
the portfolio.
Mortgage backed securities are issued by lenders such as mortgage
bankers, commercial banks, and savings and loan associations. Such securities
differ from conventional debt securities which provide for periodic payment of
interest in fixed amounts (usually semiannually) with principal payments at
maturity or specified call dates. Mortgage backed securities provide monthly
payments which are, in effect, a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans. Principal prepayments result from the sale of
the underlying property or the refinancing or foreclosure of underlying
mortgages.
The yield of mortgage-backed securities is based on the average life
of the underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular
pool may be shortened by unscheduled or early payments of principal and
interest. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed rate 30-year mortgages, it has been common practice to assume that
prepayments will result in a 12-year average life. The actual prepayment
experience of a pool of mortgage loans may cause the yield realized by the U.S.
Government Securities Trust to differ from the yield calculated on the basis of
the average life of the pool. In addition, if any of these mortgage backed
securities are purchased at a premium, the premium may be lost in the event of
early prepayment which may result in a loss to the portfolio.
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Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. Reinvestment by the U.S. Government Securities Trust of scheduled
principal payments and unscheduled prepayments may occur at higher or lower
rates than the original investment, thus affecting the yield of this portfolio.
Monthly interest payments received by the portfolio have a compounding effect
which will increase the yield to shareholders as compared to debt obligations
that pay interest semiannually. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective
than Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. Also, although the value of debt securities may
increase as interest rates decline, the value of these pass-through type of
securities may not increase as much due to the prepayment feature.
The U.S. Government Securities Trust must comply with diversification
requirements established pursuant to the Internal Revenue Code for investments
of separate accounts funding contracts. Under these requirements, no more than
55% of the value of the assets of a portfolio may be represented by any one
investment; no more than 70% by any two investments; no more than 80% by any
three investments; and no more than 90% by any four investments. For these
purposes, all securities of the same issuer are treated as a single investment
and each United States government agency or instrumentality is treated as a
separate issuer. As a result of these requirements, the U.S. Government
Securities Trust may not invest more than 55% of the value of its assets in
GNMA Certificates or in securities issued or guaranteed by any other single
United States government agency or instrumentality. See the discussion under
"Taxes" below for additional information.
Use of Hedging and Other Strategic Transactions
The U.S. Government Securities Trust is currently authorized to use
only certain of the various investment strategies referred to under "Hedging
and Other Strategic Transactions." Specifically, the U.S. Government
Securities Trust may write covered call options and put options on securities
and purchase call and put options on securities, write covered call and put
options on securities indices and purchase call and put options on securities
indices, and, may enter into futures contracts on financial instruments and
indices and write and purchase put and call options on such futures contracts.
It is not presently anticipated that any of these strategies will be used to a
significant degree by the portfolio. The Statement of Additional Information
contains a description of these strategies and of certain risks associated
therewith.
MONEY MARKET TRUST
The investment objective of the Money Market Trust is to obtain
maximum current income consistent with preservation of principal and liquidity.
MAC manages the Money Market Trust and seeks to achieve this objective by
investing in high quality, U.S. dollar denominated money market instruments of
the following types:
(1) obligations issued or guaranteed as to principal and interest by the
United States Government, or any agency or authority controlled or
supervised by and acting as an instrumentality of the U.S. Government
pursuant to authority granted by Congress (hereinafter "U.S.
Government securities"), or obligations of foreign governments
including those issued or guaranteed as to principal or interest by
the Government of Canada, the government of any province of Canada, or
any Canadian or provincial Crown agency (any foreign obligation
acquired by the Trust will be payable in U.S. dollars);
(2) certificates of deposit, bank notes, time deposits, Eurodollars,
Yankee obligations and bankers' acceptances of U.S. banks, foreign
branches of U.S. banks, foreign banks and U.S. savings and loan
associations which at the date of investment have capital, surplus and
undivided profits as of the date of their most recent published
financial statements in excess of $100,000,000 (or less than
$100,000,000 if the principal amount of such bank obligations is
insured by the Federal Deposit Insurance Corporation or the Saving
Association Insurance Fund);
(3) commercial paper which at the date of investment is rated (or
guaranteed by a company whose commercial paper is rated) within the
two highest rating categories by any nationally recognized statistical
rating organization ("NRSRO") (such as "P-1" or "P-2" by Moody's or
"A-1" or "A-2"
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by S&P) or, if not rated, is issued by a company which MAC acting
pursuant to guidelines established by the Trustees, has determined to
be of minimal credit risk and comparable quality;
(4) corporate obligations maturing in 397 days or less which at the date
of investment are rated within the two highest rating categories by
any NRSRO (such as "Aa" or higher by Moody's or "AA" or higher by
S&P); and
(5) short-term obligations issued by state and local governmental issuers;
(6) securities that have been structured to be eligible money market
instruments such as participation interests in special purpose trusts
that meet the quality and maturity requirements in whole or in part
due to arrangements for credit enhancement or for shortening effective
maturity; and
(7) repurchase agreements with respect to any of the foregoing
obligations.
Commercial paper may include variable amount master demand notes,
which are obligations that permit investment of fluctuating amounts at varying
rates of interest. Such notes are direct lending arrangements between the
Money Market Trust and the note issuer, and MAC will monitor the
creditworthiness of the issuer and its earning power and cash flow, and will
also consider situations in which all holders of such notes would redeem at the
same time. Variable amount master demand notes are redeemable on demand.
All of the Money Market Trust's investments will mature in 397 days or
less and the portfolio will maintain a dollar-weighted average portfolio
maturity of 90 days or less. By limiting the maturity of its investments, the
Money Market Trust seeks to lessen the changes in the value of its assets
caused by fluctuations in short-term interest rates. In addition, the Money
Market Trust will invest only in securities the Trustees determine to present
minimal credit risks and which at the time of purchase are "eligible
securities" as defined by Rule 2a-7 under the Investment Company Act of 1940.
The Money Market Trust also intends to maintain, to the extent practicable, a
constant per share net asset value of $10.00, but there is no assurance that it
will be able to do so.
The Money Market Trust will be subject to certain risks as a result of
its ability to invest up to 20% of its assets in foreign securities. These
risks are described under "RISK FACTORS - Foreign Securities."
Use of Hedging and Other Strategic Transactions
The Money Market Trust is not authorized to use any of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions."
THE LIFESTYLE TRUSTS
There are five Lifestyle Trusts -- Conservative, Moderate, Balanced,
Growth and Aggressive. The Lifestyle Trusts differ from the portfolios
previously described in that each Lifestyle Trust invests in a number of the
other portfolios of the Trust ("Underlying Portfolios"). Each Lifestyle Trust
has its own investment objective and policies.
Conservative Lifestyle Trust. The investment objective of the
Conservative Lifestyle Trust is to provide a high level of current income with
some consideration also given to growth of capital. NASL Financial seeks to
achieve this objective by investing approximately 80% of the Lifestyle Trust's
assets in Underlying Portfolios which invest primarily in fixed income
securities and approximately 20% of its assets in Underlying Portfolios which
invest primarily in equity securities.
Moderate Lifestyle Trust. The investment objective of the Moderate
Lifestyle Trust is to provide a balance between a high level of current income
and growth of capital with a greater emphasis given to high income. NASL
Financial seeks to achieve this objective by investing approximately 60% of the
Lifestyle Trust's assets in Underlying Portfolios which invest primarily in
fixed income securities and approximately 40% of its assets in Underlying
Portfolios which invest primarily in equity securities.
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Balanced Lifestyle Trust. The investment objective of the Balanced
Lifestyle Trust is to provide a balance between a high level of current income
and growth of capital with a greater emphasis given to capital growth. NASL
Financial seeks to achieve this objective by investing approximately 40% of the
Lifestyle Trust's assets in Underlying Portfolios which invest primarily in
fixed income securities and approximately 60% of its assets in Underlying
Portfolios which invest primarily in equity securities.
Growth Lifestyle Trust. The investment objective of the Growth
Lifestyle Trust is to provide long term growth of capital with consideration
also given to current income. NASL Financial seeks to achieve this objective by
investing approximately 20% of the Lifestyle Trust's assets in Underlying
Portfolios which invest primarily in fixed income securities and approximately
80% of its assets in Underlying Portfolios which invest primarily in equity
securities.
Aggressive Lifestyle Trust. The investment objective of the
Aggressive Lifestyle Trust is to provide long term growth of capital. Current
income is not a consideration. NASL Financial seeks to achieve this objective
by investing 100% of the Lifestyle Trust's assets in Underlying Portfolios
which invest primarily in equity securities.
The Lifestyle Trusts are designed to provide a simple means of
obtaining a professionally-determined comprehensive investment program
designed for differing investment orientations. Each program is implemented by
means of selected long term investment allocations among the Underlying
Portfolios.
The portfolios eligible for purchase by the Lifestyle Trusts consist
of all of the non-Lifestyle Trusts. The Underlying Portfolios are grouped
according to whether they invest primarily in fixed income securities or equity
securities. The Underlying Portfolios investing primarily in fixed income
securities are the Strategic Bond, Global Government Bond, Capital Growth Bond,
Investment Quality Bond, U.S. Government Bond and Money Market Trusts. The
other Underlying Portfolios invest primarily in equity securities.
The percentage allocations between the two types of Underlying
Portfolios specified for each Lifestyle Trust are approximate only. Variations
in the percentages are permitted up to 10% in either direction. Thus, for
example, the Conservative Lifestyle Trust may have a fixed income/equity
allocation of 10%/90% or 30%/70%. Variations beyond the permissible deviation
range of 10% are not permitted, unless the Adviser determines that in light of
market or economic conditions the normal percentage limitations should be
exceeded to protect the portfolio or to achieve the portfolio's objective.
NASL Financial manages the Lifestyle Trusts at no cost, although it
reserves the right to seek compensation for services in the future. Within the
prescribed percentage allocations between the two types of Underlying
Portfolios, NASL Financial may from time to time adjust the percent of assets
invested in any single portfolios held by a Lifestyle Trust. Such adjustments
may be made to increase or decrease the Lifestyle Trust's holdings of
particular assets classes, such as common stocks of foreign issuers, or to
adjust portfolio quality or the duration of fixed income securities.
Adjustments may also be made to increase or reduce the percent of the Lifestyle
Trust's assets subject to the management of a particular Subadviser. In
addition, changes may be made to reflect some fundamental change in the
investment environment.
Although substantially all of the assets of the Lifestyle Trusts will
be invested in shares of the Underlying Portfolios, the Lifestyle Trusts may
invest up to 100% of their assets in cash or in the money market instruments of
the type in which the Money Market Trust is authorized to invest for the
purpose of meeting redemption requests or making other anticipated cash
payments or to protect the portfolio in the event the Adviser determines that
market or economic conditions warrant a defensive posture. Because
substantially all of the securities in which the Lifestyle Trusts may invest
are Underlying Portfolios, each of the Lifestyle Trusts is non-diversified for
purposes of the Investment Company Act of 1940.
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The Lifestyle Trusts are subject to the risks of the Underlying
Portfolios in which they invest. The Lifestyle Trusts are not authorized to use
any of the various investment strategies referred to under "Hedging and Other
Strategic Transactions."
RISK FACTORS
INVESTMENT RESTRICTIONS GENERALLY
The Trust is subject to a number of restrictions in pursuing its
investment objectives and policies. The following is a brief summary of
certain restrictions that may be of interest to contract owners. Some of these
restrictions are subject to exceptions not stated here. Such exceptions and a
complete list of the investment restrictions applicable to the individual
portfolios and to the Trust are set forth in the Statement of Additional
Information under the caption "Investment Restrictions."
Except for the restrictions specifically identified as fundamental,
all investment restrictions described in this Prospectus and in the Statement
of Additional Information are not fundamental, so that the Trustees of the
Trust may change them without shareholder approval. Fundamental policies may
not be changed without the affirmative vote of a majority of the outstanding
voting securities.
Fundamental policies applicable to all portfolios include prohibitions
on (i) investing more than 25% of the total assets of any portfolio, except
the Real Estate Securities Trust and the Lifestyle Trusts, in the securities of
issuers having their principal activities in any particular industry (with
exceptions for U.S. Government securities and certain other obligations) and
(ii) borrowing money, except for temporary or emergency purposes (but not for
leveraging) and then not in excess of 33 1/3% of the value of the total assets
of the portfolio at the time the borrowing is made. In addition, each
portfolio may borrow in connection with reverse repurchase agreements, mortgage
dollar rolls and other similar transactions. Reverse repurchase agreements and
mortgage dollar rolls may be considered a form of borrowing and will be treated
as a borrowing for purposes of the restriction on borrowing in excess of 33
1/3% of the value of the total assets of a portfolio. A portfolio will not
purchase securities while borrowings (other than reverse repurchase agreements,
mortgage dollar rolls and similar transactions) exceed 5% of total assets. In
addition, each of the portfolios except the Global Government Bond, Emerging
Growth and Lifestyle Trusts, is prohibited from purchasing securities of any
issuer if the purchase would cause more than 5% of the value of a portfolio's
total assets to be invested in the securities of any one issuer (excluding U.S.
Government securities) or cause more than 10% of the voting securities of the
issuer to be held by a portfolio, except that up to 25% of the value of each
portfolio's total assets (except the Money Market Trust) may be invested
without regard to this restriction.
Restrictions that apply to all portfolios and that are not fundamental
include prohibitions on (i) knowingly investing more than 15% of the net assets
of any portfolio in "illiquid" securities (including repurchase agreements
maturing in more than seven days but excluding master demand notes), (ii)
pledging, hypothecating, mortgaging or transferring more than 10% of the total
assets of any portfolio as security for indebtedness (except that the
applicable percent is 33 1/3% in the case of the Blue Chip Growth,
Equity-Income, International Stock and Science & Technology Trusts, 15% in the
case of the International Small Cap, Growth, Balanced and Worldwide Growth
Trusts and 50% in the case of the Value Trust), and (iii) purchasing securities
of other investment companies, other than in connection with a merger,
consolidation or reorganization, if the purchase would cause more than 10% of
the value of a portfolio's total assets to be invested in investment company
securities, except that the Lifestyle Trusts are not subject to this
restriction. The percentage restriction in clause (i) of the preceding
sentence, however, is 10% in the case of the Money Market Trust.
Finally, the Money Market Trust is subject to certain restrictions
required by Rule 2a-7 under the Investment Company Act of 1940. In order to
comply with such restrictions, the Money Market Trust will, inter alia, not
purchase the securities of any issuer if it would cause (i) more than 5% of its
total assets to be invested in the securities of any one issuer (excluding U.S.
Government securities and repurchase agreements fully collateralized by U.S.
Government securities), except as permitted by the Rule for certain securities
for a period of up to three business days after purchase, (ii) more than 5% of
its total assets to be invested in "second tier securities," as defined by the
Rule, or (iii) more than the greater of $1 million or 1% of its total net
assets to be invested in the second tier securities of that issuer.
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* * *
There are also diversification and other requirements for all of the
portfolios imposed by the federal tax laws, as described under "Taxes" in this
Prospectus.
The following is a description of certain investment policies subject
to investment restrictions that may be of particular interest to contract
owners.
ADDITIONAL INVESTMENT RESTRICTIONS ON BORROWING AND FOREIGN INVESTING
In order to comply with limitations imposed by the State of California
Insurance Department, each Trust will comply with the following restrictions on
borrowing and each Trust that invests in foreign securities will comply with
the following restrictions regarding foreign investments. These restrictions
are nonfundamental and may be changed without shareholder approval.
Borrowing. Each portfolio of the Trust will not borrow money except
that each portfolio may borrow in an amount (i) up to 25% of the portfolio's
net assets for temporary purposes to facilitate redemptions (not for
leveraging) and (ii) up to 10% of the portfolio's net assets in connection
with reverse repurchase agreements, mortgage dollar rolls and other similar
transactions. This limitation is more restrictive than the Trust's fundamental
restriction on borrowing.
Foreign Securities. Each portfolio of the Trust that invests in
foreign securities will comply with the following restrictions:
(i) A portfolio will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when foreign
country investments comprise less than 80% of the portfolio's net asset value;
to three when less than 60% of such value; to two when less than 40%; and to
one when less than 20%.
(ii) Except as set forth in items (iii) and (iv) below, a portfolio will have
no more than 20% of its net asset value invested in securities of issuers
located in any one country.
(iii) A portfolio may have an additional 15% of its net asset value invested
in securities of issuers located in any one of the following countries (to the
extent such investment is consistent with the investment policies of the
portfolio): Australia, Canada, France, Japan, the United Kingdom or West
Germany.
(iv) A portfolio's investments in United States issuers are not subject to
these foreign country diversification restrictions.
HIGH YIELD (HIGH RISK) SECURITIES
GENERAL. The Strategic Bond and High Yield Trusts may invest without
limitation, the Investment Quality Bond Trust may invest up to 20% of its
assets, the Equity-Income, Aggressive Asset Allocation and Moderate Asset
Allocation Trusts may each invest up to 10% of its assets, and the Balanced,
International Small Cap, Growth, Blue Chip Growth and Worldwide Growth Trusts
may each invest up to 5% of its assets, in "high yield" (high risk) securities.
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Certain of the debt securities in which the portfolios may invest
may have, or be considered comparable to securities having, the lowest ratings
for non-subordinated debt instruments assigned by Moody's or S&P (i.e., rated C
by Moody's or CCC or lower by S&P). These securities are considered to have
extremely poor prospects of ever attaining any real investment standing, to
have a current identifiable vulnerability to default, to be unlikely to have
the capacity to pay interest and repay principal when due in the event of
adverse business, financial or economic conditions, and/or to be in default or
not current in the payment of interest or principal. Such securities are
considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
Accordingly, it is
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possible that these types of factors could, in certain instances, reduce the
value of securities held by the portfolio with a commensurate effect on the
value of the portfolio's shares. Because the Strategic Bond and High Yield
Trusts may invest without limitation in high yield debt securities, an
investment in those portfolios should not be considered as a complete
investment program for all investors.
Because the Strategic Bond, High Yield, and Investment Quality Bond
Trusts will invest primarily in fixed-income securities, the net asset value of
each portfolio's shares can be expected to change as general levels of interest
rates fluctuate, although the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
Except to the extent that values are affected independently by other factors
such as developments relating to a specific issuer, when interest rates
decline, the value of a fixed-income portfolio can generally be expected to
rise. Conversely, when interest rates rise, the value of a fixed-income
portfolio can generally be expected to decline.
The secondary markets for high yield corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield debt securities are
concentrated in relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield debt securities is generally lower than that for higher-rated
securities and the secondary markets could contract under adverse market or
economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the ability of portfolios investing in high yield securities to dispose of
particular portfolio investments and may limit the ability of those portfolios
to obtain accurate market quotations for purposes of valuing securities and
calculating net asset value. If a portfolio investing in high yield debt
securities is not able to obtain precise or accurate market quotations for a
particular security, it will become more difficult for the Trustees to value
that portfolio's investment portfolio and the Trustees may have to use a
greater degree of judgment in making such valuations. Less liquid secondary
markets may also affect a portfolio's ability to sell securities at their fair
value. In addition, each portfolio may invest up to 15% (10% in the case of
the Money Market Trust) of its net assets, measured at the time of investment,
in illiquid securities, which may be more difficult to value and to sell at
fair value. If the secondary markets for high yield debt securities are
affected by adverse economic conditions, the proportion of a portfolio's assets
invested in illiquid securities may increase.
CORPORATE DEBT SECURITIES. While the market values of securities
rated below investment grade and comparable unrated securities tend to react
less to fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, such securities
generally present a higher degree of credit risk. Issuers of these securities
are often highly leveraged and may not have more traditional methods of
financing available to them, so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness.
FOREIGN SOVEREIGN DEBT SECURITIES. Investing in foreign sovereign
debt securities will expose the Strategic Bond, High Yield and Investment
Quality Bond Trusts and other portfolios investing in such securities to the
direct or indirect consequences of political, social or economic changes in the
developing and emerging countries that issue the securities. The ability and
willingness of sovereign obligors in developing and emerging countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which these portfolios may invest have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty or instability.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, and its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies.
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The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few
commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated
in dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings form foreign trade to service its external debt,
it may need to depend on continuing loans and aid from foreign governments,
commercial banks, and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant
government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor
to obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on
its obligations. If such an event occurs, the portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign sovereign debt securities to obtain recourse may be subject
to the political climate in the relevant country. In addition, no assurance
can be given that the holders of commercial bank debt will not contest payments
to the holders of other foreign sovereign debt obligations in the event of
default under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which the portfolios may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect the
portfolio's holdings. Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to
other market participants.
In addition to high yield foreign sovereign debt securities, many of
the Trust's portfolios may invest in investment grade foreign securities. For
a discussion of such securities and their associated risks, see "Foreign
Securities" below.
FOREIGN SECURITIES
Each of the portfolios, other than the U.S. Government Securities and
Equity Index Trusts, may invest in securities of foreign issuers. Such foreign
securities may be denominated in foreign currencies, except with respect to the
Money Market Trust which may only invest in U.S. dollar-denominated securities
of foreign issuers. The International Small Cap, Capital Growth Bond, Global
Equity, Global Government Bond, Worldwide Growth, High Yield, International
Growth and Income, International Stock, Strategic Bond, Real Estate Securities,
Common Stock and Pacific Rim Emerging Markets Trusts may each, without
limitation, invest up to 100% of its assets in securities issued by foreign
entities and/or denominated in foreign currencies. The Aggressive Asset
Allocation Trust may invest up to 35% of its
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assets, the Growth, Balanced and Science & Technology Trusts each up to 30% of
its assets, the Moderate Asset Allocation and Equity-Income Trusts each up to
25% of its assets, the Pilgrim Baxter Growth and Conservative Asset Allocation
Trusts each up to 15% of its assets, the Value Trust up to 5% of its assets,
and each of the other portfolios other than the U.S. Government Securities and
Equity Index Trusts up to 20% of its assets in securities issued by foreign
entities and/or denominated in foreign currencies. (In the case of the
Small/Mid Cap, Growth, Balanced and Value Trusts, ADRs and U.S. dollar
denominated securities are not included in the percentage limitation.)
Securities of foreign issuers include obligations of foreign branches
of U.S. banks and of foreign banks, common and preferred stocks, debt
securities issued by foreign governments, corporations and supranational
organizations, and American Depository Receipts, European Depository Receipts
and Global Depository Receipts ("ADRs", "EDRs" and "GDRs"). ADRs are U.S.
dollar-denominated securities backed by foreign securities deposited in a U.S.
securities depository. ADRs are created for trading in the U.S. markets. The
value of an ADR will fluctuate with the value of the underlying security,
reflect any changes in exchange rates and otherwise involve risks associated
with investing in foreign securities. ADRs in which the portfolios may invest
may be sponsored or unsponsored. There may be less information available about
foreign issuers of unsponsored ADRs.
Securities of foreign issuers also include EDRs and GDRs, which are
receipts evidencing an arrangement with a non-U.S. bank similar to that for
ADRs and are designed for use in non-U.S. securities markets. EDRs and GDRs
are not necessarily quoted in the same currency as the underlying security.
Foreign securities may be subject to foreign government taxes which
reduce their attractiveness. See "Taxes." In addition, investing in
securities denominated in foreign currencies and in the securities of foreign
issuers, particularly non-governmental issuers, involves risks which are not
ordinarily associated with investing in domestic issuers. These risks include
political or economic instability in the country involved and the possibility
of imposition of currency controls. Since certain portfolios may invest in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the unrealized appreciation or depreciation of
investments insofar as United States investors are concerned. Foreign currency
exchange rates are determined by forces of supply and demand on the foreign
exchange markets. These forces are, in turn, affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. The portfolios may incur
transaction charges in exchanging foreign currencies.
There may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers, including foreign
branches of U.S. banks, are subject to different accounting and reporting
requirements which are generally less extensive than the requirements
applicable to domestic issuers. Foreign stock markets (other than Japan) have
substantially less volume than the United States exchanges and securities of
foreign issuers are generally less liquid and more volatile than those of
comparable domestic issuers. There is frequently less governmental regulation
of exchanges, broker-dealers and issuers than in the United States, and
brokerage costs may be higher. In addition, investments in foreign companies
may be subject to the possibility of nationalization, withholding of dividends
at the source, expropriation or confiscatory taxation, currency blockage,
political or economic instability or diplomatic developments that could
adversely affect the value of those investments. Finally, in the event of a
default on any foreign obligation, it may be difficult for the Trust to obtain
or to enforce a judgment against the issuer.
Foreign markets, especially emerging markets, may have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a portfolio is uninvested and no return is earned thereon. The
inability of a portfolio to make intended security purchases due to settlement
problems could cause the portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to a portfolio due to subsequent declines in values of the
portfolio securities or, if the portfolio has entered into a contract to sell
the security, possible liability to the purchaser. Certain foreign markets,
especially emerging markets, may require governmental approval for the
repatriation of investment income, capital or the
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proceeds of sales of securities by foreign investors. A portfolio could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the portfolio of any restrictions on investments.
In addition to the foreign securities listed above, the Strategic
Bond, High Yield, Investment Quality Bond, Worldwide Growth, International
Small Cap, Growth, Balanced, Aggressive Asset Allocation and Moderate Asset
Allocation Trusts may also invest in foreign sovereign debt securities, which
involve certain additional risks. See "Risk Factors--High Yield (High Yield)
Securities--Foreign Sovereign Debt Securities" above.
WARRANTS
Subject to certain restrictions, each of the Portfolios except the
Money Market Trust and the Lifestyle Trusts may purchase warrants, including
warrants traded independently of the underlying securities.
LENDING SECURITIES
Each portfolio may lend its securities so long as such loans do not
represent in excess of 33 1/3% of a portfolio's total assets. This is a
fundamental policy. The procedure for lending securities is for the borrower
to give the lending portfolio collateral consisting of cash, cash equivalents
or securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities. The lending portfolio may invest the cash collateral and
earn additional income or receive an agreed upon fee from a borrower which has
delivered cash equivalent collateral. The Trust anticipates that its
securities will be loaned only under the following conditions: (1) the
borrower must furnish collateral equal at all times to the market value of the
securities loaned and the borrower must agree to increase the collateral on a
daily basis if the securities increase in value; (2) the loan will be made in
accordance with New York Stock Exchange rules, which presently require the
borrower, after notice, to redeliver the securities within five business days;
and (3) the portfolio making the loan may pay reasonable service, placement,
custodian or other fees in connection with loans of securities and share a
portion of the interest from these investments with the borrower of the
securities. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially.
WHEN-ISSUED SECURITIES ("FORWARD COMMITMENTS")
In order to help ensure the availability of suitable securities, each
of the portfolios may purchase debt securities on a "when-issued" or on a
"forward delivery" basis, which means that the obligations will be delivered to
the portfolio at a future date, which may be a month or more after the date of
commitment (referred to as "forward commitments"). It is expected that, under
normal circumstances, a portfolio purchasing securities on a when-issued or
forward delivery basis will take delivery of the securities, but the portfolio
may sell the securities before the settlement date, if such action is deemed
advisable. In general, a portfolio does not pay for the securities or start
earning interest on them until the obligations are scheduled to be settled, but
it does, in the meantime, record the transaction and reflect the value each day
of the securities in determining its net asset value. At the time delivery is
made, the value of when-issued or forward delivery securities may be more or
less than the transaction price, and the yields then available in the market
may be higher than those obtained in the transaction. While awaiting delivery
of the obligations purchased on such bases, a portfolio will establish a
segregated account consisting of cash or high quality debt securities equal to
the amount of the commitments to purchase when-issued or forward delivery
securities. The availability of liquid assets for this purpose and the effect
of asset segregation on a portfolio's ability to meet its current obligations,
to honor requests for redemption and to have its investment portfolio managed
properly will limit the extent to which the portfolio may purchase when-issued
or forward delivery securities. Except as may be imposed by these factors,
there is no limit on the percent of a portfolio's total assets that may be
committed to such transactions.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Each of the Trust's portfolios may enter into repurchase agreements
and reverse repurchase agreements. Repurchase agreements involve the
acquisition by a portfolio of debt securities subject to an agreement to resell
them at an agreed-upon price. Under a repurchase agreement, at the time the
portfolio
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acquires a security, it agrees to resell it to the original seller (a financial
institution or broker/dealer which meets the guidelines established by the
Trustees) and must deliver the security (and/or securities that may be added to
or substituted for it under the repurchase agreement) to the original seller on
an agreed-upon date in the future. The repurchase price is in excess of the
purchase price. The arrangement is in economic effect a loan collateralized by
securities.
The Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a portfolio's repurchase agreements. The Trustees will
regularly monitor the use of repurchase agreements and the Subadvisers will,
pursuant to procedures adopted by the Trustees, continuously monitor the amount
of collateral held with respect to a repurchase transaction so that it equals
or exceeds the amount of the obligation.
A portfolio's risk in a repurchase transaction is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date. In the
event of bankruptcy or other default by the seller, there may be possible
delays and expenses in liquidating the instrument purchased, decline in its
value and loss of interest. Securities subject to repurchase agreements will
be valued every business day and additional collateral will be requested if
necessary so that the value of the collateral is at least equal to the value of
the repurchase obligation, including the interest accrued thereon.
Each portfolio of the Trust may enter into "reverse" repurchase
agreements. Under a reverse repurchase agreement, a portfolio may sell a debt
security and agree to repurchase it at an agreed upon time and at an agreed
upon price. The portfolio retains record ownership of the security and the
right to receive interest and principal payments thereon. At an agreed upon
future date, the portfolio repurchases the security by remitting the proceeds
previously received, plus interest. The difference between the amount the
portfolio receives for the security and the amount it pays on repurchase is
deemed to be payment of interest. The portfolio will maintain in a segregated
custodial account cash, Treasury bills or other U.S. Government securities
having an aggregate value equal to the amount of such commitment to repurchase
including accrued interest, until payment is made. In certain types of
agreements, there is no agreed-upon repurchase date and interest payments are
calculated daily, often based on the prevailing overnight repurchase rate.
While a reverse repurchase agreement may be considered a form of leveraging and
may, therefore, increase fluctuations in a portfolio's net asset value per
share, each portfolio will cover the transaction as described above.
MORTGAGE DOLLAR ROLLS
Each portfolio of the Trust (except the Money Market Trust and the
Lifestyle Trusts) may enter into mortgage dollar rolls. Under a mortgage
dollar roll, a portfolio sells mortgage-backed securities for delivery in the
future (generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, the portfolio forgoes principal
and interest paid on the mortgage-backed securities. A portfolio is
compensated by the difference between the current sale price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. A
portfolio may also be compensated by receipt of a commitment fee. A portfolio
may only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash or cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction. Dollar roll transactions involve the risk that the market
value of the securities sold by the portfolio may decline below the repurchase
price of those securities. While a mortgage dollar roll may be considered a
form of leveraging, and may, therefore, increase fluctuations in a portfolio's
net asset value per share, each portfolio will cover the transaction as
described above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
Individual portfolios may be authorized to use a variety of investment
strategies described below for hedging purposes only, including hedging various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements) and managing the effective maturity or duration of
debt instruments held by the portfolio. The description in this Prospectus of
each portfolio indicates which, if any, of these types of transactions may be
used by the portfolio. Limitations on the portion of a portfolio's assets that
may be used in connection with the investment strategies described below are
set out in the Statement of Additional Information.
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Subject to the constraints described above, an individual portfolio
may (if and to the extent so authorized) purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities,
financial futures contracts and fixed income indices and other financial
instruments, enter into financial futures contracts, enter into interest rate
transactions, and enter into currency transactions (collectively, these
transactions are referred to in this Prospectus as "Hedging and Other Strategic
Transactions"). A portfolio's interest rate transactions may take the form of
swaps, caps, floors and collars, and a portfolio's currency transactions may
take the form of currency forward contracts, currency futures contracts,
currency swaps and options on currencies or currency futures contracts.
Hedging and Other Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held or to
be purchased by a portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect a portfolio's unrealized gains in the
value of its securities, to facilitate the sale of those securities for
investment purposes, to manage the effective maturity or duration of a
portfolio's securities or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. A
portfolio may use any or all types of Hedging and Other Strategic Transactions
which it is authorized to use at any time; no particular strategy will dictate
the use of one type of transaction rather than another, as use of any
authorized Hedging and Other Strategic Transaction will be a function of
numerous variables, including market conditions. The ability of a portfolio to
utilize Hedging and Other Strategic Transactions successfully will depend on,
in addition to the factors described above, the subadviser's ability to predict
pertinent market movements, which cannot be assured. These skills are
different from those needed to select a portfolio's securities. None of the
portfolios is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the Commodity Futures Trading Commission (the "CFTC"))
and Hedging and Other Strategic Transactions involving futures contracts and
options on futures contracts will be purchased, sold or entered into only for
bona fide hedging, risk management or appropriate portfolio management purposes
and not for speculative purposes. The use of certain Hedging and Other
Strategic Transactions will require that a portfolio segregate cash, liquid
high grade debt obligations or other assets to the extent a portfolio's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. Risks associated with Hedging and
Other Strategic Transactions are described in "Hedging and Other Strategic
Transactions -- Risk Factors" in the Statement of Additional Information. A
detailed discussion of various Hedging and Other Strategic Transactions,
including applicable regulations of the CFTC and the requirement to segregate
assets with respect to these transactions, also appears in the Statement of
Additional Information.
ILLIQUID SECURITIES
Each of the portfolios is precluded from investing in excess of 15%
of its net assets in securities that are not readily marketable, except that
the Money Market Trust may not invest in excess of 10% of its net assets in
such securities. Excluded from the 10% and 15% limitation are securities that
are restricted as to resale but for which a ready market is available pursuant
to exemption provided by Rule 144A adopted pursuant to the Securities Act of
1933 ("1933 Act") or other exemptions from the registration requirements of the
1933 Act. Whether securities sold pursuant to Rule 144A are readily marketable
for purposes of the Trust's investment restriction is a determination to be
made by the Subadvisers subject to the Trustees' oversight and for which the
Trustees are ultimately responsible. The Subadvisers will also monitor the
liquidity of Rule 144A securities held by the portfolios for which they are
responsible. To the extent Rule 144A securities held by a portfolio should
become illiquid because of a lack of interest on the part of qualified
institutional investors, the overall liquidity of the portfolio could be
adversely affected. In addition, the Money Market Trust may invest in
commercial paper issued in reliance on the exemption from registration afforded
by Section 4(2) of the 1933 Act. Section 4(2) commercial paper is restricted
as to the disposition under federal securities law, and is generally sold to
institutional investors, such as the Trust, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be made in an exempt transaction. Section
4(2) commercial paper is normally resold to other institutional investors like
the Money Market Trust through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. The Money Market Trust's subadviser believes that Section
4(2) commercial paper meets its criteria for liquidity and is quite liquid.
The Money Market Trust intends, therefore, to treat Section 4(2) commercial
paper as liquid and not
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subject to the investment limitation applicable to illiquid securities. The
Money Market Trust's subadviser will monitor the liquidity of 4(2) commercial
paper held by the Money Market Trust, subject to the Trustees' oversight and
for which the Trustees are ultimately responsible.
MANAGEMENT OF THE TRUST
Under Massachusetts law and the Trust's Declaration of Trust and
By-Laws, the management of the business and affairs of the Trust is the
responsibility of its Trustees. The Trust was originally organized on August
3, 1984 as "NASL Series Fund, Inc." (the "Fund"), a Maryland corporation.
Pursuant to an Agreement and Plan of Reorganization and Liquidation approved at
the Special Meeting of Shareholders held on December 2, 1988, the Fund was
reorganized as a Massachusetts business trust established pursuant to an
Agreement and Declaration of Trust dated September 29, 1988 (the "Declaration
of Trust"). The reorganization became effective on December 31, 1988. At that
time, the assets and liabilities of each of the Fund's separate investment
portfolios were assumed by the corresponding portfolios of the Trust and the
Trust carried on the business and operations of the Fund with the same
investment management arrangements as were in effect for the Fund immediately
prior to such reorganization. Effective December 31, 1996, Manulife Series
Fund, Inc., a registered management investment company with nine portfolios,
was merged into the Trust. The net assets of four of the portfolios of Manulife
Series Fund, Inc. were transferred to comparable portfolios of the Trust, and
the remaining five portfolios -- the Pacific Rim Emerging Markets, Common
Stock, Real Estate Securities, Capital Growth and Equity Index Portfolios --
were transferred to the Trust and reconstituted as new portfolios of the Trust.
ADVISORY ARRANGEMENTS
NASL Financial Services, Inc. ("NASL Financial" or, in its capacity as
investment adviser to the Trust the "Adviser"), a Massachusetts corporation
whose principal offices are located at 116 Huntington Avenue, Boston,
Massachusetts 02116, is a wholly-owned subsidiary of Security Life the ultimate
parent of which is The Manufacturers Life Insurance Company ("Manulife"), a
Canadian mutual life insurance company based in Toronto, Canada. Prior to
January 1, 1996, Security Life was a wholly owned subsidiary of North American
Life Assurance Company ("NAL"), a Canadian mutual life insurance company. On
January 1, 1996 NAL and Manulife merged with the combined company retaining the
name Manulife. NASL Financial is registered as an investment adviser under the
Investment Advisers Act of 1940 and as a broker-dealer under the Securities
Exchange Act of 1934, and it is a member of the National Association of
Securities Dealers, Inc. ("NASD"). In addition, NASL Financial serves as
principal underwriter of certain contracts issued by Security Life and as
investment adviser to one other investment company, North American Funds.
Under the terms of the Advisory Agreement, the Adviser administers the
business and affairs of the Trust. The Adviser is responsible for performing
or paying for various administrative services for the Trust, including
providing at the Adviser's expense, (i) office space and all necessary office
facilities and equipment, (ii) necessary executive and other personnel for
managing the affairs of the Trust and for performing certain clerical,
accounting and other office functions, and (iii) all other information and
services, other than services of counsel, independent accountants or investment
subadvisory services provided by any subadviser under a subadvisory agreement,
required in connection with the preparation of all tax returns and documents
required to comply with the federal securities laws. The Adviser pays the cost
of (i) any advertising or sales literature relating solely to the Trust, (ii)
the cost of printing and mailing prospectuses to persons other than current
holders of Trust shares or of variable contracts funded by Trust shares and
(iii) the compensation of the Trust's officers and Trustees that are officers,
directors or employees of the Adviser or its affiliates. In addition, advisory
fees are reduced or the Adviser reimburses the Trust if the total of all
expenses (excluding advisory fees, taxes, portfolio brokerage commissions,
interest, litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Trust's business)
applicable to a portfolio exceeds an annual rate of .75% in the case of the
International Small Cap, Global Equity, Global Government Bond, Worldwide
Growth, International Growth and Income, International Stock and Pacific Rim
Emerging Markets Trusts, .50% in the case of all other portfolios except for
the Equity Index Trust, or .15% in the case of the Equity Index Trust of the
average annual net assets of such portfolio. The expense limitations will
continue in effect from year to year unless otherwise terminated at any year
end by the Adviser on 30 days' notice to the Trust. (For a limited period of
one year ending December 31, 1997, the expense limitation applicable to
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the Real Estate Securities, Common Stock and Capital Growth Bond Trusts will
include all expenses of such portfolios, so that their total expenses for that
year, including advisory fees, will not exceed .50%.) For the prior fiscal
year, the Adviser did not reimburse the Trust for any expenses since expenses
were below the expense limitations. However, if expenses were to increase above
the expense limits and the reimbursements were terminated, Trust expenses would
increase.
In addition to providing the services and expense limitations
described above, the Adviser selects, contracts with and compensates
subadvisers to manage the investment and reinvestment of the assets of all
portfolios of the Trust, except the Lifestyle Trusts. The Adviser monitors the
compliance of such subadvisers with the investment objectives and related
policies of each portfolio and reviews the performance of such subadvisers and
reports periodically on such performance to the Trustees of the Trust.
Portfolio decisions for the Lifestyle Trusts are made by the Adviser.
[Information relating to personnel responsible for the management of the
Lifestyle Trusts to be provided.]
As compensation for its services, the Adviser receives a fee from the
Trust computed separately for each portfolio, except for the Lifestyle Trusts
for which the Adviser makes no charge. The fee for each portfolio is stated as
an annual percentage of the current value of the net assets of the portfolio.
The fee, which is accrued daily and payable monthly, is calculated for each day
by multiplying the daily equivalent of the annual percentage prescribed for a
portfolio by the value of the net assets of the portfolio at the close of
business on the previous business day of the Trust. The following is a
schedule of the management fees each portfolio currently is obligated to pay
the Adviser:
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<TABLE>
<CAPTION>
PORTFOLIO
-----------------------------------------------------------------------------
<S> <C>
Pacific Rim Emerging Markets Trust . . . . . . . . . . . . .850%
Science & Technology Trust . . . . . . . . . . . . . . . . 1.100%
International Small Cap Trust . . . . . . . . . . . . . . 1.100%
Emerging Growth Trust . . . . . . . . . . . . . . . . . . 1.050%
Pilgrim Baxter Growth Trust . . . . . . . . . . . . . . . 1.050%
Small/Mid Cap Trust . . . . . . . . . . . . . . . . . . . 1.000%
International Stock Trust . . . . . . . . . . . . . . . . 1.050%
Worldwide Growth Trust . . . . . . . . . . . . . . . . . 1.000%
Global Equity Trust . . . . . . . . . . . . . . . . . . . .900%
Growth Trust . . . . . . . . . . . . . . . . . . . . . . . .850%
Equity Trust . . . . . . . . . . . . . . . . . . . . . . .750%
Common Stock Trust . . . . . . . . . . . . . . . . . . . . .700%*
Equity Index Trust . . . . . . . . . . . . . . . . . . . . .250%
Blue Chip Growth Trust . . . . . . . . . . . . . . . . . . .925%
Value Trust . . . . . . . . . . . . . . . . . . . . . . . .800%
International Growth and Income Trust . . . . . . . . . . .950%
Growth and Income Trust . . . . . . . . . . . . . . . . . .750%
Equity-Income Trust . . . . . . . . . . . . . . . . . . . .800%
Real Estate Securities Trust . . . . . . . . . . . . . . . .700%*
Balanced Trust . . . . . . . . . . . . . . . . . . . . . . .800%
Aggressive Asset Allocation Trust . . . . . . . . . . . . .750%
High Yield Trust . . . . . . . . . . . . . . . . . . . . . .775%
Moderate Asset Allocation Trust . . . . . . . . . . . . . .750%
Conservative Asset Allocation Trust . . . . . . . . . . . .750%
Strategic Bond Trust . . . . . . . . . . . . . . . . . . .775%
Global Government Bond Trust . . . . . . . . . . . . . . .800%
Capital Growth Bond . . . . . . . . . . . . . . . . . . . .650%*
Investment Quality Bond Trust . . . . . . . . . . . . . . .650%
US Government Securities Trust . . . . . . . . . . . . . .650%
Money Market Trust . . . . . . . . . . . . . . . . . . . .500%
</TABLE>
* Because of the special one-year expense limitation described above, total
fees will not exceed .50%.
For the year ended December 31, 1995 the aggregate investment advisory
fees paid by the Trust was $33,808,255, allocated among the portfolios as
follows: $5,513,312-- Global Equity Trust, $2,115,434-- Blue Chip Growth Trust,
$5,643,363-- Equity Trust, $2,459,247-- Equity-Income Trust, $3,922,671--
Growth and Income Trust, $450,200-- International Growth and Income Trust
(January 9, 1995, commencement of operations, to December 31, 1995), $767,448
- - Strategic Bond Trust, $1,757,909-- Global Government Bond Trust,
$798,045--Investment Quality Bond Trust, $1,291,668-- U.S. Government
Securities Trust, $1,318,573-- Money Market Trust, $1,463,421-- Aggressive
Asset Allocation Trust, $4,667,061-- Moderate Asset Allocation Trust and
$1,639,903-- Conservative Asset Allocation Trust.
SUBADVISORY ARRANGEMENTS
Each of the Trust's subadvisers, except Fidelity Management Trust
Company, is registered as an investment adviser under the Investment Advisers
Act of 1940. Agreements with the subadvisers have heretofore been approved by
the vote of a majority of the then outstanding voting securities of each series
of shares of the portfolios to be managed by the subadviser. The Trust has
filed an application with the Securities and Exchange Commission seeking
exemptive relief to permit the appointment of a subadviser pursuant to an
agreement that is not approved by shareholders. If granted, the Trust would
be able to change subadvisers from time to time without the expense and delays
associated with obtaining shareholder approval of the new subadviser. There is
no assurance that the requested relief will be granted.
Fidelity Management Trust Company
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<PAGE> 63
Fidelity Management Trust Company ("FMTC"), the subadviser to the
Equity and Automatic Asset Allocation Trusts, founded in 1946, is located at 82
Devonshire Street, Boston, Massachusetts 02109. FMTC is part of Fidelity
Investments, a group of companies that provides investment management and other
financial services. FMTC is a wholly-owned subsidiary of FMR Corp., the parent
company of the Fidelity companies. Founded in 1981, FMTC serves as investment
manager to institutional clients, managing assets for insurance companies,
tax-exempt retirement funds, endowments, foundations and other institutional
investors. As of ______, 1996 FMTC had investment management responsibility
for approximately $____ billion of assets. Fidelity Investments, founded by
Edward C. Johnson 2d, the father of the current chairman, Edward C. Johnson
3d, is the country's largest privately-owned investment management organization
and as of ______, 1996 had assets under management exceeding $____ billion.
Fidelity Investments maintains a staff of over 100 in-house research analysts
and follows some 7000 companies worldwide.
David Felman has been primarily responsible for the day-to-day
management of the Equity Trust since June 1996. Scott D. Stewart and Boyce I.
Greer have been primarily responsible for the day-to-day management of the
three Asset Allocation Trusts since December 1991.
David Felman joined Fidelity in June, 1993. Prior to managing the
Equity Trust, Mr. Felman held the following positions at Fidelity: portfolio
manager of the Select Telecommunications portfolio (April, 1994 to June, 1996),
portfolio manager of the Select Chemical portfolio (January, 1995 to July,
1995), assistant to the portfolio manager of the Magellan Fund (December, 1994
to June, 1996) and research analyst (prior to April, 1994). Mr. Felman
received an A.M. from Harvard University in 1993, a M.B.A. from New York
University in 1991 and a B.A. from Columbia University in 1988.
Scott Stewart joined Fidelity in 1987, and is Senior Vice President,
Portfolio Manager and head of the Structured Equity Group.
Boyce Greer is the Group Leader and Senior Vice President of FMTC and
Vice President of FMR in the Fixed Income Group. He joined Fidelity in 1987 as
a Portfolio Manager responsible for portfolio risk analysis.
Oechsle International Advisors. L.P.
Oechsle International Advisors, L.P. ("Oechsle International"), the
subadviser to the Global Government Bond Trust, founded in 1986, is a Delaware
limited partnership whose principal offices are located at One International
Place, Boston, Massachusetts 02110. Oechsle International, which also has
offices in London, England, Frankfurt, Germany and Tokyo, Japan, as of _____,
1996 managed approximately $___ billion for institutional and private
investors. Oechsle International is a money manager providing management and
advisory services with respect to all primary international securities markets.
Each year Oechsle International's investment professionals concentrate on up to
30 different countries, averaging 700 visits to companies annually.
Astrid Vogler has been primarily responsible for the day-to-day
management of the Global Government Bond Trust. Ms. Vogler has been a Fixed
Income Portfolio Manager at Oechsle International in Frankfurt, West Germany
since 1988.
Wellington Management Company
Wellington Management Company ("Wellington Management"), the
subadviser to the Growth and Income and Investment Quality Bond Trusts,
founded in 1933, is a Massachusetts partnership whose principal business
address is 75 State Street, Boston, Massachusetts 02109. Wellington Management
is a professional investment counseling firm which provides investment services
to investment companies, employee benefit plans, endowments, foundations and
other institutions and individuals. As of ______, 1996, Wellington Management
had investment management authority with respect to approximately $___ billion
of client assets. The managing partners of Wellington Management are Robert W.
Doran, Duncan M. McFarland and John R. Ryan.
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Matthew E. Megargel, Senior Vice President of Wellington Management,
has served as portfolio manager to the Growth and Income Trust since February
1992. Mr. Megargel also serves as the portfolio manager for the North American
Funds' Growth and Income Fund. Mr. Megargel joined Wellington Management in
1983 as a research analyst and took on additional responsibilities as a
portfolio manager in 1988. In 1991, he became solely a portfolio manager with
Wellington Management.
Thomas L. Pappas, Senior Vice President of Wellington Management, has
served as portfolio manager to the Investment Quality Bond Trust since March
1994. Mr. Pappas also serves as portfolio manager to the North American Funds'
Investment Quality Bond Fund. Mr. Pappas has been a portfolio manager with
Wellington Management since 1987.
J.P. Morgan Investment Management, Inc.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") is the
Subadviser to the International Growth and Income Trust. J.P. Morgan, with
principal offices at 522 Fifth Avenue, New York 10036, is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank
holding company organized under the laws of Delaware which is located at 60
Wall Street, New York, New York 10260. Through offices in New York City and
abroad, J.P. Morgan & Co., through J.P. Morgan and other subsidiaries, offers a
wide range of services to governmental, institutional, corporate and individual
customers and acts as investment adviser to individual and institutional
clients with combined assets under management of approximately $___ billion as
of _____, 1996. J.P. Morgan has managed international securities for
institutional investors since 1974. As of ______, 1996, the non-U.S. securities
under J.P. Morgan's management was approximately $___ billion. J.P. Morgan
provides investment advice and portfolio management services to the portfolio.
Subject to the supervision of the Trustees, J.P. Morgan makes the portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments.
J.P. Morgan uses a sophisticated, disciplined, collaborative process
for managing the portfolio. The following persons are primarily responsible
for the day-to-day management of the portfolio (their business experience for
the past five years is indicated parenthetically): Paul A. Quinsee, Vice
President (employed by J.P. Morgan since February 1992, previously Vice
President, Citibank) and Gareth A. Fielding, Vice President (employed by J.P.
Morgan since February 1992, previously he received his MBA from Imperial
College at London University, while he was a self-employed trader on the London
International Financial Futures Exchange.)
Mr. Quinsee is primarily responsible for the day-to-day management of
16 other institutional and investment company accounts that invest in
international securities constituting approximately $___ billion of assets.
Since July 1994, Mr. Fielding has been responsible for the day-to-day
management (in some cases with another person) of 11 institutional and
investment company portfolios that invest primarily in international fixed
income securities, constituting approximately $___ billion of assets. Mr.
Fielding is a specialist in mortgage and asset-backed securities. Prior to
July 1994, Mr. Fielding traded global fixed income products on J.P. Morgan's
London trading desk.
Salomon Brothers Asset Management Inc
Salomon Brothers Asset Management Inc ("SBAM"), the subadviser to the
U.S. Government Securities and Strategic Bond Trusts, is an indirect,
wholly-owned subsidiary of Salomon Inc ("SI") incorporated in 1987. The
business address of SBAM is 7 World Trade Center, New York, New York 10048.
Through its office in New York and affiliates in London, Frankfurt, Hong Kong
and Tokyo, SBAM provides a full range of fixed income and equity investment
advisory services for its individual and institutional clients around the
world, including European and Far East central banks, pension funds,
endowments, insurance companies, and various investment companies (including
portfolios thereof). As of _______, 1996, SBAM Limited, SBAM and their
advisory affiliates had investment advisory responsibility for approximately
$____ billion of assets. SBAM has access to SI's more than 400 economists,
mortgage, bond, sovereign and equity analysts.
In connection with SBAM's service as subadviser to the Strategic Bond
Trust, SBAM's London based affiliate, Salomon Brothers Asset Management Limited
("SBAM Limited"), whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, provides certain
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advisory services to SBAM relating to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Strategic Bond
Trust. SBAM Limited is compensated by SBAM at no additional expense to the
Trust. SBAM Limited was formed to acquire the asset management division of a
sister company, Salomon Brothers International Limited, which currently has
approximately $2 billion under management. Like SBAM, SBAM Limited is an
indirect, wholly-owned subsidiary of Salomon Inc. SBAM Limited is a member of
the Investment Management Regulatory Organization Limited in the United Kingdom
and is registered as an investment adviser in the United States pursuant to the
Investment Advisers Act of 1940.
Steven Guterman has been primarily responsible for the day-to-day
management of the mortgage-backed securities and U.S. government securities
portions of the U.S. Government Securities Trust since December 1991 and the
Strategic Bond Trust since February 1993. Mr. Guterman is assisted in the
management of the two foregoing Trusts by Roger Lavan. Peter J. Wilby has been
primarily responsible for the day-to-day management of the high yield and
sovereign debt portions of the Strategic Bond Trust since February 1993. Mr.
David Scott is primarily responsible for the international portion of the
Strategic Bond Trust.
Mr. Guterman, who joined SBAM in 1990, is a Managing Director of
Salomon Brothers Inc. and a Senior Portfolio Manager, responsible for the
SBAM's investment company and institutional portfolios which invest primarily
in mortgage-backed securities and U.S. government issues. Mr. Guterman also
serves as portfolio manager for North American Funds' U.S. Government
Securities and Strategic Income Funds, Salomon Brothers Mortgage Investment
Fund, and Salomon Brothers Mortgage Arbitrage Finance Limited. In addition,
Mr. Guterman serves as portfolio manager for a number of SBAM's institutional
clients. Mr. Guterman joined Salomon Brothers, Inc. in 1983. He initially
worked in the mortgage research group where he became a Research Director and
later traded derivative mortgage-backed securities for Salomon Brothers, Inc.
Mr. Lavan has assisted Mr. Guterman with the day to day management of
the mortgage-backed securities portions of the U.S. Government Securities
Trust since December 1991 and the Strategic Bond Trust since February 1993.
Mr. Lavan joined SBAM in 1990 and is a Portfolio Manager and Quantitative Fixed
Income Analyst for SBAM where he is responsible for working with senior
portfolio managers to monitor and analyze market relationships and identify and
implement relative value transactions in SBAM's investment company and
institutional portfolios which invest in mortgage-backed securities and U.S.
Government Securities. Mr. Lavan also assists Mr. Guterman with the day to day
management of the mortgage-backed securities portions of the North American
Funds' U.S. Government Securities and Strategic Income Funds. Prior to joining
SBAM, Mr. Lavan spent four years analyzing portfolios for Salomon's Fixed
Income Sales Group and Product Support Divisions.
Mr. Wilby, who joined SBAM in 1989, is a Managing Director of Salomon
Brothers Inc. and a Senior Portfolio Manager, responsible for SBAM's investment
company and institutional portfolios which invest in high yield U.S. corporate
debt securities and high yield foreign sovereign debt securities. Mr. Wilby is
also primarily responsible for the day-to-day management of the high yield and
sovereign debt portions of North American Fund's Strategic Income Fund, Salomon
Brothers High Income Fund, Inc, The Emerging Markets Income Fund, Inc and the
Latin America Investment Fund, Inc. (with respect to the Fund's investment in
Latin American sovereign debt). From 1984 to 1989, Mr. Wilby was employed by
Prudential Capital Management Group ("Prudential"). He served as director of
Prudential's credit research unit and as a corporate and sovereign credit
analyst with Prudential. Mr. Wilby later managed high yield bonds and
leveraged equities in the mutual funds and institutional portfolios at
Prudential.
David Scott is a senior fixed-income portfolio manager with SBAM
Limited in London. His primary responsibility is managing long term global bond
portfolios. He also takes an integral role in developing investment strategy.
Prior to joining Salomon Brothers in April 1994, Mr. Scott worked at J.P.
Morgan Investment Management ("J.P. Morgan") from October 1990 to March 1994
where he had responsibility for global and non-dollar portfolios. Clients
included government departments, pension funds and insurance companies. Before
joining J.P. Morgan, Mr. Scott worked for Mercury Asset Management from January
1987 to October 1990 where he had responsibility for captive insurance
portfolios and product. Mr. Scott is a Fellow of the Institute of Actuaries and
worked for the Wyatt Company from November 1984 to January 1987 as a consultant
advising companies on pension and
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employee related benefit issues. He received a BSc in Mathematics and Economics
from Nottingham University.
Fred Alger Management, Inc.
Investment decisions for the Small/Mid Cap Trust are made by its
Subadviser, Fred Alger Management, Inc. ("Alger"). Alger, located at 75 Maiden
Lane, New York, New York 10038, has been in the business of providing
investment advisory services since 1964 and as of ______, 1996 had
approximately $___ billion under management, including $___ billion in mutual
fund accounts and $___ billion in other advisory accounts. Alger Management is
wholly owned by Fred Alger & Company, Incorporated which in turn is wholly
owned by Alger Associates, Inc., a financial services holding company. Fred M.
Alger, III and his brother, David D. Alger, are the majority shareholders of
Alger Associates, Inc. and may be deemed to control that company and its
subsidiaries.
David D. Alger, President of Alger Management, is primarily
responsible for the day-to-day management of the Small/Mid Cap Trust. He has
been employed by Alger as Executive Vice President and Director of Research
since 1971 and as President since 1995 and he serves as portfolio manager for
other mutual funds and investment accounts managed by Alger Management. Also
participating in the management of the Small/Mid Cap Trust are Ronald Tartaro
and Seilai Khoo. Mr. Tartaro has been employed by Alger Management since 1990
and he serves as a Senior Vice President. Prior to 1990, he was a member of
the technical staff at AT&T Bell Laboratories. Ms. Khoo has been employed by
Alger Management since 1989 and she serves as a Senior Vice President.
Founders Asset Management, Inc.
Investment decisions for the Growth, International Small Cap, Balanced
and Worldwide Growth Trusts are made by its Subadviser, Founders Asset
Management, Inc. ("Founders"), located at 2930 East Third Avenue, Denver,
Colorado 80206, a registered investment adviser first established as an asset
manager in 1938. Bjorn K. Borgen, Chairman, Chief Executive Officer and Chief
Investment Officer of Founders, owns 100% of the voting stock of Founders. As
of _____, 1996, Founders had over $___ billion of assets under management,
including $___ billion in mutual fund accounts and $___ billion in other
advisory accounts.
Founders is a "growth-style" manager of equity portfolios and gives
priority to the selection of individual securities that have the potential to
provide superior results over time, despite short-term volatility. Under normal
circumstances, Founders' approach to investment management gives greater
emphasis to the fundamental financial, marketing and operating strengths of
the companies whose securities it buys, and is less concerned with the
short-term impact of changes in macroeconomic and market conditions. Founders
focuses on purchasing the stocks of companies with strong management and market
positions that have earnings prospects that are significantly above the average
for their market sectors.
To facilitate the day-to-day investment management of the Growth,
International Small Cap, Balanced and Worldwide Growth Trusts, Founders employs
a unique team-and-lead-manager system. The management team is composed of
several members of the Investment Department, including Founders' Chief
Investment Officer, lead portfolio managers, assistant portfolio managers,
portfolio traders and research analysts. Team members share responsibility for
providing ideas, information, knowledge and expertise in the management of the
portfolios. Each team member has one or more areas of expertise that is
applied to the management of the Portfolio. Daily decisions on portfolio
selection for the portfolio rests with a lead portfolio manager assigned to the
portfolio.
Michael W. Gerding, Vice President of Investments, is the lead
portfolio manager for the International Small Cap and Worldwide Growth Trusts.
Mr. Gerding is a chartered financial analyst who has been part of Founders'
investment department for six years. Prior to joining Founders, Mr. Gerding
served as a portfolio manager and research analyst with NCNB Texas for several
years. Mr. Gerding earned a BBA in finance and an MBA from Texas Christian
University.
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Edward F. Keely, Vice President of Investments, is the lead portfolio
manager for the Growth Trust. Mr. Keely is a chartered financial analyst who
joined Founders in 1989. A graduate of The Colorado College, Mr. Keely holds a
Bachelor of Arts degree in economics.
Brian F. Kelly, Portfolio Manager, is the lead portfolio manager for
the Balanced Trust. Mr. Kelly joined Founders in 1996. Prior to joining
Founders, Mr. Kelly served as portfolio manager for Invesco Trust Company
(1993-1996) and as a senior investment analyst for Sears Investment Management
Company (1986-1993). A graduate of the University of Notre Dame, Mr. Kelly
received his MBA and JD from the University of Iowa. He is also a Certified
Public Accountant.
T. Rowe Price Associates, Inc.
T. Rowe Price, whose address is at 100 East Pratt Street, Baltimore,
Maryland 21202, is the subadviser for the Blue Chip Growth, Equity-Income and
Science & Technology Trusts. Founded in 1937 by the late Thomas Rowe Price,
Jr., T. Rowe Price and its affiliates managed over $85 billion for over four
million individual and institutional investor accounts as of August 31, 1996.
The Blue Chip Growth Trust has an investment advisory committee
composed of the following members: Larry J. Puglia, Chairman, Brian W.H.
Berghuis, Thomas H. Broadus Jr., John D. Gillespie, Thomas J. Huber, and
William J. Stromberg. The committee chairman has day-to-day responsibility for
managing the portfolio and works with the committee in developing and executing
the portfolio's investment program. Mr. Puglia joined T. Rowe Price in 1990 and
has been managing investments since 1993. He became chairman of the Blue Chip
Growth Trust investment advisory committee on October 1, 1996.
The investment advisory committee for the Science and Technology Trust
is composed of the following members: Charles A. Morris, Chairman, Lise J.
Buyer, Jill L. Hauser, Joseph Klein III, and Brian D. Stansky. Mr. Morris
joined T. Rowe Price in 1987, and has been managing investments since 1991. He
has been chairman of the investment advisory committee of T. Rowe Price Science
& Technology Fund, Inc. since 1991. The investment advisory committee for the
Equity-Income Trust is comprised of the following members: Brian C. Rogers,
Chairman, Stephen W. Boese, Richard P. Howard, and William J. Stromberg. Mr.
Rogers joined T. Rowe Price in 1982 and has been managing investments since
1983. He has been chairman of the Equity Income Trust investment advisory
committee since October 1, 1996.
Rowe Price-Fleming International, Inc.
Price-Fleming is subadviser to the International Stock Trust. Price
Fleming's U.S. office is located at 100 East Pratt Street, Baltimore, Maryland
21202. Price-Fleming has offices in Baltimore, London, Tokyo, and Hong Kong.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited (Flemings).
T. Rowe Price, Flemings, and Jardine Fleming are owners of
Price-Fleming. The common stock of Price-Fleming is 50% owned by a wholly
owned subsidiary of T. Rowe Price, 25% by a subsidiary of Flemings, and 25% by
Jardine Fleming Group Limited (Jardine Fleming). (Half of Jardine Fleming is
owned by Flemings and half by Jardine Matheson Holdings Limited) T. Rowe Price
has the right to elect a majority of the Board of Directors of Price Fleming,
and Flemings has the right to elect the remaining directors, one of whom will
be nominated by Jardine Fleming.
An investment advisory group has day to day responsibility for
managing the portfolio and developing and executing its investment program.
The members of the advisory group are as follows: Martin G. Wade, Christopher
D. Alderson, Peter B. Askew, Richard J. Bruce, Mark J.T. Edwards, John R. Ford,
Robert C. Howe, James B.M. Seddon, Benedict R.F. Thomas, and David J.L.
Warren..
Martin Wade joined Price-Fleming in 1979 and has 26 years of
experience with the Fleming Group in research, client service, and investment
management. (Fleming Group included Robert Fleming and/or Jardine Fleming.)
Christopher Alderson joined Price-Fleming in 1988 and has nine
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years of experience with the Fleming Group in research and portfolio
management. Peter Askew joined Price-Fleming in 1988 and has 20 years of
experience managing multi-currency fixed income portfolios. Richard Bruce
joined Price-Fleming in 1991 and has seven years of experience in investment
management with the Fleming Group in Tokyo. Mark Edwards joined Price-Fleming
in 1986 and has 14 years of experience in financial analysis. John Ford joined
Price-Fleming in 1982 and has 15 years of experience with the Fleming Group in
research and portfolio management. Robert Howe joined Price-Fleming in 1986 and
has 14 years of experience in economic research, company research, and
portfolio management. James Seddon joined Price-Fleming in 1987 and has 10 year
of experience in portfolio management. Benedict Thomas joined Price-Fleming in
1988 and has six years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 15 years of experience in equity research, fixed
income research, and portfolio management.
Morgan Stanley Asset Management, Inc.
Morgan Stanley, with principal offices at 1221 Avenue of the Americas,
New York, New York 10020, has been the subadviser to the Global Equity Trust
since October 1, 1996. Morgan Stanley, a wholly-owned subsidiary of Morgan
Stanley Group, Inc., conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At June 30, 1996, Morgan Stanley, together with its
affiliated asset management companies, managed investments totaling
approximately $103.5 billion, including approximately $87 billion under active
management and $16.5 billion as named fiduciary or fiduciary adviser.
Frances Campion is primarily responsible for the portfolio management
of the Global Equity Trust. Ms. Campion joined Morgan Stanley in January 1990
as a global equity fund manager and is now a Principal of Morgan Stanley & Co.
Incorporated. Her responsibilities include day to day management of the Global
Equity Portfolio of Morgan Stanley Institutional Fund, Inc. Prior to joining
Morgan Stanley, Ms. Campion was a U.S. equity analyst with Lombard Odler
Limited where she had responsibility for the management of global portfolios.
Ms. Campion has ten years global investment experience. She is a graduate of
University of College, Dublin.
Miller Anderson & Sherrerd, LLP
MAS, the subadviser to the Value and High Yield Trusts, is a
Pennsylvania limited liability partnership founded in 1969 and is located at
One Tower Bridge, West Conshohocken, PA 19428. MAS provides investment
services to employee benefit plans, endowment funds, foundations and other
institutional investors and as of June 30, 1996 had in excess of $36 billion in
assets under management. On January 3, 1996, Morgan Stanley Group Inc.
acquired MAS in a transaction in which Morgan Stanley Asset Management
Holdings, Inc., an indirect wholly owned subsidiary of Morgan Stanley Group
Inc., became the sole general partner of MAS. Morgan Stanley Asset Management
Holdings Inc. and two other wholly owned subsidiaries of Morgan Stanley Group
Inc. became the limited partners of MAS.
The investment professionals of MAS who are primarily responsible for
the day to day management of the Value Trust are Robert J. Marcin and A. Morris
Williams, Jr. Robert J. Marcin, Portfolio Manager, joined MAS in 1988, and A.
Morris William's, Jr., Portfolio Manager, joined MAS in 1973. Messrs. Marcin
and Williams are also primarily responsible for the management of the Value
Portfolio of MAS Funds. The investment professionals primarily responsible for
the High Yield Trust are Thomas L. Bennett and Stephen F. Esser. Thomas L.
Bennett, Portfolio Manager, joined MAS in 1994, and Stephen F. Esser, Portfolio
Manager, joined MAS in 1988. Messrs. Bennett and Esser are also primarily
responsible for the management of the High Yield Portfolio of MAS Funds.
Pilgrim Baxter & Associates, Ltd.
PBHG, the subadviser of the Pilgrim Baxter Growth Trust, is a
professional investment management firm that, along with its predecessors, has
been in business since 1982. The controlling shareholder of PBHG is United
Asset Management Corporation ("UAM"), a New York Stock Exchange listed holding
company principally engaged, through affiliated firms, in providing
institutional investment management services and acquiring institutional
investment management firms. UAM's corpo-
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rate headquarters are located at One International Place, Boston, Massachusetts
02110. PBHG currently has discretionary management authority with respect to
approximately $12 billion in assets. In addition to advising certain
portfolios of the Trust, North American Funds and The PBHG Funds, Inc., PBHG
provides advisory services to pension and profit-sharing plans, charitable
institutions, corporations, individual investors, trusts and estates, and other
investment companies. The principal business address of the PBHG is 1255
Drummers Lane, Suite 300, Wayne, Pennsylvania 19087.
Gary L. Pilgrim, CFA, is primarily responsible for the day to day
management of the Pilgrim Baxter Growth Trust. Mr. Pilgrim also serves as the
portfolio manager of the Pilgrim Baxter Growth Trust, a mutual fund available
to the general public, and has served as the portfolio manager of the Growth
Fund of The PBHG Funds, Inc. since its inception. Mr. Pilgrim has served as the
Chief Investment Officer for PBHG for the past six years and has been its
President since 1993.
Manufacturers Adviser Corporation
MAC, a Colorado corporation, is the subadviser of the Money Market,
Pacific Rim Emerging Markets, Capital Growth Bond, Common Stock, Real Estate
Securities and Equity Index Trusts. Its principal business at the present time
is to provide investment management services to these portfolios and comparable
portfolios of North American Funds. MAC is an indirect wholly-owned subsidiary
of Manulife. The address of MAC is 200 Bloor Street East, Toronto, Ontario,
Canada M4W 1E5.
Management of the above portfolios is provided by a team of investment
professionals each of whom plays an important role in the management process
of each portfolio. Team members work together to develop investment strategies
and select securities for a portfolio. They are supported by research
analysts, traders and other investment specialists who work alongside the
investment professionals in an effort to utilize all available resources to
benefit the shareholders.
The persons with primary responsibility for the day to day management
of the Real Estate Securities Trust are Mark Schmeer and Leslie Grober. Mr.
Schmeer joined MAC in 1995. He is an investment manager of U.S. Equities at
Manulife. Prior to 1995 he was a Vice President of Sun Life Investment
Management, where he served from 1993 to 1995. Mr. Schmeer was a manager of
U.S. Investments for Ontario Hydro Corporation from 1986 to 1993. Ms. Grober
also joined MAC in 1995. She has been an investment manager of U.S. Equities at
Manulife since 1994. Ms. Grober was an investment representative of
Toronto-Dominion Bank from 1991 to 1993. Prior to that she was employed by the
Bank of Montreal.
The persons with primary responsibility for the day to day management
of the Common Stock Trust are Mark Schmeer and Rhonda Chang. Ms. Chang joined
MAC in 1995. She has been an investment manager at Manulife since 1994. From
1990 to 1994, Ms. Chang was an investment analyst with American International
Group.
Catherine Addison has primary responsibility for the day to day
management of the Capital Growth Bond Trust. She has had such responsibility
for the predecessor portfolio of Manulife Series Fund, Inc., since 1988. She
has been an investment manager of U.S. Fixed Income at Manulife since 1985.
The persons with primary responsibility for the day to day management
of the Pacific Rim Emerging Markets Trust are Steven Hill, Richard James Crook
and Emilia Panadero Perez. Mr. Hill joined MAC in 1995. He is also an
investment manager at Manulife. Prior to 1995, Mr. Hill was a director of
INVESCO Asset Management, where he served in 1993 and 1994. Mr. Hill was a
director of Yasuda Trust Europe from 1989 to 1992. Richard James Crook joined
MAC in 1994. He has been an investment manager of Manulife since 1975. Amelia
Panadero Perez joined MAC in 1995. She has been an investment manager at
Manulife since 1989.
Warburg Pincus Counsellors, Inc.,
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Warburg, the subadviser of the Emerging Growth Trust, is a
professional investment counselling firm which provides investment services to
investment companies, employee benefit plans, endowment funds, foundations and
other institutions and individuals. As of_______________, 1996, Warburg managed
approximately $_____ billion of assets, including approximately $____ billion
of assets of ___ investment companies or portfolios. Incorporated in 1970,
Warburg is a wholly owned subsidiary of Warburg, Pincus Counsellors G.P.
("Warburg G.P."), a New York general partnership. E.M. Warburg, Pincus & Co.,
Inc. ("EMW") controls Warburg through its ownership of a class of voting
preferred stock of Warburg. Warburg G.P. has no business other than being a
holding company of Warburg and its subsidiaries. Warburg's address is 466
Lexington Avenue, New York, New York 10017-3147.
The co-portfolio managers of the Fund are Elizabeth B. Dater and
Stephen J. Lurito. Ms. Dater has been portfolio manager of the Warburg Pincus
Emerging Growth Fund since its inception on January 21, 1988. She is a managing
director of EMW and has been a portfolio manager of Warburg since 1978. Mr.
Lurito has been a portfolio manager of the that Fund since 1990. He is a
managing director of EMW and has been with Warburg since 1987, before which
time he was a research
* * *
Under the terms of each of the Subadvisory Agreements, the subadviser
manages the investment and reinvestment of the assets of the assigned
portfolios, subject to the supervision of the Trustees of the Trust. The
subadviser formulates a continuous investment program for each such portfolio
consistent with its investment objectives and policies outlined in this
Prospectus. Each subadviser implements such programs by purchases and sales of
securities and regularly reports to the Adviser and the Trustees of the Trust
with respect to the implementation of such programs.
As compensation for their services, the subadvisers receive fees from
the Adviser computed separately for each portfolio. The fee for each portfolio
is stated as an annual percentage of the current value of the net assets of
such portfolio. The fees are calculated on the basis of the average of all
valuations of net assets of each portfolio made at the close of business on
each business day of the Trust during the period for which such fees are paid.
Once the average net assets of a portfolio exceed specified amounts, the fee is
reduced with respect to such excess. The following is a schedule of the
management fees the Adviser currently is obligated to pay the subadvisers out
of the advisory fee it receives from each portfolio as specified above:
<TABLE>
<CAPTION>
BETWEEN BETWEEN
$50,000,000 $200,000,000
FIRST AND AND EXCESS OVER
PORTFOLIO $50,000,000 $200,000,000 $500,000,000 $500,000,000
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emer'g Mrkts
Trust. . . . . . . . . . . . .400% .350% .275% .225%
Science & Technology Trust . . .600% .600% .600% .600%
International Small Cap Trust . .650% .600% .500% .400%
Emerging Growth Trust. . . . . .550% .550% .550% .550%
Pilgrim Baxter Growth Trust . . .600% .600% .500% .500%
Small/Mid Cap Trust . . . . . . .525% .500% .475% .450%
International Stock Trust. . . .750%* .500% .500%* .450%*
Worldwide Growth Trust . . . . .600% .550% .450% .350%
Global Equity Trust . . . . . . .500% .450% .375% .325%
Growth Trust . . . . . . . . . .450% .450% .350% .300%
Equity Trust . . . . . . . . . .375% .325% .275% .200%
Common Stock Trust . . . . . . .275% .225% .175% .150%
Equity Index Trust . . . . . . .100% .100% .100% .100%
Blue Chip Growth . . . . . . . .500% .450% .400% .325%
Value Trust . . . . . . . . . . .400% .300% .200% .200%
International Growth and
Income Trust . . . . . . . . .500% .450% .400% .350%
Growth and Income Trust . . . .325% .275% .225% .150%
Equity-Income Trust . . . . . . .400% .300% .200% .200%
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Real Estate Securities Trust . .275% .225% .175% .150%
Balanced Trust . . . . . . . . .375% .325% .275% .225%
Aggressive Asset Allocation
Trust . . . . . . . . . . . .350% .300% .250% .175%
High Yield Trust . . . . . . . .350% .300% .250% .200%
Moderate Asset Allocation Trust .375% .325% .275% .200%
Conservative Asset Allocation
Trust. . . . . . . . . . . . .400% .350% .300% .225%
Strategic Bond Trust** . . . . .350% .300% .250% .100%
Global Government Bond Trust . .375% .350% .300% .250%
Capital Growth Bond Trust . . . .225% .225% .150% .100%
Investment Quality Bond Trust .225% .225% .150% .100%
U.S. Government Securities Trust .225% .225% .150% .100%
Money Market Trust . . . . . . .075% .075% .075% .020%
</TABLE>
*.750% up to $20 million; .600% from $20 million up to $50 million; when net
assets equal or exeed $200 million, the .500% fee (and the .450% fee when net
assets exceed $500 million) applies to all net assets of the portfolio.
** In connection with the subadvisory consulting agreement between SBAM and
SBAM Limited, SBAM will pay SBAM Limited, as full compensation for all services
provided under the subadvisory consulting agreement, a portion of its
subadvisory fee, such amount being an amount equal to the fee payable under
SBAM's subadvisory agreement multiplied by the current value of the net assets
of the portion of the assets of the Strategic Bond Trust that SBAM Limited has
been delegated to manage divided by the current value of the net assets of the
portfolio.
For the year ended December 31, 1995, the Adviser paid aggregate
subadvisory fees of $12,007,940, allocated among the portfolios as follows:
Global Equity Trust - $2,415,918, Blue Chip Growth Trust - $978,146, Equity
Trust - $1,628,673, Equity-Income Trust - $864,812, Growth & Income Trust -
$1,267,236, International Growth & Income Trust - $232,320, Global Government
Bond Trust - $771,716, Investment Quality Bond Trust - $276,246, U.S.
Government Securities Trust - $442,603, Money Market Trust - $197,786,
Aggressive Asset Allocation Trust - $560,019, Moderate Asset Allocation Trust -
$1,433,417, Conservative Asset Allocation Trust - $616,971, Strategic Bond
Trust - $322,077 ($63,321 of this amount was paid to SBAM Limited.).
Above are brief summaries of the advisory agreement with NASL
Financial ("Advisory Agreement") and the subadvisory agreements with the
subadvisers ("Subadvisory Agreements"). A more comprehensive statement of the
terms of such agreements appears in the Statement of Additional Information
under the caption "Investment Management Arrangements".
All or a portion of Trust brokerage commissions may be paid to
affiliates of Salomon, J.P. Morgan, Alger, Fidelity, Morgan Stanley and
Oechsle. Information on the amount of these commissions is set forth in the
Statement of Additional Information under "Portfolio Brokerage."
EXPENSES
Subject to the expense limitations discussed above, the Trust is
responsible for the payment of all expenses of its organization, operations and
business, except for those expenses the Adviser or subadvisers have agreed to
pay pursuant to the Advisory or Subadvisory Agreements. Among the expenses to
be borne by the Trust are charges and expenses of the custodian, independent
accountants and transfer, bookkeeping and dividend disbursing agents appointed
by the Trust; brokers' commissions and issue and transfer taxes on securities
transactions to which the Trust is a party; taxes payable by the Trust; and
legal fees and expenses in connection with the affairs of the Trust, including
registering and qualifying its shares with regulatory authorities and in
connection with any litigation.
For the year ended December 31, 1995, the expenses, including the
Adviser's fee but excluding portfolio brokerage commissions, expressed as a
percentage of average net assets, for each of the Trust's portfolios were as
follows: 1.05% -- Global Equity Trust, .975% -- Blue Chip Growth Trust, .80% --
Equity Trust .85% -- Equity-Income Trust, .80% -- Growth and Income Trust 1.47%
(annualized) -- In-
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ternational Growth and Income Trust, .92% - Strategic Bond Trust, .93% --
Global Government Bond Trust, .74% -- Investment Quality Bond Trust, .71% --
U.S. Government Securities Trust, .54% -- Money Market Trust, .91% --
Aggressive Asset Allocation Trust, .84% -- Moderate Asset Allocation Trust and
.87% -- Conservative Asset Allocation Trust.
For the year ended December 31, 1995, the expenses, excluding the
Adviser's fee and portfolio brokerage commissions, expressed as a percentage of
average net assets, for each of the Trust's portfolios were as follows: .15% --
Global Equity Trust, 0% -- Blue Chip Growth Trust, .05% -- Equity Trust .05% --
Equity-Income Trust, .05% -- Growth and Income Trust, .52% (annualized) --
International Growth and Income Trust, .15% - Strategic Bond Trust, .13% --
Global Government Bond Trust, .09% -- Investment Quality Bond Trust, .06% --
U.S. Government Securities Trust, .04% -- Money Market Trust, .16% --
Aggressive Asset Allocation Trust, .09% -- Moderate Asset Allocation Trust and
.12% -- Conservative Asset Allocation Trust.
Each of the portfolios, except the Global Equity, Blue Chip Growth,
Equity, Equity-Income and Growth and Income Trusts, anticipates that its annual
portfolio turnover rate will exceed 100%. A high portfolio turnover rate
generally involves correspondingly greater brokerage commission expenses, which
must be borne directly by the portfolio. The portfolio turnover rate of each of
the Trust's portfolios may vary from year to year, as well as within a year.
See "Portfolio Turnover" in the Statement of Additional Information.
PERFORMANCE DATA
From time to time the Trust may publish advertisements containing
performance data relating to its portfolios. Performance data will consist of
total return quotations which will always include quotations for recent
one-year and, when applicable, five-year and ten-year periods and where less
than five or ten years, for the period since the date the portfolio, including
its predecessor prior to the reorganization of the Fund on December 31, 1988,
became available for investment. In the case of the Pacific Rim Emerging
Markets, Real Estate Securities, Common Stock, Capital Growth Bond and Equity
Index Trusts, such quotations will be for periods that include the performance
of the predecessor portfolios of Manulife Series Trust, Inc. Such quotations
for such periods will be the average annual rates of return required for an
initial investment of $1,000 to equal the market value of such investment on
the last day of the period, after reflection of all Trust charges and expenses
and assuming reinvestment of all dividends and distributions. Performance
figures used by the Trust are based on the actual historical performance of its
portfolios for specified periods, and the figures are not intended to indicate
future performance. Moreover, the Trust's performance figures are not
comparable to those for public mutual funds. Trust shares are only available
as the underlying investment medium for contracts which provide for certain
charges, as described in the accompanying contract Prospectus. The impact of
such charges is not reflected in the Trust's performance figures. More
detailed information on the computations is set forth in the Statement of
Additional Information. The Trust's annual report, which is available without
charge upon request, contains further discussions of Trust performance.
The Trust may also from time to time advertise the performance of
certain portfolios relative to that of unmanaged indices, including but not
limited to the Dow Jones Industrial Average, the Lehman Brothers Bond,
Government Corporate, Corporate and Aggregate Indices, the Standard and Poor's
500, the Value Line Composite and the Morgan Stanley Capital International
Europe, Australia and Far East ("EAFE") and World Indices. The Trust may also
advertise the performance rankings assigned certain portfolios or their
investment subadvisers by various statistical services, including but not
limited to SEI, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis and Variable Insurance Products Performance Analysis, Variable Annuity
Research and Data Service, Intersec Research Survey of Non-U.S. Equity Fund
Returns and Frank Russell International Universe, and any other data which may
be presented from time to time by such analysts as Dow Jones, Morning Star,
Chase International Performance, Wilson Associates, Stanger, CDA Investment
Technology, the Consumer Price Index ("CPI"), The Bank Rate Monitor National
Index, IBC/Donaghue's Average U.S. Government and Agency, or as they appear in
various publications, including The Wall Street Journal, New York Times,
Forbes, Barrons, Fortune, Money Magazine, Financial World and Financial
Services Week.
GENERAL INFORMATION
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SHARES OF THE TRUST
The Trust's Declaration of Trust authorizes the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest having a
par value of $.01 per share, to divide such shares into an unlimited number of
series of shares and to designate the relative rights and preferences thereof,
all without shareholder approval. In addition, the Trustees are authorized to
divide any series of shares into separate classes, also without shareholder
approval. The Trust currently has thirty-five series of shares, one for each
portfolio. Shares of each portfolio have equal rights with regard to
redemptions, dividends, distributions and liquidations with respect to that
portfolio. When issued, shares are fully paid and non-assessable and do not
have preemptive or conversion rights or cumulative voting rights. All shares
are entitled to one vote and are voted by series, except that when voting for
the election of Trustees and when otherwise permitted by the Investment Company
Act of 1940, shares are voted in the aggregate. Only shares of a particular
portfolio are entitled to vote on matters determined by the Trustees to affect
only the interests of that portfolio.
The Trust currently has three shareholders, Security Life, Manulife
America and FNAL. Security Life provided the Trust with its initial capital.
Currently, Security Life owns Trust shares attributable to the initial
capitalization of the Growth and Income Trust. Each shareholder owns the Trust
shares attributable to contracts participating in its separate accounts and
will vote such shares and, in the case of Security Life, Trust shares owned
beneficially by Security Life in accordance with instructions received from
contract owners.
Shares of the Trust may be sold to both variable annuity separate
accounts and variable life insurance separate accounts of affiliated insurance
companies. The Trust currently does not foresee any disadvantages to the
owners of variable annuity or variable life insurance contracts arising from
the fact that the interests of those owners may differ. Nevertheless, the
Trust's Board of Trustees will monitor events in order to identify any material
irreconcilable conflicts which may possibly arise due to differences of tax
treatment or other considerations and to determine what action, if any, should
be taken in response thereto. Such an action could include the withdrawal of a
separate account from participation in the Trust.
TAXES
TAX STATUS. The Trust believes that each portfolio will qualify as a
regulated investment company under Subchapter M, Chapter 1, Subtitle A of the
Internal Revenue Code (the "Code"), and the Trust intends to take the steps
necessary to so qualify each portfolio. As a result of qualifying as a
regulated investment company, each portfolio will not be subject to Federal
income tax to the extent that the portfolio distributes its net income,
including its net realized capital gains, to its shareholders. Accordingly,
each portfolio intends to distribute substantially all of its net income,
including all of its net realized capital gains, to its shareholders. Under
current law, net income, including net realized capital gain, is not taxed to a
life insurance company to the extent that it is applied to increase the
reserves for the company's variable annuity and life insurance contracts.
SOURCES OF GROSS INCOME. To qualify for treatment as a regulated
investment company, a portfolio must, among other things, derive its income
from certain sources. Specifically, in each taxable year a portfolio must
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in stock, securities, or currencies. A portfolio
must also derive less than 30% of its gross income from the sale or other
disposition of any of the following which was held for less than three months:
(1) stock or securities, (2) options, futures, or forward contracts (other than
options, futures, or forward contracts on foreign currencies), or (3) foreign
currencies (or options, futures, or forward contracts on foreign currencies)
but only if such currencies (or options, futures, or forward contracts) are not
directly related to the portfolio's principal business of investing in stock or
securities (or options and futures with respect to stocks or securities). For
purposes of these tests, gross income generally is determined without regard to
losses from the sale or other disposition of stock or securities or other
portfolio assets. Compliance with these requirements may prevent a portfolio
from utilizing options, futures, and forward contracts as much as the
subadviser might otherwise believe to be desirable.
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DIVERSIFICATION OF ASSETS. To qualify for treatment as a regulated
investment company, a portfolio must also satisfy certain requirements with
respect to the diversification of its assets. A portfolio must have, at the
close of each quarter of the taxable year, at least 50% of the value of its
total assets represented by cash, cash items, United States Government
securities, securities of other regulated investment companies, and other
securities which, in respect of any one issuer, do not represent more than 5%
of the value of the assets of the portfolio nor more than 10% of the voting
securities of that issuer. In addition, at those times not more than 25% of
the value of the portfolio's assets may be invested in securities (other than
United States Government securities or the securities of other regulated
investment companies) of any one issuer, or of two or more issuers which the
portfolio controls and which are engaged in the same or similar trades or
businesses or related trades or businesses.
Because the Trust is established as an investment medium for insurance
company separate accounts, regulations under Subchapter L of the Code impose
additional diversification requirements on each portfolio. These requirements
generally are that no more than 55% of the value of the assets of a portfolio
may be represented by any one investment; no more than 70% by any two
investments; no more than 80% by any three investments; and no more than 90% by
any four investments. For these purposes, all securities of the same issuer
are treated as a single investment and each United States government agency or
instrumentality is treated as a separate issuer.
FOREIGN INVESTMENTS. Portfolios investing in foreign securities or
currencies may be required to pay withholding or other taxes to foreign
governments. Foreign tax withholding from dividends and interest, if any, is
generally at a rate between 10% and 35%. The investment yield of any portfolio
that invests in foreign securities or currencies will be reduced by these
foreign taxes. Shareholders will bear the cost of any foreign tax withholding,
but may not be able to claim a foreign tax credit or deduction for these
foreign taxes. Portfolios investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes and interest
charges (and investment yield of the portfolios making such investments will be
reduced by these taxes and interest charges). Shareholders will bear the cost
of these taxes and interest charges, but will not be able to claim a deduction
for these amounts.
ADDITIONAL TAX CONSIDERATIONS. If a portfolio failed to qualify as a
regulated investment company, owners of contracts based on the portfolio (1)
might be taxed currently on the investment earnings under their contracts and
thereby lose the benefit of tax deferral, and (2) the portfolio might incur
additional taxes. In addition, if a portfolio failed to comply with the
diversification requirements of the regulations under Subchapter L of the Code,
owners of contracts based on the portfolio would be taxed on the investment
earnings under their contracts and thereby lose the benefit of tax deferral.
Accordingly, compliance with the above rules is carefully monitored by the
Adviser and the Subadvisers and it is intended that the portfolios will comply
with these rules as they exist or as they may be modified from time to time.
Compliance with the tax requirements described above may result in a reduction
in the return under a portfolio, since, to comply with the above rules, the
investments utilized (and the time at which such investments are entered into
and closed out) may be different from that Subadvisers might otherwise believe
to be desirable.
OTHER INFORMATION. For more information regarding the tax
implications for the purchaser of a variable annuity or life insurance
contracts who allocates investments to the Trust, please refer to the
prospectus for the contract.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisors. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
DIVIDENDS
The Trust intends to declare as dividends substantially all of the net
investment income, if any, of each portfolio. For dividend purposes, net
investment income of each portfolio except the Money Market Trust will consist
of all payments of dividends (other than stock dividends) or interest received
by such portfolio less the estimated expenses of such portfolio (including fees
payable to the Adviser) and for the
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Money Market Trust it will consist of the interest income earned on
investments, plus or minus amortized purchase discount or premium, plus or
minus realized gains and losses, less estimated expenses. Dividends from the
net investment income and the net realized short-term and long-term capital
gains, if any, for each portfolio except the Money Market Trust will be
declared not less frequently than annually and reinvested in additional full
and fractional shares of that portfolio or paid in cash. Dividends from net
investment income and net realized short-term and long-term capital gains, if
any, for the Money Market Trust will be declared and reinvested, or paid in
cash, daily.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Trust are offered continuously, without sales charge, at
prices equal to the respective net asset values of the portfolio. The Trust
sells its shares directly without the use of any underwriter. Shares of the
Trust are sold and redeemed at their net asset value next computed after a
purchase payment or redemption request is received by the shareholder from the
contract owner or after any other purchase or redemption order is received by
the Trust. Depending upon the net asset values at that time, the amount paid
upon redemption may be more or less than the cost of the shares redeemed.
Payment for shares redeemed will be made as soon as possible, but in any event
within seven days after receipt of a request for redemption.
The net asset value of the shares of each portfolio is determined once
daily as of the close of regularly scheduled trading of the New York Stock
Exchange, Monday through Friday, except that no determination is required on
(i) days on which changes in the value of such portfolio's portfolio securities
will not materially affect the current net asset value of the shares of the
portfolio, (ii) days during which no shares of such portfolio are tendered for
redemption and no order to purchase or sell such shares is received by the
Trust, or (iii) the following business holidays or the days on which such
holidays are observed by the New York Stock Exchange: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Generally, trading in non-U.S. securities,
as well as U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the close of
regularly scheduled trading of the New York Stock Exchange. The values of such
securities used in computing the net asset value of a portfolio's shares are
generally determined as of such times. Occasionally, events which affect the
values of such securities may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of a portfolio's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the subadvisers under procedures established and regularly
reviewed by the Trustees.
The net asset values per share of all portfolios other than the Money
Market Trust are computed by adding the sum of the value of the securities held
by each portfolio plus any cash or other assets it holds, subtracting all its
liabilities, and dividing the result by the total number of shares outstanding
of that portfolio at such time. Securities held by each of the portfolios
other than the Money Market Trust, except for money market instruments with
remaining maturities of 60 days or less and Underlying Portfolio shares held by
the Lifestyle Trusts, are valued at their market value if market quotations are
readily available. Otherwise, such securities are valued at fair value as
determined in good faith by the Trustees although the actual calculations may
be made by persons acting pursuant to the direction of the Trustees.
All instruments held by the Money Market Trust and money market
instruments with a remaining maturity of 60 days or less held by the other
portfolios are valued on an amortized cost basis.
CUSTODIAN
State Street Bank and Trust Company, ("State Street") 225 Franklin
Street, Boston, Massachusetts 02110, currently acts as custodian and
bookkeeping agent of all the Trust assets. State Street has selected various
banks and trust companies in foreign countries to maintain custody of certain
foreign securities. State Street is authorized to use the facilities of the
Depository Trust Company, the Participants Trust Company and the book-entry
system of the Federal Reserve Banks.
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APPENDIX I
DEBT SECURITY RATINGS
STANDARD & POOR'S RATINGS GROUP ("S&P")
Commercial Paper:
A-1 The rating A-1 is the highest rating assigned by S&P to
commercial paper. This designation indicates that the degree
of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
for issuers designated "A-1".
Bonds:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB-B-CCC
-CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligations. BB indicates the lowest
degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Bonds rated D are in default. The D category is used when
interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired.
The D rating is also used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of
a plus or minus to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Commercial Paper:
P-1 The rating P-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated P-1 (or related supporting
institutions) have a superior capacity for repayment of
short-term promissory obligations. P-1 repayment capacity
will normally be evidenced by the following characteristics:
(1) leading market positions in established industries; (2)
high rates of return on funds employed; (3) conservative
capitalization structures with moderate
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reliance on debt and ample asset protection; (4) broad margins
in earnings coverage of fixed financial charges and high
internal cash generation; and (5) well established access to a
range of financial markets and assured sources of alternate
liquidity.
P-2 Issuers rated P-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
Bonds:
Aaa Bonds which are rated Aaa by Moody's are judged to be of the
best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds which are rated Aa by Moody's are judged to be of high
quality by all standards. Together with the Aaa group, they
comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude
or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A by Moody's possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa by Moody's are considered as medium
grade obligations, that is, they are neither highly protected
nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance and other terms of the contract
over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
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APPENDIX II
STRATEGIC BOND TRUST DEBT RATING
The average distribution of investments in corporate and government
bonds by ratings for the fiscal year ended December 31, 1995,
calculated monthly on a dollar-weighted basis, for the Strategic Bond
Trust, are as follows:
<TABLE>
<CAPTION>
UNRATED BUT OF
MOODY'S STANDARD & POOR'S COMPARABLE QUALITY PERCENTAGE*
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Aaa AAA 11% 0%
Aa AA 0% 0%
A A 0% 2%
Baa BBB 0% 3%
Ba BB 23% 4%
B B 0% 33%
Caa CCC 0% 2%
Ca CC 0% 0%
C C 0% 0%
D 0% 0%
Unrated as a Group 34%
U.S. Government Securities* 22%
---
100%
</TABLE>
The actual distribution of the Strategic Bond Trust's corporate and
government bond investments by ratings on any given date will vary. In
addition, the distribution of the Trust's investments by ratings as set forth
above should not be considered as representative of the Trust's future
portfolio composition.
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
INVESTMENT QUALITY BOND TRUST DEBT RATINGS
The average distribution of investments in corporate and government
bonds by ratings for the fiscal year ended December 31, 1995,
calculated monthly on a dollar-weighted basis, for the Investment
Quality Bond Trust, are as follows:
<TABLE>
<CAPTION>
UNRATED BUT OF
MOODY'S STANDARD & POOR'S COMPARABLE QUALITY PERCENTAGE*
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Aaa AAA 0% 9%
Aa AA 0% 5%
A A 0% 19%
Baa BBB 0% 5%
Ba BB 0% 2%
B B 0% 1%
Caa CCC 0% 0%
Ca CC 0% 0%
C C 0% 0%
D 0% 0%
Unrated as a Group 0%
U.S. Government Securities* 59%
----
100%
</TABLE>
The actual distribution of the Investment Quality Bond Trust's
corporate and government bond investments by ratings on any given date will
vary. In addition, the distribution of the Trust's investments by ratings as
set forth above should not be considered as representative of the Trust's
future portfolio composition.
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<PAGE> 79
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
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<PAGE> 80
APPENDIX III
STANDARD AND POOR'S DISCLAIMERS
The Equity Index Trust is not sponsored, endorsed, sold or promoted by
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the shareholders of the Equity Index Trust or any member of the
public regarding the advisability of investing in securities generally or in
the Equity Index Trust particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Trust
is the licensing of certain trademarks and trade names of S&P and of the S&P
500 Index which is determined, composed and calculated by S&P without regard to
the Trust or the Equity Index Trust. S&P has no obligation to take the needs
of the Trust or the shareholders of the Equity Index Trust into consideration
in determining, composing or calculating the S&P 500 Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of shares of the Equity Index Trust or the timing of the issuance or
sale of the shares of the Equity Index Trust or in the determination or
calculation of the equation by which shares of the Equity Index Trust are to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Equity Index Portfolio.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Trust, shareholders of the Equity
Index Trust, or any other person or entity from the use of the S&P 500 Index or
any data included therein. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the S&P 500 Index or any data
included therein. Without limiting any of the foregoing, in no event shall S&P
have any liability for any special, punitive, indirect, or consequential
damages (including lost profits), even if notified of the possibility of such
damages.
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<PAGE> 81
PART B
INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 82
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
NASL SERIES TRUST
(the "Trust")
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Trust's Prospectus dated December 31,
1996 which may be obtained from NASL Series Trust, 116 Huntington Avenue,
Boston, Massachusetts, 02116.
The date of this Statement of Additional Information is December 31, 1996.
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<PAGE> 83
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Money Market Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Other Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
HEDGING AND OTHER STRATEGIC TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
General Characteristics of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
General Characteristics of Futures Contracts and Options on Futures Contracts . . . . . . . . . . . . 15
Options on Securities Indices and Other Financial Indices . . . . . . . . . . . . . . . . . . . . . . 15
Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Combined Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Swaps, Caps, Floors and Collar s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Eurodollar Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Risks of Hedging and Other Strategic Transactions Outside the United States . . . . . . . . . . . . . 19
Use of Segregated and Other Special Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Fundamental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Nonfundamental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Compensation of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
INVESTMENT MANAGEMENT ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Subadvisory Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Agreement With Prior Subadviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ORGANIZATION OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Shares of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Principal Holders of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
REPORTS TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
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<PAGE> 84
INVESTMENT POLICIES
The following discussion supplements the Trust's "Investment
Objectives and Policies" set forth in the Prospectus.
MONEY MARKET INSTRUMENTS
The Money Market Trust will be invested in the types of money market
instruments described below. Certain of the instruments listed below may also
be purchased by the other portfolios in accordance with their investment
policies and all portfolios may purchase such instruments to invest otherwise
idle cash or for defensive purposes, except that the U.S. Government Securities
Trust and the Equity Index Trust may not invest in the instruments described in
2. below.
1. U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS. Government
obligations are debt securities issued or guaranteed as to principal or
interest by the U.S. Treasury. These securities include treasury bills, notes
and bonds. U.S. Government agency obligations are debt securities issued or
guaranteed as to principal or interest by an agency or instrumentality of the
U.S. Government pursuant to authority granted by Congress. U.S. Government
agency obligations include, but are not limited to, the Student Loan Marketing
Association, Federal Home Loan Banks, Federal Intermediate Credit Banks and the
Federal National Mortgage Association. U.S. instrumentality obligations
include, but are not limited to, the Export-Import Bank and Farmers Home
Administration. Some obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported by the right of the issuer to
borrow from the U.S. Treasury or the Federal Reserve Banks, such as those
issued by Federal Intermediate Credit Banks; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. There are
also separately traded interest components of securities issued or guaranteed
by the United States Treasury. No assurance can be given that the U.S.
Government will provide financial support to such U.S. Government sponsored
agencies or instrumentalities in the future, since it is not obligated to do so
by law. The foregoing types of instruments are hereafter collectively referred
to as "U.S. Government securities."
2. CANADIAN AND PROVINCIAL GOVERNMENT AND CROWN AGENCY Obligations.
Canadian Government obligations are debt securities issued or guaranteed as to
principal or interest by the Government of Canada pursuant to authority granted
by the Parliament of Canada and approved by the Governor in Council, where
necessary. These securities include treasury bills, notes, bonds, debentures
and marketable Government of Canada loans. Canadian Crown agency obligations
are debt securities issued or guaranteed by a Crown corporation, company or
agency ("Crown agencies") pursuant to authority granted by the Parliament of
Canada and approved by the Governor in Council, where necessary. Certain Crown
agencies are by statute agents of Her Majesty in right of Canada, and their
obligations, when properly authorized, constitute direct obligations of the
Government of Canada. Such obligations include, but are not limited to, those
issued or guaranteed by the Export Development Corporation, Farm Credit
Corporation, Federal Business Development Bank and Canada Post Corporation. In
addition, certain Crown agencies which are not by law agents of Her Majesty may
issue obligations which by statute the Governor in Council may authorize the
Minister of Finance to guarantee on behalf of the Government of Canada. Other
Crown agencies which are not by law agents of Her Majesty may issue or
guarantee obligations not entitled to be guaranteed by the Government of
Canada. No assurance can be given that the Government of Canada will support
the obligations of Crown agencies which are not agents of Her Majesty, which it
has not guaranteed, since it is not obligated to do so by law.
Provincial Government obligations are debt securities issued or
guaranteed as to principal or interest by the government of any province of
Canada pursuant to authority granted by the Legislature of any such province
and approved by the Lieutenant Governor in Council of any such province, where
necessary. These securities include treasury bills, notes, bonds and
debentures. Provincial Crown agency
3
<PAGE> 85
obligations are debt securities issued or guaranteed by a provincial Crown
corporation, company or agency ("provincial Crown agencies") pursuant to
authority granted by a provincial Legislature and approved by the Lieutenant
Governor in Council of such province, where necessary. Certain provincial
Crown agencies are by statute agents of Her Majesty in right of a particular
province of Canada, and their obligations, when properly authorized, constitute
direct obligations of such province. Other provincial Crown agencies which are
not by law agents of Her Majesty in right of a particular province of Canada
may issue obligations which by statute the Lieutenant Governor in Council of
such province may guarantee, or may authorize the Treasurer thereof to
guarantee, on behalf of the government of such province. Finally, other
provincial Crown agencies which are not by law agencies of Her Majesty may
issue or guarantee obligations not entitled to be guaranteed by a provincial
government. No assurance can be given that the government of any province of
Canada will support the obligations of provincial Crown agencies which are not
agents of Her Majesty, which it has not guaranteed, as it is not obligated to
do so by law. Provincial Crown agency obligations described above include, but
are not limited to, those issued or guaranteed by a provincial railway
corporation, a provincial hydroelectric or power commission or authority, a
provincial municipal financing corporation or agency and a provincial telephone
commission or authority.
Any Canadian obligation acquired by the Money Market Trust will be
payable in U.S. dollars.
3. CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of
deposit are certificates issued against funds deposited in a bank or a savings
and loan. They are for a definite period of time and earn a specified rate of
return. Bankers' acceptances are short-term credit instruments evidencing the
obligation of a bank to pay a draft which has been drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity. They are primarily used
to finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
Trust portfolios may acquire obligations of foreign banks and foreign
branches of U.S. banks. These obligations are not insured by the Federal
Deposit Insurance Corporation.
4. COMMERCIAL PAPER. Commercial paper consists of unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is issued in bearer form with maturities generally not
exceeding nine months. Commercial paper obligations may include variable
amount master demand notes. Variable amount master demand notes are
obligations that permit the investment of fluctuating amounts at varying rates
of interest pursuant to direct arrangements between a portfolio, as lender, and
the borrower. These notes permit daily changes in the amounts borrowed. The
portfolio has the right to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to decrease the amount, and
the borrower may prepay up to the full amount of the note without penalty.
Because variable amount master demand notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated that such
instruments will be traded, and there is no secondary market for these notes,
although they are redeemable (and thus immediately repayable by the borrower)
at face value, plus accrued interest, at any time. A portfolio will only
invest in variable amount master demand notes issued by companies which at the
date of investment have an outstanding debt issue rated "Aaa" or "Aa" by
Moody's or "AAA" or "AA" by S&P and which the applicable Subadviser has
determined present minimal risk of loss to the portfolio. A Subadviser will
look generally at the financial strength of the issuing company as "backing"
for the note and not to any security interest or supplemental source such as a
bank letter of credit. A master demand note will be valued each day a
portfolio's net asset value is determined, which value will generally be equal
to the face value of the note plus accrued interest unless the financial
position of the issuer is such that its ability to repay the note when due is
in question.
5. CORPORATE OBLIGATIONS. Corporate obligations include bonds and
notes issued by corporations to finance long-term credit needs.
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<PAGE> 86
6. REPURCHASE AGREEMENTS. Repurchase agreements are arrangements
involving the purchase of obligations by a portfolio and the simultaneous
agreement to resell the same obligations on demand or at a specified future
date and at an agreed upon price. A repurchase agreement can be viewed as a
loan made by a portfolio to the seller of the obligation with such obligation
serving as collateral for the seller's agreement to repay the amount borrowed
with interest. Such transactions afford an opportunity for a portfolio to earn
a return on cash which is only temporarily available. Repurchase agreements
entered into by the portfolio will be with banks, brokers or dealers. However,
a portfolio will enter into a repurchase agreement with a broker or dealer only
if the broker or dealer agrees to deposit additional collateral should the
value of the obligation purchased by the portfolio decrease below the resale
price.
In selecting sellers with whom the portfolio will enter into
repurchase transactions, the Trustees have adopted procedures that establish
certain credit worthiness, asset and collateralization requirements and limit
the counterparties to repurchase transactions to those financial institutions
which are members of the Federal Reserve System and for a primary government
securities dealer reporting to the Federal Reserve Bank of New York's Market
Reports Division or a broker/dealer which meet certain credit worthiness
criteria or which report U.S. Government securities positions to the Federal
Reserve Board. However, the Trustees reserve the right to change the criteria
used to select such financial institutions and broker/dealers. The Trustees
will regularly monitor the use of repurchase agreements and the Subadviser
will, pursuant to procedures adopted by the Trustees, continuously monitor that
the collateral held with respect to a repurchase transaction equals or exceeds
the amount of the obligations.
Should an issuer of a repurchase agreement fail to repurchase the
underlying obligation, the loss to the portfolio, if any, would be the
difference between the repurchase price and the underlying obligation's market
value. A portfolio might also incur certain costs in liquidating the
underlying obligation. Moreover, if bankruptcy or other insolvency proceedings
should be commenced with respect to the seller, realization upon the underlying
obligation by the Trust might be delayed or limited. Generally, repurchase
agreements are of a short duration, often less than one week but on occasion
for longer periods.
OTHER INSTRUMENTS
The following provides a more detailed explanation of some of the
other instruments in which certain portfolios may invest.
1. MORTGAGE SECURITIES
Mortgage securities differ from conventional bonds in that principal
is paid over the life of the securities rather than at maturity. As a result,
a portfolio receives monthly scheduled payments of principal and interest, and
may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a portfolio reinvests the payments and any
unscheduled prepayments of principal it receives, it may receive a rate of
interest which is higher or lower than the rate on the existing mortgage
securities. For this reason, mortgage securities may be less effective than
other types of debt securities as a means of locking in long term interest
rates.
In addition, because the underlying mortgage loans and assets may be
prepaid at any time, if a portfolio purchases mortgage securities at a premium,
a prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected payments will reduce, yield to maturity.
Adjustable rate mortgage securities, are similar to the mortgage
securities discussed above, except that unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent
interests in mortgage loans with variable rates of interest. These variable
rates of interest reset
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<PAGE> 87
periodically to align themselves with market rates. Most adjustable rate
mortgage securities provide for an initial mortgage rate that is in effect for
a fixed period, typically ranging from three to twelve months. Thereafter, the
mortgage interest rate will reset periodically in accordance with movements in
a specified published interest rate index. The amount of interest due to an
adjustable rate mortgage holder is determined in accordance with movements in a
specified published interest rate index by adding a pre-determined increment or
"margin" to the specified interest rate index. Many adjustable rate mortgage
securities reset their interest rates based on changes in the one-year,
three-year and five-year constant maturity Treasury rates, the three-month or
six-month Treasury Bill rate, the 11th District Federal Home Loan Bank Cost of
Funds, the National Median Cost of Funds, the one-month, three-month, six-month
or one-year London Interbank Offered Rate ("LIBOR") and other market rates.
A portfolio will not benefit from increases in interest rates to the
extent that interest rates rise to the point where they cause the current
coupon of adjustable rate mortgages held as investments to exceed any maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. In this event, the value of the mortgage securities in a portfolio
would likely decrease. Also, the portfolio's net asset value could vary to the
extent that current yields on adjustable rate mortgage securities are different
than market yields during interim periods between coupon reset dates. During
periods of declining interest rates, income to a portfolio derived from
adjustable rate mortgages which remain in a mortgage pool will decrease in
contrast to the income on fixed rate mortgages, which will remain constant.
Adjustable rate mortgages also have less potential for appreciation in value as
interest rates decline than do fixed rate investments.
Privately-Issued Mortgage Securities. Privately-issued pass through
securities provide for the monthly principal and interest payments made by
individual borrowers to pass through to investors on a corporate basis, and in
privately issued collateralized mortgage obligations, as further described
below. Privately-issued mortgage securities are issued by private originators
of, or investors in, mortgage loans, including mortgage bankers, commercial
banks, investment banks, savings and loan associations and special purpose
subsidiaries of the foregoing. Since privately-issued mortgage certificates
are not guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements that may
accompany privately-issued mortgage securities, see "Types of Credit Support"
below. A portfolio will not limit its investments to asset-backed securities
with credit enhancements.
Collateralized Mortgage Obligations ("CMOs"). CMOs generally are
bonds or certificates issued in multiple classes that are collateralized by or
represent an interest in mortgages. CMOs may be issued by single-purpose,
stand-alone finance subsidiaries or trusts of financial institutions,
government agencies, investment banks or other similar institutions. Each
class of CMOs, often referred to as a "tranche", may be issued with a specific
fixed coupon rate (which may be zero) or a floating coupon rate, and has a
stated maturity or final distribution date. Principal prepayments on the
underlying mortgages may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates. Interest is paid or
accrued on CMOs on a monthly, quarterly or semiannual basis. The principal of
and interest on the underlying mortgages may be allocated among the several
classes of a series of a CMO in many ways. The general goal sought to be
achieved in allocating cash flows on the underlying mortgages to the various
classes of a series of CMOs is to create tranches on which the expected cash
flows have a higher degree of predictability than the underlying mortgages. As
a general matter, the more predictable the cash flow is on a CMO tranche, the
lower the anticipated yield will be on that tranche at the time of issuance.
As part of the process of creating more predictable cash flows on most of the
tranches in a series of CMOs, one or more tranches generally must be created
that absorb most of the volatility in the cash flows on the underlying
mortgages. The yields on these tranches are relatively higher than on tranches
with more predictable cash flows. Because of the uncertainty of the cash flows
on these tranches, and the sensitivity thereof to changes in prepayment rates
on the underlying mortgages, the market prices of and yield on these tranches
tend to be highly volatile.
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CMOs purchased may be:
(1) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. Government;
(2) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and the guarantee
is collateralized by U.S. Government securities; or
(3) securities for which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality of the U.S.
Government.
STRIPS. In addition to the U.S. Government securities discussed
above, certain portfolios may invest in separately traded interest components
of securities issued or guaranteed by the United States Treasury. The interest
components of selected securities are traded independently under the Separate
Trading of Registered Interest and Principal of Securities program ("STRIPS").
Under the STRIPS program, the interest components are individually numbered and
separately issued by the United States Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Stripped Mortgage Securities. Stripped mortgage securities are
derivative multiclass mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. Government, or by private
issuers, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities in which the portfolio invests. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will not exceed 15% of a portfolio's net assets.
Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from
the mortgage assets, while the other class will receive most of the interest
and the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest only or "IO" class), while the other
class will receive all of the principal (the principal only or "PO" class).
The yield to maturity on an IO class is extremely sensitive not only to changes
in prevailing interest rates but also the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the portfolio's yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the portfolio may fail to fully recoup
its initial investment in these securities even if the securities are rated AAA
by S&P.
As interest rates rise and fall, the value of IOs tends to move in the
same direction as interest rates. The value of the other mortgage securities
described in this Prospectus, like other debt instruments, will tend to move in
the opposite direction to interest rates. Accordingly, the Trust believes that
investing in IOs, in conjunction with the other mortgage securities described
herein, will contribute to a portfolio's relatively stable net asset value.
In addition to the stripped mortgage securities described above, the
Strategic Bond, High Yield and Value Trusts may invest in similar securities
such as Super POs and Levered IOs which are more volatile than POs IOs and
IOettes. Risks associated with instruments such as Super POs are similar in
nature to those risks related to investments in POs. Risks connected with
Levered IOs and IOettes are similar in nature to those associated with IOs.
The Strategic Bond Trust may also invest in other similar
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instruments developed in the future that are deemed consistent with the
investment objectives, policies and restrictions of the portfolio.
Under the Internal Revenue Code of 1986, as amended (the "Code"), POs
may generate taxable income from the current accrual of original issue
discount, without a corresponding distribution of cash to the portfolio. See
"Additional Information Concerning Taxes."
Inverse Floaters. The Strategic Bond, High Yield and Value Trusts may
invest in inverse floaters which are also derivative mortgage securities.
Inverse floaters may be issued by agencies or instrumentalities of the U.S.
Government, or by private issuers, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Inverse floaters have greater volatility than
other types of mortgage securities in which the portfolio invests (with the
exception of stripped mortgage securities). Although inverse floaters are
purchased and sold by institutional investors through several investment
banking firms acting as brokers or dealers, the market for such securities has
not yet been fully developed. Accordingly, inverse floaters are generally
illiquid and to such extent, together with any other illiquid investments, will
not exceed 15% of a portfolio's net assets.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the
opposite direction of short-term interest rates and at an accelerated rate.
Inverse floaters may be volatile and there is a risk that their market value
will vary from their amortized cost.
2. ASSET-BACKED SECURITIES
The securitization techniques used to develop mortgage securities are
also being applied to a broad range of other assets. Through the use of trusts
and special purpose corporations, automobile and credit card receivables are
being securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to the CMO structure.
Generally the issuers of asset-backed bonds, notes or pass-through certificates
are special purpose entities and do not have any significant assets other than
the receivables securing such obligations. In general, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans.
As a result, investment in these securities should result in greater price
stability for the portfolio's shares. Instruments backed by pools of
receivables are similar to mortgage-backed securities in that they are subject
to unscheduled prepayments of principal prior to maturity. When the
obligations are prepaid, the portfolio must reinvest the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time.
Therefore, a portfolio's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
that prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss. A portfolio will only
invest in asset-backed securities rated, at the time of purchase, AA or better
by S&P or Aa or better by Moody's or which, in the opinion of the investment
subadviser, are of comparable quality.
As with mortgage securities, asset-backed securities are often backed
by a pool of assets representing the obligation of a number of different
parties and use similar credit enhancement techniques. For a description of
the types of credit enhancement that may accompany privately-issued mortgage
securities, see "Types of Credit Support" below. A portfolio will not limit
its investments to asset-backed securities with credit enhancements. Although
asset-backed securities are not generally traded on a national securities
exchange, such securities are widely traded by brokers and dealers, and to such
extent will not be considered illiquid securities for the purposes of the
investment restriction under "Investment Restrictions" below.
TYPES OF CREDIT SUPPORT. Mortgage securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failure
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by obligors on underlying assets to make payments, such securities may contain
elements of credit support. Such credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the pass-through of payments due on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default enhances the likelihood of ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Trust will not
pay any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
The ratings of mortgage securities and asset-backed securities for
which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even
in cases where the delinquency and loss experience on the underlying pool of
assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on,
or the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
3. ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS
Zero coupon securities and pay-in-kind bonds involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity.
When a zero coupon security is held to maturity, its entire return, which
consists of the amortization of discount, comes from the difference between its
purchase price and its maturity value. This difference is known at the time of
purchase, so that investors holding zero coupon securities until maturity know
at the time of their investment what the return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from
their maturity value and provide for the commencement of regular interest
payments at a deferred date. The portfolios also may purchase pay-in-kind
bonds. Pay-in-kind bonds are bonds that pay all or a portion of their interest
in the form of debt or equity securities.
Zero coupon securities and pay-in-kind bonds tend to be subject to
greater price fluctuations in response to changes in interest rates than are
ordinary interest-paying debt securities with similar maturities. The value of
zero coupon securities appreciates more during periods of declining interest
rates and depreciates more during periods of rising interest rates.
Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers. Although zero coupon securities
and pay-in-kind bonds are generally not traded on a national securities
exchange, such securities are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the investment
restriction under "Investment Restrictions" below.
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Current federal income tax law requires the holder of a zero coupon
security or certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its
qualification as a regulated investment company and avoid liability for federal
income and excise taxes, a portfolio may be required to distribute income
accrued with respect to these securities and may have to dispose of portfolio
securities under disadvantageous circumstances in order to generate cash to
satisfy these distribution requirements. See "Taxes--Pay-in-kind Bonds and
Zero Coupon Bonds" below.
4. HIGH YIELD (HIGH RISK) DOMESTIC CORPORATE DEBT SECURITIES
The market for high yield U.S. corporate debt securities has undergone
significant changes in the past decade. Issuers in the U.S. high yield market
originally consisted primarily of growing small capitalization companies and
larger capitalization companies whose credit quality had declined from
investment grade. During the mid-1980's, participants in the U.S. high yield
market issued high yield securities principally in connection with leveraged
buyouts and other leveraged recapitalizations. In late 1989 and 1990, the
volume of new issues of high yield U.S. corporate debt declined significantly
and liquidity in the market decreased. Since early 1991, the volume of new
issues of high yield U.S. corporate debt securities has increased substantially
and secondary market liquidity has improved. During the same periods, the U.S.
high yield debt market exhibited strong returns, and it continues to be an
attractive market in terms of yield and yield spread over U.S. Treasury
securities. Currently, most new offerings of U.S. high yield securities are
being issued to refinance higher coupon debt and to raise funds for general
corporate purposes.
High yield U.S. corporate debt securities in which the portfolios may
invest include bonds, debentures, notes and commercial paper and will generally
be unsecured. Most of these debt securities will bear interest at fixed rates.
However, the portfolios may also invest in debt securities with variable rates
of interest or which involve equity features, such as contingent interest or
participations based on revenues, sales or profits (i.e., interest or other
payments, often in addition to a fixed rate of return, that are based on the
borrower's attainment of specified levels of revenues, sales or profits and
thus enable the holder of the security to share in the potential success of the
venture).
5. HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES
The Strategic Bond, Investment Quality Bond and High Yield Trusts
expect that a significant portion of their emerging market governmental debt
obligations will consist of "Brady Bonds." In addition, the Worldwide Growth,
International Small Cap, Moderate Asset Allocation and Aggressive Asset
Allocation Trusts may also invest in Brady Bonds. Brady Bonds are debt
securities issued under the framework of the "Brady Plan," an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. The Brady Plan framework, as it has developed,
contemplates the exchange of external commercial bank debt for newly issued
bonds (Brady Bonds). Brady Bonds may also be issued in respect of new money
being advanced by existing lenders in connection with the debt restructuring.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly do not have a long payment history. Brady Bonds issued to date
generally have maturities of between 15 and 30 years from the date of issuance
and have traded at a deep discount from their face value. The Trusts may
invest in Brady Bonds of emerging market countries that have been issued to
date, as well as those which may be issued in the future. In addition to Brady
Bonds, the Trusts may invest in emerging market governmental obligations issued
as a result of debt restructuring agreements outside of the scope of the Brady
Plan.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by
a debtor nation with its creditors. As a result, the financial packages
offered by each country differ. The types of options have included the
exchange of
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outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
have generally borne interest computed semi-annually at a rate equal to 13/16
of one percent above the current six month LIBOR rate. Regardless of the
stated face amount and stated interest rate of the various types of Brady
Bonds, the portfolios will purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Brady Bonds issued to date have traded at
a deep discount from their face value. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due at maturity (typically
15 to 30 years from the date of issuance) by U.S. Treasury zero coupon bonds
with a maturity equal to the final maturity of such Brady Bonds, although the
collateral is not available to investors until the final maturity of the Brady
Bonds. Collateral purchases are financed by the International Monetary Fund
(the "IMF"), the World Bank and the debtor nations' reserves. In addition,
interest payments on certain types of Brady Bonds may be collateralized by cash
or high-grade securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of the
interest accruals being uncollateralized. The Trusts may purchase Brady Bonds
with no or limited collateralization, and will be relying for payment of
interest and (except in the case of principal collateralized Brady Bonds)
principal primarily on the willingness and ability of the foreign government to
make payment in accordance with the terms of the Brady Bonds. Brady Bonds
issued to date are purchased and sold in secondary markets through U.S.
securities dealers and other financial institutions and are generally
maintained through European transactional securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which the portfolios invest are likely to be acquired at a discount.
6. HYBRID INSTRUMENTS
Hybrid instruments (a type of potentially high-risk derivative) have
been developed and combine the elements of futures contracts or options with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit or
other evidence of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity, redemption or
retirement, is determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies, intangibles, goods,
articles or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as interest rates,
currency exchange rates, commodity indices, and securities indices
(collectively "Benchmarks"). Thus, Hybrid Instruments may take a variety of
forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of
a currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar- denominated Hybrid
Instrument whose redemption price is linked to the average three year interest
rate in a designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate was lower
than a specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the portfolio could limit the downside risk of
the security by establishing a minimum redemption price so that the principal
paid at maturity could not be below a predetermined minimum level if interest
rates
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were to rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the portfolio
the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the portfolio could lose
money if, for example, interest rates do not move as anticipated or credit
problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus,
an investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has
a fixed principal amount, is denominated in U.S. dollars or bears interest
either at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply
and demand for the Underlying Assets and interest rate movements. In recent
years, various Benchmarks and prices for Underlying Assets have been highly
volatile, and such volatility may be expected in the future. Reference is also
made to the discussion below of futures, options, and forward contracts for a
description of certain risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by
the terms of the Hybrid Instrument and have an even more dramatic and
substantial effect upon the value of the Hybrid Instrument. Also, the prices
of the Hybrid Instrument and the Benchmark or Underlying Asset may not move in
the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor,
and therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority. The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the net asset
value of the portfolio.
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HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Hedging and Other Strategic
Transactions", an individual portfolio may be authorized to use a variety of
investment strategies. These strategies will be used for hedging purposes
only, including hedging various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), and managing the
effective maturity or duration of debt instruments held by the portfolio (such
investment strategies and transactions are referred to herein as "Hedging and
Other Strategic Transactions"). The description in the Prospectus of each
portfolio indicates which, if any, of these types of transactions may be used
by the portfolio.
A detailed discussion of Hedging and Other Strategic Transactions
follows below. No portfolio which is authorized to use any of these investment
strategies will be obligated, however, to pursue any of such strategies and no
portfolio makes any representation as to the availability of these techniques
at this time or at any time in the future. In addition, a portfolio's ability
to pursue certain of these strategies may be limited by the Commodity Exchange
Act, as amended, applicable rules and regulations of the CFTC thereunder and
the federal income tax requirements applicable to regulated investment
companies which are not operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Other Strategic
Transactions involving options require segregation of portfolio assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. A portfolio's purchase of a put option on a security, for
example, might be designed to protect its holdings in the underlying instrument
(or, in some cases, a similar instrument) against a substantial decline in the
market value of such instrument by giving the portfolio the right to sell the
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller the
obligation to sell, the underlying instrument at the exercise price. A
portfolio's purchase of a call option on a security, financial futures
contract, index, currency or other instrument might be intended to protect the
portfolio against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
the instrument. An "American" style put or call option may be exercised at any
time during the option period, whereas a "European" style put or call option
may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary
such as the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to the options. The discussion
below uses the OCC as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Index options
and Eurodollar instruments (which are described below under "Eurodollar
Instruments") are cash settled for the net amount, if any, by which the option
is "in-the-money" (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.
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A portfolio's ability to close out its position as a purchaser or
seller of an OCC-issued or exchange-listed put or call option is dependent, in
part, upon the liquidity of the particular option market. Among the possible
reasons for the absence of a liquid option market on an exchange are: (1)
insufficient trading interest in certain options, (2) restrictions on
transactions imposed by an exchange, (3) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities, including reaching daily price limits, (4) interruption
of the normal operations of the OCC or an exchange, (5) inadequacy of the
facilities of an exchange or the OCC to handle current trading volume or (6) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for
that option on that exchange would cease to exist, although any such
outstanding options on that exchange would continue to be exercisable in
accordance with their terms.
The hours of trading for listed options may not coincide with the
hours during which the underlying financial instruments are traded. To the
extent that the option markets close before the markets for the underlying
financial instruments, significant price and rate movements can take place in
the underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to
securities dealers, financial institutions or other parties (collectively
referred to as "Counterparties" and individually referred to as a
"Counterparty") through direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms
and performance mechanics, all of the terms of an OTC option, including such
terms as method of settlement, term, exercise price, premium, guaranties and
security, are determined by negotiation of the parties. It is anticipated that
any portfolio authorized to use OTC options will generally only enter into OTC
options that have cash settlement provisions, although it will not be required
to do so.
Unless the parties provide for it, no central clearing or guaranty
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Thus, the subadviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be met. A portfolio will enter into OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers," or broker-dealers,
domestic or foreign banks, or other financial institutions that are deemed
creditworthy by the subadviser. In the absence of a change in the current
position of the staff of the Commission, OTC options purchased by a portfolio
and the amount of the portfolio's obligation pursuant to an OTC option sold by
the portfolio (the cost of the sell-back plus the in-the-money amount, if any)
or the value of the assets held to cover such options will be deemed illiquid.
If a portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments held by the
portfolio or will increase the portfolio's income. Similarly, the sale of put
options can also provide portfolio gains.
If and to the extent authorized to do so, a portfolio may purchase and
sell call options on securities and on Eurodollar instruments that are traded
on U.S. and foreign securities exchanges and in the OTC markets, and on
securities indices, currencies and futures contracts. All calls sold by a
portfolio must be "covered" (that is, the portfolio must own the securities or
futures contract subject to the call) or must otherwise meet the asset
segregation requirements described below for so long as the call is
outstanding. Even though a portfolio will receive the option premium to help
protect it against loss, a call sold by the portfolio will expose the portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the portfolio to hold a security or instrument that it might
otherwise have sold.
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Each portfolio reserves the right to invest in options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, the portfolio's investment objective and the restrictions set
forth herein.
If and to the extent authorized to do so, a portfolio may purchase and
sell put options on securities (whether or not it holds the securities in its
portfolio) and on securities indices, currencies and futures contracts. A
portfolio will not sell put options if, as a result, more than 50% of the
portfolio's assets would be required to be segregated to cover its potential
obligations under put options other than those with respect to futures
contracts. In selling put options, a portfolio faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a portfolio may trade
financial futures contracts or purchase or sell put and call options on those
contracts as a hedge against anticipated interest rate, currency or market
changes, for duration management and for risk management purposes. Futures
contracts are generally bought and sold on the commodities exchanges on which
they are listed with payment of initial and variation margin as described
below. The sale of a futures contract creates a firm obligation by a
portfolio, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to certain instruments, the net cash amount). Options
on futures contracts are similar to options on securities except that an option
on a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract and obligates the seller to
deliver that position.
A portfolio's use of financial futures contracts and options thereon
will in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and will be entered into only
for bona fide hedging, risk management (including duration management) or other
appropriate portfolio management purposes. Maintaining a futures contract or
selling an option on a futures contract will typically require a portfolio to
deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified assets ("initial margin") that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of a portfolio. If a portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potentially variation
margin) for the resulting futures position just as it would for any futures
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction, but no assurance can be given that a
position can be offset prior to settlement or that delivery will occur.
No portfolio will enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and
premiums on open futures contracts and options thereon would exceed 5% of the
current fair market value of the portfolio's total assets; however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
value of all futures contracts sold by a portfolio (adjusted for the historical
volatility relationship between such portfolio and the contracts) will not
exceed the total market value of the portfolio's securities. The segregation
requirements with respect to futures contracts and options thereon are
described below under "Use of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a portfolio may purchase and
sell call and put options on securities indices and other financial indices.
In so doing, the portfolio can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other
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instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified).
This amount of cash is equal to the excess of the closing price of the index
over the exercise price of the option, which also may be multiplied by a
formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an
option on an index depends on price movements in the instruments comprising the
market, market segment, industry or other composite on which the underlying
index is based, rather than price movements in individual securities, as is the
case with respect to options on securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, a portfolio may engage in
currency transactions with Counterparties to hedge the value of portfolio
securities denominated in particular currencies against fluctuations in
relative value. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under "Swaps, Caps, Floors and Collars". A portfolio may enter into
currency transactions only with Counterparties that are deemed creditworthy by
the subadviser.
A portfolio's dealings in forward currency contracts and other
currency transactions such as futures contracts, options, options on futures
contracts and swaps will be limited to hedging and other non-speculative
purposes, including transaction hedging and position hedging. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of a portfolio, which will generally arise in connection with
the purchase or sale of the portfolio's portfolio securities or the receipt of
income from them. Position hedging is entering into a currency transaction
with respect to portfolio securities positions denominated or generally quoted
in that currency. A portfolio will not enter into a transaction to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held by
the portfolio that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A portfolio may cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to increase or
decline in value relative to other currencies to which the portfolio has or in
which the portfolio expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its
securities, a portfolio may also engage in proxy hedging. Proxy hedging is
often used when the currency to which a portfolio's holdings is exposed is
difficult to hedge generally or difficult to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency, the
changes in the value of which are generally considered to be linked to a
currency or currencies in which some or all of a portfolio's securities are or
are expected to be denominated, and to buy dollars. The amount of the contract
would not exceed the market value of the portfolio's securities denominated in
linked currencies.
Currency transactions are subject to risks different from other
portfolio transactions, as discussed below under "Risk Factors". If a
portfolio enters into a currency hedging transaction, the portfolio will comply
with the asset segregation requirements described below under "Use of
Segregated and Other Special Accounts".
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COMBINED TRANSACTIONS
If and to the extent authorized to do so, a portfolio may enter into
multiple transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including forward
currency contracts), multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions, instead of a single
Hedging and Other Strategic Transaction, as part of a single or combined
strategy when, in the judgment of the subadviser, it is in the best interests
of the portfolio to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a portfolio
based on the subadviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase the risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Hedging and Other Strategic Transactions into which a
portfolio may be authorized to enter are interest rate, currency and index
swaps, the purchase or sale of related caps, floors and collars and other
derivatives. A portfolio will enter into these transactions primarily to seek
to preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a
portfolio anticipates purchasing at a later date. A portfolio will use these
transactions for non-speculative purposes and will not sell interest rate caps
or floors if it does not own securities or other instruments providing the
income the portfolio may be obligated to pay. Interest rate swaps involve the
exchange by a portfolio with another party of their respective commitments to
pay or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). A
currency swap is an agreement to exchange cash flows on a notional amount based
on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles
the purchaser to receive payments of interest on a notional principal amount
from the party selling the interest rate floor to the extent that a specified
index falls below a predetermined interest rate or amount. The purchase of a
floor entitles the purchaser to receive payments on a notional principal amount
from the party selling the floor to the extent that a specific index falls
below a predetermined interest rate or amount. A collar is a combination of a
cap and a floor that preserves a certain return with a predetermined range of
interest rates or values.
A portfolio will usually enter into interest rate swaps on a net
basis, that is, two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the portfolio receiving
or paying, as the case may be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, collars and other similar derivatives
are entered into for good faith hedging or other non-speculative purposes, they
do not constitute senior securities under the Investment Company Act of 1940,
as amended, and, thus, will not be treated as being subject to the portfolio's
borrowing restrictions. A portfolio will not enter into any swap, cap, floor,
collar or other derivative transaction unless the Counterparty is deemed
creditworthy by the subadviser. If a Counterparty defaults, a portfolio may
have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
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The liquidity of swap agreements will be determined by a Subadviser
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset a portfolio's rights and
obligations relating to the investment). Such determination will govern
whether a swap will be deemed to be within the 15% restriction on investments
in securities that are not readily marketable.
Each portfolio will maintain cash and appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If a portfolio enters into a swap agreement on a net basis, it will
segregate assets with a daily value at least equal to the excess, if any, of
the portfolio's accrued obligations under the swap agreement over the accrued
amount the portfolio is entitled to receive under the agreement. If a
portfolio enters into a swap agreement on other than a net basis, it will
segregate assets with a value equal to the full amount of the portfolio's
accrued obligations under the agreement. See also, "Use of Segregated and
Other Special Accounts."
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, a portfolio may make
investments in Eurodollar instruments, which are typically dollar-denominated
futures contracts or options on those contracts that are linked to the London
Interbank Offered Rate ("LIBOR"), although foreign currency denominated
instruments are available from time to time. Eurodollar futures contracts
enable purchasers to obtain a fixed rate for the lending of funds and sellers
to obtain a fixed rate for borrowings. A portfolio might use Eurodollar
futures contracts and options thereon to hedge against changes in LIBOR, to
which many interest rate swaps and fixed income instruments are linked.
RISK FACTORS
Hedging and Other Strategic Transactions have special risks associated
with them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the subadviser's view as to certain market
movements is incorrect, the risk that the use of the Hedging and Other
Strategic Transactions could result in losses greater than if they had not been
used. Use of put and call options could result in losses to a portfolio, force
the sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause a portfolio to hold a security it
might otherwise sell.
The use of futures and options transactions entails certain special
risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related securities
position of a portfolio could create the possibility that losses on the hedging
instrument are greater than gains in the value of the portfolio's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, a portfolio might not be able to close out a transaction
without incurring substantial losses. Although a portfolio's use of futures
and options transactions for hedging should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the same time it will
tend to limit any potential gain to a portfolio that might result from an
increase in value of the position. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result
in losses to a portfolio if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists
that the perceived linkage between various currencies may not be present or may
not be present during the
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particular time that a portfolio is engaging in proxy hedging. Currency
transactions are also subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to a portfolio if it is unable to
deliver or receive currency or monies in settlement of obligations and could
also cause hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as incurring transaction costs. Buyers and sellers
of currency futures contracts are subject to the same risks that apply to the
use of futures contracts generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures contracts is relatively
new, and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be available.
Currency exchange rates may fluctuate based on factors extrinsic to that
country's economy.
Losses resulting from the use of Hedging and Other Strategic
Transactions will reduce a portfolio's net asset value, and possibly income,
and the losses can be greater than if Hedging and Other Strategic Transactions
had not been used.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may
not involve a clearing mechanism and related guarantees, and will be subject to
the risk of governmental actions affecting trading in, or the prices of,
foreign securities, currencies and other instruments. The value of positions
taken as part of non-U.S. Hedging and Other Strategic Transactions also could
be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in a portfolio's ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States, (4) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States and (5)
lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Other Strategic Transactions by a portfolio
will require, among other things, that the portfolio segregate cash, liquid
high grade debt obligations or other assets with its custodian, or a designated
sub-custodian, to the extent the portfolio's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a portfolio
to pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade debt
obligations at least equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. A call option on securities
written by a portfolio, for example, will require the portfolio to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a portfolio on an index will require the
portfolio to own portfolio securities that correlate with the index or to
segregate liquid high grade debt obligations equal to the excess of the index
value over the exercise price on a current basis. A put option on securities
written by a portfolio will require the portfolio to segregate liquid high
grade debt obligations equal to the exercise price. Except when a portfolio
enters into a forward contract in connection with the purchase or sale of a
security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates the
portfolio to buy or sell a foreign currency will generally require the
portfolio to hold an amount of that currency or liquid securities
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denominated in that currency equal to a portfolio's obligations or to segregate
liquid high grade debt obligations equal to the amount of the portfolio's
obligations.
OTC options entered into by a portfolio, including those on
securities, currency, financial instruments or indices, and OCC-issued and
exchange-listed index options will generally provide for cash settlement,
although a portfolio will not be required to do so. As a result, when a
portfolio sells these instruments it will segregate an amount of assets equal
to its obligations under the options. OCC-issued and exchange-listed options
sold by a portfolio other than those described above generally settle with
physical delivery, and the portfolio will segregate an amount of assets equal
to the full value of the option. OTC options settling with physical delivery
or with an election of either physical delivery or cash settlement will be
treated the same as other options settling with physical delivery.
In the case of a futures contract or an option on a futures contract,
a portfolio must deposit initial margin and, in some instances, daily variation
margin in addition to segregating assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. A portfolio will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having
an aggregate value equal to at least the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to a portfolio's net
obligation, if any.
Hedging and Other Strategic Transactions may be covered by means other
than those described above when consistent with applicable regulatory policies.
A portfolio may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. A
portfolio could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
portfolio. Moreover, instead of segregating assets if it holds a futures
contracts or forward contract, a portfolio could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Other Strategic
Transactions may also be offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction, no segregation is
required, but if it terminates prior to that time, assets equal to any
remaining obligation would need to be segregated.
OTHER LIMITATIONS
No portfolio will maintain open short positions in futures contracts,
call options written on futures contracts, and call options written on
securities indices if, in the aggregate, the current market value of the open
positions exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the
unrealized gain or loss on those open positions, adjusted for the historical
volatility relationship between that portion of the portfolio and the contracts
(e.g., the Beta volatility factor). For purposes of the limitation stated in
the immediately preceding sentence, to the extent the portfolio has written
call options on specific securities in that portion of its portfolio, the value
of those securities will be deducted from the current market value of that
portion of the securities portfolio. If this limitation should be exceeded at
any time, the portfolio will take prompt action to close out the appropriate
number of open short positions to bring its open futures and options positions
within this limitation.
The degree to which a portfolio may utilize Hedging and Other
Strategic Transactions may also be affected by certain provisions of the
Internal Revenue Code of 1986, as amended.
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INVESTMENT RESTRICTIONS
There are two classes of investment restrictions to which the Trust is
subject in implementing the investment policies of the portfolios: fundamental
and nonfundamental. Nonfundamental restrictions are subject to change by the
Trustees of the Trust without shareholder approval. Fundamental restrictions
may only be changed by a vote of the lesser of (i) 67% or more of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
With respect to the submission of a change in an investment
restriction to the holders of the Trust's outstanding voting securities, the
matter shall be deemed to have been effectively acted upon with respect to a
particular portfolio if a majority of the outstanding voting securities of the
portfolio vote for the approval of the matter, notwithstanding (1) that the
matter has not been approved by the holders of a majority of the outstanding
voting securities of any other portfolio affected by the matter, and (2) that
the matter has not been approved by the vote of a majority of the outstanding
voting securities of the Trust.
All of the restrictions through restriction 8. are fundamental.
Restrictions 9. through 15. are nonfundamental.
FUNDAMENTAL
The Trust may not issue senior securities, except to the extent that
the borrowing of money in accordance with restriction 3. may constitute the
issuance of a senior security. (For purposes of this restriction, purchasing
securities on a when-issued or delayed delivery basis and engaging in Hedging
and Other Strategic Transactions will not be deemed to constitute the issuance
of a senior security.) In addition, unless a portfolio is specifically
excepted by the terms of a restriction, each portfolio will not:
(1) Invest more than 25% of the value of its total assets in securities of
issuers having their principal activities in any particular industry,
excluding United States Government securities and obligations of
domestic branches of U.S. banks and savings and loan associations,
except that this restriction shall not apply to the Real Estate
Securities Trust and the Lifestyle Trusts. [The Trust has determined
to forego the exclusion from the above policy of obligations of
domestic branches of U.S. savings and loan associations and to limit
the exclusion of obligations of domestic branches of U.S. banks to the
Money Market Trust.] For purposes of this restriction, neither
finance companies as a group nor utility companies as a group are
considered to be a single industry. Such companies will be grouped
instead according to their services; for example, gas, electric and
telephone utilities will each be considered a separate industry. Also
for purposes of this restriction, foreign government issuers and
supranational issuers are not considered members of any industry.
(2) Purchase the securities of any issuer if the purchase would cause more
than 5% of the value of the portfolio's total assets to be invested in
the securities of any one issuer (excluding United States Government
securities) or cause more than 10% of the voting securities of the
issuer to be held by the portfolio, except that up to 25% of the value
of each portfolio's total assets may be invested without regard to
these restrictions. The Global Government Bond Trust, the Emerging
Growth Trust and the Lifestyle Trusts are not subject to these
restrictions.
(3) Borrow money, except that each portfolio may borrow (i) for temporary
or emergency purposes (not for leveraging) up to 33 1/3% of the value
of the portfolio's total assets (including amounts borrowed) less
liabilities (other than borrowings) and (ii) in connection with
reverse repurchase agreements, mortgage dollar rolls and other similar
transactions.
(4) Underwrite securities of other issuers except insofar as the Trust may
be considered an underwriter under the Securities Act of 1933 in
selling portfolio securities.
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(5) Purchase or sell real estate, except that each portfolio may invest in
securities issued by companies which invest in real estate or
interests therein and each of the portfolios other than the Money
Market Trust may invest in mortgages and mortgage backed securities.
(6) Purchase or sell commodities or commodity contracts except that each
portfolio other than the Money Market Trust may purchase and sell
futures contracts on financial instruments and indices and options on
such futures contracts and each portfolio other than the Money Market
Trust and U.S. Government Securities Trust may purchase and sell
futures contracts on foreign currencies and options on such futures
contracts.
(7) Lend money to other persons except by the purchase of obligations in
which the portfolio is authorized to invest and by entering into
repurchase agreements. For purposes of this restriction, collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve the lending of money.
(8) Lend securities in excess of 33 1/3% of the value of its total assets.
For purposes of this restriction, collateral arrangements with respect
to options, forward currency and futures transactions will not be
deemed to involve loans of securities.
NONFUNDAMENTAL
(9) Knowingly invest more than 15% of the value of its net assets in
securities or other investments, including repurchase agreements
maturing in more than seven days but excluding master demand notes,
that are not readily marketable, except that the Money Market Trust
may not invest in excess of 10% of its net assets in such securities
or other investments.
(10) Sell securities short or purchase securities on margin except that it
may obtain such short-term credits as may be required to clear
transactions. For purposes of this restriction, collateral
arrangements with respect to Hedging and Other Strategic Transactions
will not be deemed to involve the use of margin.
(11) Write or purchase options on securities, financial indices or
currencies except to the extent a portfolio is specifically authorized
to engage in Hedging and Other Strategic Transactions.
(12) Purchase securities for the purpose of exercising control or
management.
(13) Purchase securities of other investment companies if the purchase
would cause more than 10% of the value of the portfolio's total assets
to be invested in investment company securities, provided that (i) no
investment will be made in the securities of any one investment
company if immediately after such investment more than 3% of the
outstanding voting securities of such company would be owned by the
portfolio or more than 5% of the value of the portfolio's total
assets would be invested in such company and (ii) no restrictions
shall apply to a purchase of investment company securities in
connection with a merger, consolidation or reorganization or in
connection with the investment of collateral received in connection
with the lending of securities in the Navigator Securities Lending
Trust. For purposes of this restriction, privately issued
collateralized mortgage obligations will not be treated as investment
company securities if issued by "Exemptive Issuers". Exemptive
Issuers are defined as unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue redeemable
securities as defined in section 2(a)(32) of the Investment Company
Act of 1940, (c) operate under general exemptive orders exempting them
from "all provisions of the Investment Company Act of 1940," and (d)
are not registered or regulated under the Investment Company Act of
1940 as investment companies. This restriction (13) shall not apply to
the Lifestyle Trusts.
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(14) Pledge, hypothecate, mortgage or transfer (except as provided in
restriction 8.) as security for indebtedness any securities held by
the portfolio except in an amount of not more than 10% (33 1/3% in the
case of the Blue Chip Growth, Equity-Income, International Stock and
Science & Technology Trusts, 15% in the case of the International
Small Cap, Growth, Balanced and Worldwide Growth Trusts and 50% in the
case of the Value Trust) of the value of the portfolio's total assets
and then only to secure borrowings permitted by restrictions 3. and
10. For purposes of this restriction, collateral arrangements with
respect to Hedging and Other Strategic Transactions will not be deemed
to involve a pledge of assets.
(15) Purchase securities of foreign issuers, except that (A) the Aggressive
Asset Allocation Trust may invest up to 35% of its assets in such
securities; (B) the Growth, Balanced and Science & Technology Trusts
may each invest up to 30% of its assets in such securities, (C) the
Equity-Income and Moderate Asset Allocation Trusts may each invest up
to 25% of its assets in such securities; (D) the Pilgrim Baxter Growth
and Conservative Asset Allocation Trusts each may invest up to 15% of
its assets in such securities; (E) the Value Trust may invest up to 5%
of its assets in foreign securities; (F) each other portfolio other
than the U.S. Government Securities and Equity Index Trusts may invest
up to 20% of its total assets in such securities (in the case of the
Small/Mid Cap, Growth, Balanced and Value Trusts, ADRs and U.S.
dollar-denominated securities are not included in the applicable
percentage limit); and (G) the foregoing restriction shall not apply
to the International Small Cap, Worldwide Growth, Global Equity,
Pacific Rim Emerging Markets, International Stock, High Yield, Global
Government Bond, International Growth and Income, Strategic Bond,
Capital Growth Bond,. Real Estate Securities and Common Stock Trusts.
In addition to the above policies, the Money Market Trust is subject
to certain restrictions required by Rule 2a-7 under the Investment Company Act
of 1940. In order to comply with such restrictions, the Money Market Trust
will, inter alia, not purchase the securities of any issuer if it would cause
(i) more than 5% of its total assets to be invested in the securities of any
one issuer (excluding U.S. Government securities and repurchase agreements
fully collateralized by U.S. Government securities), except as permitted by
Rule 2a-7 for certain securities for a period of up to three business days
after purchase, (ii) more than 5% of its total assets to be invested in "second
tier securities," as defined by Rule, or (iii) more than the greater of $1
million or 1% of its total assets to be invested in the second tier securities
of that issuer.
If a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in the investment's percentage of the
value of a portfolio's total assets resulting from a change in such values or
assets will not constitute a violation of the percentage restriction, except in
the case of the Money Market Trust where the percentage limitation of
restriction 9. must be met at all times.
PORTFOLIO TURNOVER
The annual rate of portfolio turnover will normally differ for each
portfolio and may vary from year to year. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities during the
fiscal year by the monthly average of the value of the portfolio's securities
(excluding from the computation all securities, including options, with
maturities at the time of acquisition of one year or less). A high rate of
portfolio turnover (100% or more) generally involves correspondingly greater
brokerage commission expenses, which must be borne directly by the portfolio.
No portfolio turnover rate can be calculated for the Money Market Trust due to
the short maturities of the instruments purchased. The portfolio turnover rate
may vary from year to year, as well as within a year. The portfolio turnover
rates for the portfolios of the Trust for the years ended December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Global Equity Trust . . . . . . . . . . . . . 63% 52%
</TABLE>
23
<PAGE> 105
<TABLE>
<S> <C> <C>
Equity Trust . . . . . . . . . . . . . . . . . 88% 132%
Blue Chip Growth Trust . . . . . . . . . . . . 57% 33%
In ternational Growth and
Income Trust* . . . . . . . . . . . . . . 112% NA
Growth and Income Trust . . . . . . . . . . . 39% 42%
Equity-Income Trust . . . . . . . . . . . . . . 52% 26%
Aggressive Asset Allocation
Trust . . . . . . . . . . . . . . . . . . 11% 136
Moderate Asset Allocation
Trust . . . . . . . . . . . . . . . . . . 129% 180%
Conservative Asset Allocation
Trust . . . . . . . . . . . . . . . . . . 110% 220%
Strategic Bond Trust . . . . . . . . . . . . . 181% 197%
Global Government Bond
Trust . . . . . . . . . . . . . . . . . . 171% 157%
Investment Quality Bond Trust . . . . . . . . 137% 140%
U.S. Government Securities
Trust . . . . . . . . . . . . . . . . . . 212% 387%
</TABLE>
*Annualized
Portfolio turnover rates (based on normal circumstances) for newer portfolios
are not expected to exceed 200%.
Prior rates of portfolio turnover do not provide an accurate guide
as to what the rate will be in any future year, and prior rates and estimated
rates are not a limiting factor when it is deemed appropriate to purchase or
sell securities for a portfolio. Each portfolio of the Trust intends to comply
with the various requirements of the Internal Revenue Code so as to qualify as
a "regulated investment company" thereunder. One such requirement is that a
portfolio must derive less than 30% of its gross income from the sale or other
disposition of stock or securities held for less than three months.
Accordingly, the ability of a particular portfolio to effect certain portfolio
transactions may be limited.
24
<PAGE> 106
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, together with information as
to their principal occupations during the past five years, are listed below:
<TABLE>
<CAPTION>
===============================================================================================
NAME, ADDRESS AND AGE POSITION WITH THE PRINCIPAL OCCUPATION
TRUST DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen Trustee Senior Lecturer, William E.
136 Knickerbocker Road Simon Graduate School of
Pittsford, NY 14534 Business Administration,
Age: 67 University of Rochester
- -----------------------------------------------------------------------------------------------
John D. DesPrez III President Vice President, Annuities, The
116 Huntington Avenue Manufacturers Life Insurance
Boston, MA 02116 Company, September 1996 to
Age: 39 present; President and
Director, North American
Security Life Insurance
Company, September 1996 to
present; President, North
American Funds, March 1993 to
September 1996; Vice President
and General Counsel, North
American Security Life
Insurance Company, 1991 to
1994.
- -----------------------------------------------------------------------------------------------
Charles L. Bardelis Trustee President and Executive
297 Dillingham Ave. Officer, Island Commuter
Falmouth, MA 02540 Corp.(Marine Transport)
Age: 54
- -----------------------------------------------------------------------------------------------
Samuel Hoar** Trustee Senior Mediator, Judicial
73 Tremont Street Arbitration Mediation Services
Boston, MA 02109 "JAMS/Endispute," June 1, 1994
Age: 68 to date; Partner, Goodwin,
Proctor and Hoar, prior to June
1, 1994
- -----------------------------------------------------------------------------------------------
Brian L. Moore* Chairman of Executive Vice President,
5650 Yonge Street Trustees Canadian Insurance Operations,
North York, Ontario, Canada, M2M 4G4 The Manufacturers Life
Age: 51 Insurance Company, January 1,
1996 to date; Chief Executive
Officer, North American Life
Assurance Company, October 1993
to December 1995; Executive
Vice President and Chief
Financial Officer, September
- -----------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 107
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
1988 to October 1993, North
American Life Assurance Company
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Robert J. Myers Trustee Consulting Actuary
9610 Wire Avenue (self-employed), April 1983 to
Silver Springs, MD 20921 date; Member, Prospective
Age: 83 Payment Assessment Commission,
June 1993 to present; Chairman,
Commission on Railroad
Retirement Reform, 1988 to
1990.
- -----------------------------------------------------------------------------------------------
John G. Vrysen Vice President Vice President, Chief Financial
116 Huntington Avenue Officer, U.S. Operations, of
Boston, MA 02116 Manulife, January 1, 1996 to
Age: 40 date; Vice President and
Actuary, January 1986 to date,
North American Security Life
Insurance Company.
- -----------------------------------------------------------------------------------------------
James D. Gallagher Secretary Vice President, Legal Services,
116 Huntington Avenue of Manulife, January 1, 1996 to
Boston, MA 02116 date; Vice President, Secretary
Age: 41 and General Counsel, June 1994
to date, North American
Security Life Insurance
Company; Vice President and
Associate General Counsel, 1990
to 1994, The Prudential
Insurance Company of America.
- -----------------------------------------------------------------------------------------------
Richard C. Hirtle Vice President Vice President, Chief Financial
116 Huntington Avenue and Treasurer Officer, Annuities, of
Boston, MA 02116 Manulife, January 1996 to date;
Age: 40 Vice President, Treasurer and
Chief Financial Officer,
November 1988 to date, North
American Security Life
Insurance Company.
===============================================================================================
</TABLE>
*Trustee who is an "interested person", as defined in the Investment Company
Act of 1940.
**Trustee who is an "interested person" of the Trust but not the Adviser.
COMPENSATION OF TRUSTEES
26
<PAGE> 108
The Trust does not pay any remuneration to its Trustees who are
officers or employees of the Adviser or its affiliates. Trustees not so
affiliated receive an annual retainer of $------- , a fee of $------- for each
meeting of the Trustees that they attend in person and a fee of $200 for each
such meeting conducted by telephone. Trustees are reimbursed for travel and
other out-of-pocket expenses. The officers listed above are furnished to the
Trust pursuant to the Advisory Agreement described below and receive no
compensation from the Trust. These officers spend only a portion of their time
on the affairs of the Trust.
<TABLE>
<CAPTION>
===========================================================================================================
NAMES OF PERSON, POSITION AGGREGATE COMPENSATION FROM TRUST TOTAL COMPENSATION FROM TRUST
FOR PRIOR FISCAL YEAR* COMPLEX FOR PRIOR FISCAL YEAR*#
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen, Trustee $35,000 $42,500
- -----------------------------------------------------------------------------------------------------------
Charles L. Bardelis, Trustee $35,000 $42,500
- -----------------------------------------------------------------------------------------------------------
Samuel Hoar, Trustee $35,000 $42,500
- -----------------------------------------------------------------------------------------------------------
Robert J. Myers, Trustee $35,000 $42,500
===========================================================================================================
</TABLE>
*Compensation received for services as Trustee.
#Trust Complex includes all portfolios of the Trust as well as all portfolios
of North American Funds of which NASL Financial is the investment adviser.
INVESTMENT MANAGEMENT ARRANGEMENTS
The following information supplements the material appearing in the
Prospectus under the caption "Management of the Trust." Copies of the Advisory
and Subadvisory Agreements discussed below have been filed with and are
available from the Securities and Exchange Commission.
The Trust, formerly a Maryland corporation known as "NASL Series Fund,
Inc." (the "Fund"), was reorganized as a Massachusetts business trust effective
December 31, 1988. Pursuant to such reorganization, the Trust assumed all the
assets and liabilities of the Fund and carried on its business and operations
with the same investment management arrangements as were in effect for the Fund
at the time of the reorganization. The assets and liabilities of each of the
Fund's separate portfolios were assumed by the corresponding portfolios of the
Trust. Effective December 31, 1996, Manulife Series Fund, Inc., a registered
management investment company with nine portfolios, was merged into the Trust.
The net assets of four of the portfolios of Manulife Series Fund, Inc. were
transferred to comparable portfolios of the Trust, and the remaining five
portfolios -- the Pacific Rim Emerging Markets, Real Estate Securities, Common
Stock, Capital Growth and Equity Index Portfolios -- were transferred to the
Trust and reconstituted as new portfolios of the Trust.
NASL Financial (the "Adviser") is a Massachusetts corporation whose
principal offices are located at 116 Huntington Avenue, Boston, Massachusetts
02116. NASL Financial is registered as an investment adviser under the
Investment Advisers Act of 1940 and as a broker-dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc. (the "NASD"). In addition, NASL Financial serves as principal
underwriter of certain contracts issued by Security Life.
The Advisory Agreement, each Subadvisory Agreement (except those
described below) and the Salomon Brothers Asset Management Limited Consulting
Agreement were approved by the Trustees on September 28, 1995 and by the
shareholders of the portfolios on December 5, 1995. These approvals occurred
in connection with the change of control of NASL Financial as a result of the
27
<PAGE> 109
merger of North American Life Assurance Company, the ultimate controlling
parent of NASL Financial, with The Manufacturers Life Insurance Company on
January 1, 1996.
On December 15, 1995, the Trustees appointed Fred Alger Management,
Inc. ("Alger") pursuant to a new Subadvisory Agreement with Alger ("Alger
Subadvisory Agreement") to manage the Small/Mid Cap Trust. The Alger
Subadvisory Agreement and an amendment to the Advisory Agreement, both to
provide for the management of the Small/Mid Cap Trust, were approved by the
Trustees, including a majority of the Trustees who are not parties to the
agreements or interested persons of any party to such agreements. The Alger
Subadvisory Agreement and the related amendment to the Advisory Agreement have
been approved by the sole shareholder of the Small/Mid Cap Trust.
On December 15, 1995, the Trustees appointed Founders Asset
Management, Inc. ("Founders") pursuant to a new Subadvisory Agreement with
Founders ("Founders Subadvisory Agreement") to manage the International Small
Cap Trust and on June 20, 1996, the Trustees appointed Founders pursuant to an
amendment to the Founders Subadvisory Agreement to manage the Growth Trust.
The Founders Subadvisory Agreement (and in the case of the Growth Trust, the
amendment to the Founders Subadvisory Agreement) and amendments to the Advisory
Agreement, both to provide for the management of the Growth and International
Small Cap Trust, were approved by the Trustees, including a majority of the
Trustees who are not parties to the agreements or interested persons of any
party to such agreements. The Founders Subadvisory Agreement (and in the case
of the Growth Trust, the amendment to the Founders Subadvisory Agreement) and
the related amendments to the Advisory Agreement have been approved by the sole
shareholders of the Growth and the International Small Cap Trust.
Effective October 1, 1996, Oechsle International, Wellington
Management, Goldman Sachs Asset Management and Roger Engemann Management Co.,
Inc., the Subadvisers of the Global Equity, Money Market, Equity-Income and
Blue Chip Growth Trusts, respectively, resigned their positions as Subadvisers
of those portfolios. On September 27, 1996, the Trustees (i) appointed Morgan
Stanley Asset Management Inc. ("Morgan Stanley") pursuant to a new Subadvisory
Agreement with Morgan Stanley ("Morgan Stanley Subadvisory Agreement") to
manage the Global Equity Trust, (ii) appointed T. Rowe Price Associates, Inc.
("T. Rowe Price") pursuant to a new Subadvisory Agreement with T. Rowe Price
("T. Rowe Price Subadvisory Agreement") to manage the Blue Chip Growth and
Equity-Income Trusts, and (iii) appointed Manufacturers Adviser Corporation
("MAC") pursuant to a new Subadvisory Agreement with MAC ("MAC Subadvisory
Agreement") to manage the Money Market Trust. All such Subadvisory Agreements
were approved by the Trustees, including a majority of the Trustees who are not
parties to the agreements or interested persons of any party to such
agreements, on September 27, 1996 (with an effective date of October 1, 1996)
and by the shareholders of the respective portfolios on December 20, 1996.
Also on September 27, 1996, the Trustees (i) appointed Miller Anderson
& Sherrerd, LLP ("MAS") pursuant to a new Subadvisory Agreement with MAS ("MAS
Subadvisory Agreement") to manage the Value and High Yield Trusts, (ii)
appointed Warburg Pincus Counsellors, Inc. ("Warburg") pursuant to an agreement
with Warburg ("Warburg Subadvisory Agreement") to manage the Emerging Growth
Trust, (iii) appointed T. Rowe Price pursuant to the T. Rowe Price Subadvisory
Agreement to also manage the Science & Technology Trust, (iv) appointed Rowe
Price-Fleming International, Inc. ("Price-Fleming") pursuant to a new
Subadvisory Agreement with Price Fleming ("Price-Fleming Subadvisory
Agreement") to manage the International Stock Trust, (v) appointed Founders
pursuant to an amendment to the Founders Subadvisory Agreement to manage the
Worldwide Growth and Balanced Trusts, (vi) appointed Pilgrim Baxter &
Associates, Inc. ("PBHG") to manage the Pilgrim Baxter Growth Trust pursuant to
an agreement with PBHG ("PBHG Subadvisory Agreement"), (vii) appointed MAC
pursuant to the MAC Subadvisory Agreement to also manage the Pacific Rim
Emerging Markets, Real Estate Securities, Common Stock, Capital Growth Bond and
Equity Index Trusts and (viii) appointed the Adviser to manage the Lifestyle
Trusts pursuant to an amendment to the Advisory Agreement. Such Subadvisory
Agreements or amended Subadvisory Agreement and amendments to the Advisory
Agreement, to provide for the management of the newly-established portfolios,
were approved by the
28
<PAGE> 110
Trustees, including a majority of the Trustees who are not parties to the
agreements or interested persons of any party to such agreements, on September
27, 1996 and were approved by the sole shareholder of each such portfolio on
December ____, 1996.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Adviser administers the
business and affairs of the Trust. The Adviser is responsible for performing
or paying for various administrative services for the Trust, including
providing at the Adviser's expense (i) office space and all necessary office
facilities and equipment, (ii) necessary executive and other personnel for
managing the affairs of the Trust and for performing certain clerical,
accounting and other office functions, and (iii) all other information and
services, other than services of counsel, independent accountants or investment
subadvisory services provided by any subadviser under a subadvisory agreement,
required in connection with the preparation of all tax returns and documents
required to comply with the federal securities laws. The Adviser pays the cost
of any advertising or sales literature relating solely to the Trust, the cost
of printing and mailing Prospectuses to persons other than current holders of
Trust shares or of variable contracts funded by Trust shares and the
compensation of the Trust's officers and Trustees that are officers, directors
or employees of the Adviser or its affiliates. In addition, advisory fees are
reduced or the Adviser reimburses the Trust if the total of all expenses
(excluding advisory fees, taxes, portfolio brokerage commissions, interest,
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business) applicable to a
portfolio exceeds an annual rate of .75% in the case of the International Small
Cap, Global Equity, Global Government Bond, Worldwide Growth, International
Growth and Income, International Stock and Pacific Rim Emerging Markets Trusts,
.50% in the case of all other portfolios except for the Equity Index Trust, or
.15% in the case of the Equity Index Trust of the average annual net assets of
such portfolio. The expense limitation will continue in effect from year to
year unless otherwise terminated at any year end by the Adviser on 30 days'
notice to the Trust. (For a limited period of one year ending December 31,
1997, the expense limitation applicable to the Real Estate Securities, Common
Stock and Capital Growth Bond Trusts will include all expenses of such
portfolios, so that their total expenses for that year, including advisory
fees, will not exceed .50%.)
In addition to providing the services and expense limitation described
above, the Adviser selects, contracts with and compensates subadvisers to
manage the investment and reinvestment of the assets of the Trust portfolios,
except for the Lifestyle Trusts. The Adviser monitors the compliance of such
subadvisers with the investment objectives and related policies of each
portfolio and reviews the performance of such subadvisers and reports
periodically on such performance to the Trustees of the Trust.
As compensation for its services, the Adviser receives a fee from the
Trust computed separately for each portfolio. The fee for each portfolio is
stated as an annual percentage of the current value of the net assets of such
portfolio. The fee, which is accrued daily and payable monthly, is calculated
for each day by multiplying the daily equivalent of the annual percentage
prescribed for a portfolio by the value of its net assets at the close of
business on the previous business day of the Trust. The management fees each
portfolio currently is obligated to pay the Adviser is as set forth in the
Prospectus. No management fees are currently payable by the Lifestyle Trusts.
For the years ended December 31, 1995, 1994 and 1993 the aggregate
investment advisory fee payable by the Trust under the fee schedule then in
effect, absent the expense limitation provision, was $33,808,255, $27,076,438
and $16,988,737 allocated among the portfolios as follows:
<TABLE>
<CAPTION>
PORTFOLIO 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . $5,513,312 $4,916,694 $1,813,650
Blue Chip Growth . . . . . . . $2,115,434 $1,255,314 $675,183
Equity . . . . . . . . . . . . $5,643,363 $3,483,279 $1,953,233
</TABLE>
29
<PAGE> 111
<TABLE>
<S> <C> <C> <C>
Equity-Income . . . . . . . . . $2,459,247 $1,274,807 $308,485
Growth and Income . . . . . . . $3,922,671 $2,670,229 $1,544,607
International Growth & Income . $450,200* N/A N/A
Strategic Bond . . . . . . . . $767,448 $588,051 $189,565
Global Government Bond . . . . $1,757,909 $1,742,81 $947,963
Investment Quality Bond . . . . $798,045 $709,069 $529,433
U.S. Government Securities . . $1,291,668 $1,350,850 $1,153,241
Money Market Trust . . . . . . $1,318,573 $1,158,400 $606,603
Aggressive Asset Allocation . . $1,463,421 $1,354,682 $1,226,006
Moderate Asset Allocation . . . $4,667,061 $4,783,431 $4,341,909
Conservative Asset Allocation . $1,639,903 $1,788,821 $1,698,859
</TABLE>
*For the period January 9, 1995 (commencement of operations) to December 31,
1995.
THE SUBADVISORY AGREEMENTS
Under the terms of each of the current subadvisory agreements,
including the SBAM Limited Consulting Agreement (collectively "Subadvisory
Agreements"), the Subadviser manages the investment and reinvestment of the
assets of the assigned portfolios, subject to the supervision of the Trust's
Trustees. The Subadviser formulates a continuous investment program for each
such portfolio consistent with its investment objectives and policies outlined
in the Prospectus. Each Subadviser implements such programs by purchases and
sales of securities and regularly reports to the Adviser and the Trustees of
the Trust with respect to the implementation of such programs. Each
Subadviser, at its expense, furnishes all necessary investment and management
facilities, including salaries of personnel required for it to execute its
duties, as well as administrative facilities, including bookkeeping, clerical
personnel, and equipment necessary for the conduct of the investment affairs of
the assigned portfolios.
As compensation for their services, the Subadvisers receive fees from
the Adviser computed separately for each portfolio. The fee for each portfolio
is stated as an annual percentage of the current value of the net assets of the
portfolio. The fees are calculated on the basis of the average of all
valuations of net assets of each portfolio made at the close of business on
each business day of the Trust during the period for which such fees are paid.
Once the average net assets of a portfolio exceed specified amounts, the fee is
reduced with respect to such excess. The schedule of the management fees the
Adviser currently is obligated to pay the Subadvisers out of the advisory fee
it receives from each portfolio is as set forth in the Prospectus.
The prospectus refers to a subadvisory consulting agreement between
SBAM and Salomon Brothers Asset Management Limited ("SBAM Limited") which is
subject to certain conditions as set forth in the prospectus. Under that
agreement SBAM Limited provides certain investment advisory services to SBAM
relating to currency transactions and investments in non-dollar denominated
debt securities for the benefit of the Strategic Bond Trust. SBAM pays SBAM
Limited, as full compensation for all services provided under the subadvisory
consulting agreement, a portion of its subadvisory fee, such amount being an
amount equal to the fee payable under SBAM's subadvisory agreement multiplied
by the current value of the net assets of the portion of the assets of the
Strategic Bond Trust that SBAM Limited has been delegated to manage divided by
the current value of the net assets of the portfolio. The Trust will not incur
any expenses in connection with SBAM Limited's services. SBAM Limited is a
wholly owned subsidiary of Salomon Brothers Europe Limited ("SBEL"). Salomon
(International) Finance A G ("SIF") owns 100% of SBEL's Convertible Redeemable
Preference Shares and 36.8% of SBEL's Ordinary Shares, while the remaining
63.2% of SBEL's Ordinary Shares are owned by Salomon Brothers Holding Company
Inc ("SBH"). SIF is wholly owned by SBH, which is in turn, a wholly owned
subsidiary of Salomon Inc.
30
<PAGE> 112
For the years ended December 31, 1995, 1994 and 1993, the Adviser paid
aggregate subadvisory fees of $12,007,940 $9,905,072, and $6,285,555,
respectively, allocated among the portfolios as follows:
<TABLE>
<CAPTION>
PORTFOLIO 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $2,415,918 $2,192,713 $905,318
Blue Chip Growth . . . . . . . . . . . . $978,146 $558,057 $280,422
Equity . . . . . . . . . . . . . . . . . $1,628,673 $1,166,032 $710,703
Equity-Income . . . . . . . . . . . . . . $864,812 $525,739 $148,581
Growth and Income . . . . . . . . . . . . $1,267,236 $926,068 $579,977
International Growth & Income . . . . . . $232,320* N/A N/A
Strategic Bond . . . . . . . . . . . . . $322,077+ $252,633 $85,576
Global Government Bond . . . . . . . . . $771,716 $766,324 $427,234
Investment Quality Bond . . . . . . . . . $276,246 $245,447 $183,265
U.S. Government Securities . . . . . . . $442,603 $458,245 $395,910
Money Market Trust . . . . . . . . . . . $197,786 $173,760 $90,990
Aggressive Asset Allocation . . . . . . . $560,019 $521,717 $474,535
Moderate Asset Allocation . . . . . . . . $1,433,417 $456,691 $1,368,386
Conservative Asset Allocation . . . . . . $616,971 $661,646 $634,658
</TABLE>
* For the period January 9, 1995 (commencement of operations) to December 31,
1995.
+ Of this amount, $63,231 was paid by SBAM to SBAM Limited under the
Subadvisory Consulting Agreement.
Subject to the expense limitations discussed above, the Trust is
responsible for the payment of all expenses of its organization, operations and
business, except those which the Adviser or Subadvisers have agreed to pay
pursuant to the Advisory or Subadvisory Agreements. Expenses borne by the
Trust include charges and expenses of the custodian, independent accountants
and transfer, bookkeeping and dividend disbursing agent appointed by the Trust;
brokers' commissions and issue and transfer taxes on securities transactions to
which the Trust is a party; taxes and fees payable by the Trust; and legal fees
and expenses in connection with the affairs of the Trust, including registering
and qualifying its shares with regulatory authorities and in connection with
any litigation.
The Advisory Agreement and each Subadvisory Agreement will continue in
effect as to a portfolio for a period no more than two years from the date of
its execution or the execution of an amendment making the agreement applicable
to that portfolio only so long as such continuance is specifically approved at
least annually either by the Trustees or by the vote of a majority of the
outstanding voting securities of the Trust, provided that in either event such
continuance shall also be approved by the vote of the majority of the Trustees
who are not interested persons of any party to the Agreements, cast in person
at a meeting called for the purpose of voting on such approval. The required
shareholder approval of any continuance of any of the Agreements shall be
effective with respect to any portfolio if a majority of the outstanding voting
securities of the series of shares of beneficial interest of that portfolio
vote to approve such continuance, notwithstanding that such continuance may not
have been approved by a majority of the outstanding voting securities of (i)
any other portfolio affected by the Agreement or (ii) all of the portfolios of
the Trust.
If the holders of any series of shares of beneficial interest of any
portfolio fail to approve any continuance of the Advisory Agreement or the
Subadvisory Agreement, the Adviser or Subadviser (including SBAM Limited) will
continue to act as investment adviser or subadviser with respect to such
portfolio pending the required approval of the continuance of such Agreement,
of a new contract with the Adviser or Subadviser or different adviser or
subadviser, or other definitive action. In the case of the Adviser, the
compensation received in respect of such a portfolio during such period will be
no more than its actual costs incurred in furnishing investment advisory and
management services to such portfolio or the amount it would have received
under the Advisory Agreement in respect of such portfolio, whichever
31
<PAGE> 113
is less. In the case of the Subadvisers, the compensation received in respect
of such a portfolio during such period will be no more than that permitted by
Rule 15a-4 under the Investment Company Act of 1940.
The Advisory Agreement and the Subadvisory Agreements may be
terminated at any time without the payment of any penalty on 60 days' written
notice to the other party or parties to the Agreements, and to the Trust in the
case of the Subadvisory Agreements, (i) by the Trustees of the Trust; (ii) by
the vote of a majority of the outstanding voting securities of the Trust, or
with respect to any portfolio, by the vote of a majority of the outstanding
voting securities of the series of shares of beneficial interest of such
portfolio; and (iii) by the Adviser, and in the case of the Subadvisory
Agreements, by the respective Subadvisers. The Agreements will automatically
terminate in the event of their assignment.
The Advisory Agreement may be amended by the Trust and the Adviser and
the Subadvisory Agreements by the Adviser and respective Subadvisers provided
such amendment is specifically approved by the vote of a majority of the
outstanding voting securities of the Trust and by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Trust, the Adviser
or the applicable Subadviser (including SBAM Limited) cast in person at a
meeting called for the purpose of voting on such approval. The required
shareholder approval of any amendment shall be effective with respect to any
portfolio if a majority of the outstanding voting securities of that portfolio
vote to approve the amendment, notwithstanding that the amendment may not have
been approved by a majority of the outstanding voting securities of (i) any
other portfolio affected by the amendment or (ii) all the portfolios of the
Trust.
AGREEMENT WITH PRIOR SUBADVISER
The Conservative, Moderate and Aggressive Asset Allocation Trusts for
which Sass Investors acted as Subadviser up until December 13, 1991, and the
Bond Trust (now Investment Quality Bond Trust) for which Sass Investors acted
as Subadviser up until April 23, 1991, acquired certain taxable revenue bonds,
the value of which has declined substantially due to the default of the bonds
caused by the Conservatorship of Executive Life Insurance Company. The Trust
retained legal counsel to advise it as to any potential claims it may have
arising out of its purchase of such bonds. On the basis of the advice received
and, to avoid any prejudice resulting from the passage of time, the Trust has
sought to obtain agreements from certain persons which would toll the running
of statutes of limitations that might in time bar the assertion of any claims
related to its purchase of the bonds. In February 1991 the Trust entered into
an agreement with Sass Investors, its principals and affiliated companies
concerning any claims the Trust may have arising out of Sass Investors'
performance under the Sass Subadvisory Agreement in connection with the
purchase or sale of the aforementioned bonds. The parties agreed that the
running of time under any statute of limitations or by way of laches with
respect to any claims or defenses arising out of such purchase or sale would be
tolled until thirty days after termination of the agreement by either party
giving written notice to the other.
PORTFOLIO BROKERAGE
Pursuant to the Subadvisory Agreements, the Subadvisers are
responsible for placing all orders for the purchase and sale of portfolio
securities of the Trust, except for the Lifestyle Trusts the portfolio
transactions for which are the responsibility of the Adviser. The Subadvisers
have no formula for the distribution of the Trust's brokerage business, their
intention being to place orders for the purchase and sale of securities with
the primary objective of obtaining the most favorable overall results for the
Trust. The cost of securities transactions for each portfolio will consist
primarily of brokerage commissions or dealer or underwriter spreads. Bonds and
money market instruments are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes.
Occasionally, securities may be purchased directly from the issuer.
For securities traded primarily in the over-the-counter market, the Subadvisers
will, where possible, deal directly with dealers who make
32
<PAGE> 114
a market in the securities unless better prices and execution are available
elsewhere. Such dealers usually act as principals for their own account.
In selecting brokers or dealers through whom to effect transactions,
the Subadvisers will give consideration to a number of factors, including
price, dealer spread or commission, if any, the reliability, integrity and
financial condition of the broker-dealer, size of the transaction and
difficulty of execution. Consideration of these factors by a Subadviser,
either in terms of a particular transaction or the Subadviser's overall
responsibilities with respect to the Trust and any other accounts managed by
the Subadviser, could result in the Trust paying a commission or spread on a
transaction that is in excess of the amount of commission or spread another
broker-dealer might have charged for executing the same transaction. In
selecting brokers and dealers, the Subadvisers will also give consideration to
the value and quality of any research, statistical, quotation or valuation
services provided by the broker or dealer. In placing a purchase or sale
order, a Subadviser may use a broker whose commission in effecting the
transaction is higher than that of some other broker if the Subadviser
determines in good faith that the amount of the higher commission is reasonable
in relation to the value of the brokerage and research services provided by
such broker, viewed in terms of either the particular transaction or the
Subadviser's overall responsibilities with respect to the Trust and any other
accounts managed by the Subadviser. Brokerage and research services provided
by brokers and dealers include advice, either directly or through publications
or writings, as to the value of securities, the advisability of purchasing or
selling securities, the availability of securities or purchasers or sellers of
securities, and analyses and reports concerning issuers, industries,
securities, economic factors and trends and portfolio strategy. Consistent
with the foregoing considerations and the Rules of Fair Practice of the NASD,
sales of contracts for which the broker-dealer or an affiliate thereof is
responsible may be considered as a factor in the selection of such brokers or
dealers. A higher cost broker-dealer will not be selected, however, solely on
the basis of sales volume but will be selected in accordance with the criteria
set forth above.
To the extent research services are used by the Subadvisers in
rendering investment advice to the Trust, such services would tend to reduce
the Subadvisers' expenses. However, the Subadvisers do not believe that an
exact dollar value can be assigned to these services. Research services
received by the Subadvisers from brokers or dealers executing transactions for
the Trust will be available also for the benefit of other portfolios managed by
the Subadvisers.
The Subadvisers manage a number of accounts other than the Trust's
portfolios. Although investment recommendations or determinations for the
Trust's portfolios will be made by the Subadvisers independently from the
investment recommendations and determinations made by them for any other
account, investments deemed appropriate for the Trust's portfolios by the
Subadvisers may also be deemed appropriate by them for other accounts, so that
the same security may be purchased or sold at or about the same time for both
the Trust's portfolios and other accounts. In such circumstances, the
Subadvisers may determine that orders for the purchase or sale of the same
security for the Trust's portfolios and one or more other accounts should be
combined, in which event the transactions will be priced and allocated in a
manner deemed by the Subadvisers to be equitable and in the best interests of
the Trust Portfolios and such other accounts. While in some instances combined
orders could adversely affect the price or volume of a security, the Trust
believes that its participation in such transactions on balance will produce
better overall results for the Trust.
For the years ended December 31, 1995, 1994 and 1993, the Trust paid
brokerage commissions in connection with portfolio transactions of $6,609,957,
$5,510,656 and $2,877,317, respectively, allocated among the portfolios as
follows:
<TABLE>
<CAPTION>
PORTFOLIO 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $2,684,254 $2,358,799 $1,196,630
Blue Chip Growth . . . . . . . . . . . . $388,904 $187,089 $114,811
Equity . . . . . . . . . . . . . . . . . $861,497 $1,011,437 $600,555
</TABLE>
33
<PAGE> 115
<TABLE>
<S> <C> <C> <C>
Equity-Income . . . . . . . . . . . . . . $606,918 $383,033 $181,956
Growth and Income . . . . . . . . . . . . $697,618 $487,223 $308,818
International Growth and Income . . . . . $374,962* NA NA
Aggressive Asset Allocation . . . . . . . $286,517 $280,679 $122,305
Moderate Asset Allocation . . . . . . . . $604,766 $682,814 $292,232
Conservative Asset Allocation . . . . . . $104,521 $119,582 $60,010
</TABLE>
*For the period January 9, 1995 (commencement of operations) to December 31,
1995.
Salomon Brothers Inc. ("Salomon"), J.P. Morgan Securities Inc and J.P.
Morgan Securities Ltd. (J.P. Morgan"), Dresdner Bank, Fidelity Capital Markets
and Morgan Stanley & Co. Incorporated are affiliated brokers of the Trust due
to the positions of Salomon, J.P. Morgan, Oechsle International, FMTC and
Morgan Stanley, respectively, as Subadvisers to Trust portfolios. Prior to
October 1, 1996, Goldman Sachs & Co. ("Goldman") was an affiliated broker of
the Trust due to the position of Goldman as Subadviser to the Equity-Income
Trust.
34
<PAGE> 116
For the years ended December 31, 1995, 1994 and 1993, brokerage
commissions were paid to GOLDMAN, SACHS & CO. by the portfolios as follows:
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $6,951 0.26% 0.08%
Blue Chip Growth . . . . . . . . . . . . $24,855 6.39% 0.52%
Equity . . . . . . . . . . . . . . . . . $13,799 1.60% 0.62%
Equity-Income . . . . . . . . . . . . . . $63,836 10.52% 0.19%
Growth and Income . . . . . . . . . . . . $33,000 4.73% 0.46%
International Growth and Income . . . . $6,651* 1.77% 1.05%
Aggressive Asset Allocation . . . . . . . $7,202 2.51% 0.43%
Moderate Asset Allocation . . . . . . . . $11,975 1.98% 0.69%
Conservative Asset Allocation . . . . . . $2,080 1.99% 0.80%
</TABLE>
* For the period January 9, 1995 (commencement of operations) to December 31,
1995.
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Growth . . . . . . . . . . . . $6,376 3.41% 5.71%
Equity . . . . . . . . . . . . . . . . . $8,032 0.79% 0.03%
Equity-Income . . . . . . . . . . . . . . $20,741 5.41% 3.98%
Growth and Income . . . . . . . . . . . . $12,612 2.59% 1.14%
Aggressive Asset Allocation . . . . . . . $10,644 3.79% 0.53%
Moderate Asset Allocation . . . . . . . . $25,501 3.73% 3.21%
Conservative Asset Allocation . . . . . . $676 0.57% 0.08%
</TABLE>
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $15,566 1.30% 1.95%
Blue Chip Growth . . . . . . . . . . . . $4,500 3.92% 9.33%
Equity . . . . . . . . . . . . . . . . . $5,755 0.96% 1.71%
Equity-Income . . . . . . . . . . . . . . $27,565 15.15% 16.68%
Growth and Income . . . . . . . . . . . . $9,480 3.07% 3.73%
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, brokerage
commissions were paid to SALOMON BROTHERS INC by the portfolios as follows:
35
<PAGE> 117
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $34,352 1.28% 0.19%
Blue Chip Growth . . . . . . . . . . . . $16,380 4.21% 0.26%
Equity . . . . . . . . . . . . . . . . . $13,968 1.62% 0.14%
Equity-Income . . . . . . . . . . . . . . $35,568 5.86% 0.14%
Growth and Income . . . . . . . . . . . . $128,844 18.47% 1.45%
Aggressive Asset Allocation . . . . . . . $3,072 1.07% 0.88%
Moderate Asset Allocation . . . . . . . . $3,967 0.66% 1.42%
Conservative Asset Allocation . . . . . . $999 0.96% 1.87%
</TABLE>
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $17,818 0.76% 0.43%
Blue Chip Growth . . . . . . . . . . . . $4,200 2.24% 2.08%
Equity . . . . . . . . . . . . . . . . . $24,110 2.38% 2.59%
Equity-Income . . . . . . . . . . . . . . $17,052 4.45% 4.09%
Growth and Income . . . . . . . . . . . . $46,848 9.62% 3.08%
Aggressive Asset Allocation . . . . . . . $1,063 0.38% 4.74%
Moderate Asset Allocation . . . . . . . . $2,641 0.39% 6.03%
Conservative Asset Allocation . . . . . . $607 0.51% 2.07%
</TABLE>
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $14,144 1.18% 0.71%
Equity . . . . . . . . . . . . . . . . . $15,426 2.57% 1.58%
Equity-Income . . . . . . . . . . . . . . $8,748 4.81% 3.34%
Growth and Income . . . . . . . . . . . . $23,534 7.62% 6.93%
</TABLE>
For the year ended December 31, 1995, brokerage commissions were paid
to J.P. Morgan Securities by the portfolios as follows:
36
<PAGE> 118
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $15,349 0.57% 0.90%
Blue Chip Growth . . . . . . . . . . . . $2,482 0.64% 0.03%
Equity . . . . . . . . . . . . . . . . . $8,890 1.03% 0.06%
Equity-Income . . . . . . . . . . . . . . $40,124 6.61% 0.20%
Growth and Income . . . . . . . . . . . . $12,798 1.83% 0.30%
International Growth and Income . . . . . $554* 0.15% 0.41%
Aggressive Asset Allocation . . . . . . . $721 0.25% 0.24%
Moderate Asset Allocation . . . . . . . . $1,680 0.28% 0.31%
Conservative Asset Allocation . . . . . . $397 0.38% 0.14%
</TABLE>
*For the period January 9, 1995 (commencement of operations) to December 31,
1995.
For the year ended December 31, 1995, brokerage commissions were paid to
Dresdner Bank by the portfolios as follows:
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity . . . . . . . . . . . . . . . . . $277 0.03% .00%
International Growth & Income . . . . . . 408* 0.11% .04%
</TABLE>
*For the period January 9, 1995 (commencement of operations) to December 31,
1995.
For the year ended December 31, 1995, brokerage commissions were paid to
Fidelity Capital Markets by the portfolios as follows:
<TABLE>
<CAPTION>
% OF AGGREGATE
% OF PORTFOLIO'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity . . . . . . . . . . . . . . $31,110 1.16% 0.77%
International Growth & Income . . . . . . 197* 0.05% 0.15%
Aggressive Asset Allocation . . . . . . . 3,240 1.13% 0.08%
Moderate Asset Allocation . . . . . . . . 8,815 1.46% 0.07%
Conservative Asset Allocation . . . . . . 1,920 1.84% 0.05%
</TABLE>
*For the period January 9, 1995 (commencement of operations) to December 31,
1995.
37
<PAGE> 119
PURCHASE AND REDEMPTION OF SHARES
The Trust will redeem all full and fractional portfolio shares for
cash at the net asset value per share of each portfolio. Payment for shares
redeemed will generally be made within seven days after receipt of a proper
notice of redemption. However, the Trust may suspend the right of redemption
or postpone the date of payment beyond seven days during any period when (a)
trading on the New York Stock Exchange is restricted, as determined by the
Securities and Exchange Commission, or such Exchange is closed for other than
weekends and holidays; (b) an emergency exists, as determined by the
Commission, as a result of which disposal by the Trust of securities owned by
it is not reasonably practicable or it is not reasonably practicable for the
Trust fairly to determine the value of its net assets; or (c) the Commission by
order so permits for the protection of security holders of the Trust.
DETERMINATION OF NET ASSET VALUE
The following supplements the discussion of the valuation of portfolio
assets set forth in the Prospectus under the caption "Purchase and Redemption
of Shares."
Securities held by the portfolios, except for debt instruments with
remaining maturities of 60 days or less, all debt instruments held by the Money
Market Trust and shares of the Underlying Portfolios held by the Lifestyle
Trusts, will be valued as follows: securities which are traded on stock
exchanges (including securities traded in both the over-the-counter market and
on an exchange) are valued at the last sales price as of the close of the
regularly scheduled trading of the New York Stock Exchange on the day the
securities are being valued, or, lacking any sales, at the closing bid prices.
Securities traded only in the over-the-counter market are valued at the last
bid prices quoted by brokers that make markets in the securities at the close
of trading on the New York Stock Exchange. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Shares of
the Underlying Portfolios held by the Lifestyle Trusts are valued at their net
asset value as described in the Prospectus under "Purchase and Redemption of
Shares."
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of the regularly scheduled trading of the New
York Stock Exchange. The values of such securities used in computing the net
asset value of a portfolio's shares are generally determined as of such times.
Occasionally, events which affect the values of such securities may occur
between the times at which they are generally determined and the close of the
New York Stock Exchange and would therefore not be reflected in the computation
of a portfolio's net asset value. If events materially affecting the value of
such securities occur during such period, then these securities will be valued
at their fair value as determined in good faith by the Subadvisers under
procedures established and regularly reviewed by the Trustees.
Debt instruments with a remaining maturity of 60 days or less held by
each of the portfolios other than the Money Market Trust, and all instruments
held by the Money Market Trust, will be valued on an amortized cost basis.
Under this method of valuation, the instrument is initially valued at cost (or
in the case of instruments initially valued at market value, at the market
value on the day before its remaining maturity is such that it qualifies for
amortized cost valuation); thereafter, the Trust assumes a constant
proportionate amortization in value until maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is
higher or lower than the price that would be received upon sale of the
instrument.
The Money Market Trust uses the amortized cost valuation method in
reliance upon Rule 2a-7 under the Investment Company Act of 1940. As required
by the Rule, the Money Market Trust will maintain a dollar weighted average
maturity of 90 days or less. In addition, the Money Market Trust is permitted
to purchase only securities that the Trustees determine to present minimal
credit risks and
38
<PAGE> 120
which are at the time of purchase "eligible securities," as defined by the
Rule. Generally, eligible securities must be rated by a nationally recognized
statistical rating organization in one of the two highest rating categories for
short-term debt obligations or be of comparable quality. The Money Market
Trust will invest only in obligations that have remaining maturities of
thirteen months or less.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, the Money Market Trust's price per share as
computed for the purpose of sales and redemptions at $10.00. Such procedures
include a direction to the Adviser to establish procedures which will allow for
the monitoring of the propriety of the continued use of amortized cost
valuation to maintain a constant net asset value of $10.00 per share. Such
procedures include a directive to the Adviser that requires that on determining
net asset value per share based upon available market quotations, the Money
Market Trust shall value weekly (a) all portfolio instruments for which market
quotations are readily available at market, and (b) all portfolio instruments
for which market quotations are not readily available or are not obtainable
from a pricing service, at their fair value as determined in good faith by the
Trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the Trustees. If the fair value of a security
needs to be determined, the Subadviser will provide determinations, in
accordance with procedures and methods established by the Trustees of the
Trust, of the fair value of securities held by the Money Market Trust for which
market quotations are not readily available for purposes of enabling the Money
Market Trust's Custodian to calculate net asset value. The Adviser, with the
Subadviser's assistance, periodically (but no less frequently than annually)
shall prepare a written report to the Trustees verifying the accuracy of the
pricing system or estimate. A non-negotiable security which is not treated as
an illiquid security because it may be redeemed with the issuer, subject to a
penalty for early redemption, shall be assigned a value that takes into account
the reduced amount that would be received if it were currently liquidated. In
the event that the deviation from the amortized cost exceeds .50 of 1% or more
or a difference of $.05 per share in net asset value, the Adviser shall
promptly call a special meeting of the Trustees to determine what, if any,
action should be initiated. Where the Trustees believe the extent of any
deviation from the Money Market Trust's amortized cost price per share may
result in material dilution or other unfair results to investors or existing
shareholders, they shall take such action as they deem appropriate to eliminate
or reduce to the extent reasonably practical such dilution or unfair results.
The actions that may be taken by the Trustees include, but are not limited to:
(a) redeeming shares in kind; (b) selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten the average portfolio
maturity of the Money Market Trust; (c) withholding or reducing dividends;(d)
utilizing a net asset value per share based on available market quotations;
(e)investing all cash in instruments with a maturity on the next business day.
The Money Market Trust may also reduce the number of shares outstanding by
redeeming proportionately from shareholders, without the payment of any
monetary compensation, such number of full and fractional shares as is
necessary to maintain the net asset value at $10.00 per share. Any such
redemption will be treated as a negative dividend for purposes of the Net
Investment Factor under the contracts issued by North American Security Life
Insurance Company.
PERFORMANCE DATA
Each of the portfolios may quote total return figures in its
advertising and sales materials. Such figures will always include the average
annual total return for recent one year and, when applicable, five and ten year
periods and where less than five or ten years, the period since the portfolio,
including its predecessor prior to the reorganization of the Fund on December
31, 1988, became available for investment. In the case of the Pacific Rim
Emerging Markets, Real Estate Securities, Common Stock, Capital Growth Bond and
Equity Index Trusts, such quotations will be for periods that include the
performance of the predecessor portfolios of Manulife Series Trust, Inc. Where
the period since inception is less than one year, the total return quoted will
be the aggregate return for the period. The average annual total return is the
average annual compounded rate of return that equates the initial amount
invested to the market value of such investment on the last day of the period
for which such return is calculated. For purposes of the calculation it is
assumed that an initial payment of $1,000 is made on the first day of the
period for which the return is calculated and that all dividends and
distributions are reinvested at the net asset value on the reinvestment dates
during the period. All recurring fees such as advisory fees charged to the
Trust and all Trust expenses are reflected in the calculations. There are no
39
<PAGE> 121
non-recurring fees such as sales loads, surrender charges or account fees
charged by the Trust. If the period since inception is less than one year, the
figures will be based on an aggregate total return rather than an average
annual total return. Because the Investment Quality Bond Trust changed its
investment objective and investment subadviser effective April 23, 1991, the
Trust has elected to quote performance for that portfolio only since the date
of the change in order to quote returns representative of its current
objectives and/or produced by its current portfolio manager
TOTAL ANNUALIZED RETURN
[UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Trust One Year Ended Five Years Ended Since Inception or 10 Date first
6/30/96 6/30/96 Years, whichever is Available
shorter through 6/30/96
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emer'g Mar't #
International Small Cap N/A N/A %* 03/04/96
Small/Mid Cap N/A N/A %* 03/04/96
Global Equity % % % 03/18/88
Blue Chip Growth % N/A % 12/11/92
Common Stock #
Equity Index #
Equity % % %** 06/18/85
Equity-Income % N/A % 02/19/93
Real Estate Securities #
Growth and Income % % 13.06% 04/23/91
International Growth and % N/A %*** 01/9/95
Income
Strategic Bond % N/A % 02/19/93
Global Government Bond % % % 03/18/88
Capital Growth Bond #
Investment Quality Bond % % % 04/23/91
U.S. Government Securities % % % 05/01/89
Money Market % % %** 06/18/85
Cons. Asset Allocation % % % 08/03/89
Mod. Asset Allocation % % % 08/03/89
Aggr. Asset Allocation % % % 08/03/89
</TABLE>
40
<PAGE> 122
*Aggregate total return from March 4, 1996 (inception date) to June 30, 1996
(unaudited).
** 10 Years
*** Aggregate total return from January 9, 1995 (inception date).
# Performance presented for these NASL portfolios is based upon the
performance of their respective predecessor Manulife portfolios for periods
prior to the consummation of the reorganization effective December 31,
1996. Performance presented for each of these NASL portfolios is based on
the historical expenses and performance of its predecessor Manulife
portfolio and does not reflect the current expenses that an investor would
incur as a holder of shares of such NASL portfolio.
The Trust may also from time to time include in advertising and sales
literature the following: 1) information regarding its portfolio subadvisers,
such as information regarding a subadvisers specific investment expertise,
client base, assets under management or other relevant information; 2)
quotations about the Trust, its portfolios or its investment subadvisers that
appear in various publications and media; and 3) general discussions of
economic theories, including but not limited to discussions of how demographics
and political trends may effect future financial markets, as well as market or
other relevant information.
ORGANIZATION OF THE TRUST
SHARES OF THE TRUST
The Declaration of Trust authorizes the Trustees of the Trust to issue
an unlimited number of full and fractional shares of beneficial interest having
a par value of $.01 per share, to divide such shares into an unlimited number
of series of shares and to designate the relative rights and preferences
thereof, all without shareholder approval. The Trust currently has thirty-five
series of shares as described in the Prospectus. The shares of each portfolio,
when issued and paid for, will be fully paid and non-assessable and will have
no preemptive or conversion rights. Holders of shares of any portfolio are
entitled to redeem their shares as set forth under "Purchase and Redemption of
Shares." The Trust reserves the right to later issue additional series of
shares or separate classes of existing series of shares without the consent of
outstanding shareholders.
Each issued and outstanding share is entitled to participate equally
in dividends and distributions declared by the respective portfolio and upon
liquidation in the net assets of such portfolio remaining after satisfaction of
outstanding liabilities. For these purposes and for purposes of determining
the sale and redemption prices of shares, any assets which are not clearly
allocable to a particular portfolio will be allocated in the manner determined
by the Trustees. Accrued liabilities which are not clearly allocable to one or
more portfolios will also be allocated among the portfolios in the manner
determined by the Trustees.
Shareholders of each portfolio of the Trust are entitled to one vote
for each full share held (and fractional votes for fractional shares held)
irrespective of the relative net asset values of the shares of the portfolio.
All shares entitled to vote are voted by series, except that when voting for
the election of Trustees and when otherwise permitted by the Investment Company
Act of 1940, shares are voted in the aggregate and not by series. Only shares
of a particular portfolio are entitled to vote on matters determined by the
Trustees to affect only the interests of that portfolio. Pursuant to the
Investment Company Act of 1940 and the rules and regulations thereunder,
certain matters approved by a vote of a majority of all the shareholders of the
Trust may not be binding on a portfolio whose shareholders have not approved
such matter. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until less than a majority of the
Trustees holding office has been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by a vote cast in person or by proxy at a meeting
called for such purpose. Shares of the Trust do not have cumulative voting
rights, which means that the holders of more than 50% of the Trust's shares
voting for the election of Trustees can elect all of the Trustees if they so
choose. In such event, the holders of the remaining shares would not be able
to elect any Trustees.
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Under Massachusetts law, shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into
or executed by the Trustees or any officer of the Trust. The Declaration of
Trust provides for indemnification out of the property of a Trust portfolio for
all losses and expenses of any shareholder held personally liable for the
obligations of such portfolio. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon, but only out of the property of a particular portfolio. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which a particular portfolio would be
unable to meet its obligations.
PRINCIPAL HOLDERS OF SECURITIES
The Trust currently has three shareholders: The Manufacturers Life
Insurance Company of America ("Manulife America"), Security Life and First
North American Life Assurance Company ("FNAL"). Each shareholder holds Trust
shares attributable to variable and variable life contracts in their separate
accounts. Each shareholder will solicit voting instructions from such variable
and variable life contract owners and vote all shares held in proportion to the
instructions received.
Reflecting the conditions of section 817(h) and other provisions of
the Internal Revenue Code and regulations thereunder, the By-laws of the Trust
provide that shares of the Trust may be purchased only by the following
eligible shareholders: (a) separate accounts of Security Life or of other
insurance companies; (b) Security Life; (c) NASL Financial; (d) any corporation
related in a manner specified in section 267(b) of the Internal Revenue Code to
Security Life or to NASL Financial, including North American Life; and (e) any
Trustee of a qualified pension of retirement plan. As a matter of operating
policy, shares of the Trust may be purchased only by the eligible shareholders
of categories (a), (b) and (d).
REPORTS TO SHAREHOLDERS
Annual and semi-annual reports containing financial statements of the
Trust will be sent to contract owners.
INDEPENDENT ACCOUNTANTS
The audited financial statements of the Trust at December 31, 1995
included in this Statement of Additional Information and the Supplementary
Information for the period from the commencement of operations of the Trust's
corporate predecessor through December 31, 1995 included in the Prospectus have
been audited by Coopers & Lybrand L.L.P., independent public accountants, as
indicated in their report in this Statement of Additional Information and are
included herein in reliance upon such report and upon the authority of such
firm as experts in accounting and auditing.
LEGAL COUNSEL
Messrs. Jones & Blouch L.L.P., 1025 Thomas Jefferson Street, N.W.,
Washington, DC 20007, have passed upon certain legal matters relating to the
federal securities laws.
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PART C
OTHER INFORMATION
<PAGE> 125
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: [To be filed by amendment]
(1) Audited Financials
Report of Independent Accountants, February 15, 1996 -- Part B
Statements of Assets and Liabilities, December 31, 1995 --
Part B
Statements of Operations for the year ended December 31,
1995 -- Part B
Statements of Changes in Net Assets for the years ended
December 31, 1995 and December 31, 1994 -- Part B
Notes to Financial Statements, December 31, 1995 -- Part B
Portfolios of Investments, December 31, 1995 -- Part B
Financial Highlights -- Parts A and B
(2) Unaudited Financial Statements for periods ended June 30, 1996
Statements of Assets and Liabilities, June 30, 1996 -- Part B
Statements of Operations for the periods ended June 30, 1996
-- Part B
Statements of Changes in Net Assets for the periods ended June
30, 1996 -- Part B
Notes to Financial Statements, June 30, 1996 -- Part B
Portfolios of Investments, June 30, 1996 -- Part B
(b) Exhibits:
(1)(a) Agreement and Declaration of Trust dated September 29, 1988
-- previously filed as exhibit (1)(a) to post-effective
amendment no. 31 filed on February 28, 1996.
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(1)(b) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Redesignation of the Series of
Shares known as the "Convertible Securities Trust" to the
"U.S. Government Bond Trust" dated May 1, 1989 -- previously
filed as exhibit (1)(b) to post-effective amendment no. 31
filed on February 28, 1996.
(1)(c) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Conservative, Moderate and
Aggressive Asset Allocation Trusts dated May 1, 1989 --
previously filed as exhibit (1)(c) to post-effective
amendment no. 31 filed on February 28, 1996.
(1)(d) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Growth & Income Trust dated February
1, 1991 -- previously filed as exhibit (1)(d) to
post-effective amendment no. 31 filed on February 28, 1996.
(1)(e) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Redesignation of the Series of
Shares known as the "Bond Trust" to the "Investment Quality
Bond Trust" dated April 16, 1991 -- previously filed as
exhibit (1)(e) to post-effective amendment no. 31 filed on
February 28, 1996.
(1)(f) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Redesignation of the Series of
Shares known as the "U.S. Government Bond Trust" to the "U.S.
Government Securities Trust" dated June 14, 1991 --
previously filed as exhibit (1)(f) to post-effective
amendment no. 31 filed on February 28, 1996.
(1)(g) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Pasadena Growth Trust, Growth Trust
and Strategic Income Trust dated August 7, 1992 -- previously
filed as exhibit (1)(g) to post-effective amendment no. 31
filed on February 28, 1996.
(1)(h) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Redesignation of the Series of
Shares known as the "Strategic Income Trust" to the
"Strategic Bond Trust" and the Series of Shares known as the
"Growth Trust" to the "Value Equity Trust" dated April 4,1993
-- previously filed as exhibit (1)(h) to post-effective
amendment no. 31 filed on February 28, 1996.
(1)(i) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - International Growth and Income
Trust dated December 28, 1994 -- previously filed as exhibit
(1)(i) to post-effective amendment no. 31 filed on February
28, 1996.
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(1)(j) Establishment and Designation of Additional Series of Shares of
Beneficial Interest - Small/Mid Cap Trust, dated February 1,
1996 -- Filed herewith.
(1)(k) Establishment and Designation of Additional Series of Shares of
Beneficial Interest - International Small Cap Trust dated
February 1, 1996 -- Filed herewith.
(1)(l) Establishment and Designation of Additional Series of Shares of
Beneficial Interest - Growth Trust dated July 9, 1996 --
Filed herewith.
(l)(m) Establishment and Designation of Additional Series of Shares of
Beneficial Interest - Emerging Growth Trust, Pilgrim Baxter
Growth Trust, Pacific Rim Emerging Markets Trust, International
Stock Trust, Worldwide Growth Trust, Science & Technology
Trust, Common Stock Trust, Real Estate Securities Trust, Value
Trust, Equity Index Trust, Balanced Trust, High Yield Trust,
and Capital Growth Bond Trust -- and Redesignation of the
Series of Shares known as the "Pasadena Growth Trust" to the
"Blue Chip Growth Trust" and the Series of Shares known as the
"Value Equity Trust" to the "Equity-Income Trust" dated
September ____,1996 - [To be filed by amendment].
(2) By-laws of NASL Series Trust -- previously filed as exhibit (2)
to post-effective amendment no. 7 filed on October 31, 1988.
(4)(a) Specimen Share Certificate for Equity Trust -- previously filed
as exhibit (4)(a) to post-effective amendment no. 7 filed on
October 31, 1988.
(4)(b) Specimen Share Certificate for Growth and Income Trust --
previously filed as exhibit (4)(b) to post-effective
amendment no. 13 filed on February 15, 1991.
(4)(c) Specimen Share Certificate for Investment Quality Bond Trust
-- previously filed as exhibit (4)(c) to post-effective
amendment no. 14 filed on April 15, 1991.
(4)(d) Specimen Share Certificate for Money Market Trust --
previously filed as exhibit (4)(c) to post-effective
amendment no. 7 filed on October 31, 1988.
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(4)(e) Specimen Share Certificate for Global Equity Trust --
previously filed as exhibit (4)(d) to post-effective
amendment no. 7 filed on October 31, 1988.
(4)(f) Specimen Share Certificate for Global Government Bond Trust
-- previously filed as exhibit (4)(e) to post-effective
amendment no. 7 filed on October 31, 1988.
(4)(g) Specimen Share Certificate for U.S. Government Securities
Trust -- previously filed as exhibit (4)(g) to post-effective
amendment no. 14 filed on April 15, 1991.
(4)(h) Specimen Share Certificate for Conservative Asset Allocation
Trust -- previously filed as exhibit (4)(g) to post-effective
amendment no. 10 filed on May 19, 1989.
(4)(i) Specimen Share Certificate for Moderate Asset Allocation
Trust -- previously filed as exhibit (4)(h) to post-effective
amendment no. 10 filed on May 19, 1989.
(4)(j) Specimen Share Certificate for Aggressive Asset Allocation
Trust -- previously filed as exhibit (4)(i) to post-effective
amendment no. 10 filed on May 19, 1989.
(4)(k) Specimen Share Certificate for Value Equity Trust --
previously filed as exhibit (4)(k) to post-effective
amendment no. 21 filed on August 24, 1992.
(4)(l) Specimen Share Certificate for Strategic Bond Trust --
previously filed as exhibit (4)(l) to post-effective
amendment no. 21 filed on August 24, 1992.
(4)(m) Specimen Share Certificate for Pasadena Growth Trust --
previously filed as exhibit (4)(m) to post-effective
amendment no. 21 filed on August 24, 1992.
(4)(n) Specimen Share Certificate for International Growth and
Income Trust -- previously filed as exhibit (4)(n) to
post-effective amendment no. 27 filed October 20, 1994.
(4)(o) Specimen Share Certificate for the Small/Mid Cap Trust -
Previously filed as exhibit (4)(o) to post effective amendment
no. 30 filed December 14, 1995.
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<PAGE> 129
(4)(p) Specimen Share Certificate for the International Small Cap
Trust - Previously filed as exhibit (4)(p) to post effective
amendment no. 30 filed December 14, 1995.
(4)(q) Specimen Share Certificate for the Growth Trust - Previously
filed as exhibit (4)(q) to post-effective amendment no. 32
filed May 13, 1996.
(4)(r) Specimen Share Certificate for the Emerging Growth Trust -
Filed herewith.
(4)(s) Specimen Share Certificate for the Pilgrim Baxter Growth Trust
- Filed herewith.
(4)(t) Specimen Share Certificate for the Pacific Rim Emerging
Markets Trust - Filed herewith.
(4)(u) Specimen Share Certificate for the International Stock Trust
- Filed herewith.
(4)(v) Specimen Share Certificate for the Worldwide Growth Trust -
Filed herewith.
(4)(w) Specimen Share Certificate for the Science & Technology Trust -
Filed herewith.
(4)(x) Specimen Share Certificate for the Common Stock Trust - Filed
herewith.
(4)(y) Specimen Share Certificate for the Real Estate Securities Trust
- Filed herewith.
(4)(z) Specimen Share Certificate for the Value Trust - Filed
herewith.
(4)(aa) Specimen Share Certificate for the Equity Index Trust - Filed
herewith.
(4)(bb) Specimen Share Certificate for the Balanced Trust - Filed
herewith.
(4)(cc) Specimen Share Certificate for the High Yield Trust - Filed
herewith.
(4)(dd) Specimen Share Certificate for the Capital Growth Bond Trust
- Filed herewith.
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(5)(a)(1) Advisory Agreement between NASL Series Trust and NASL
Financial Services, Inc. - Previously filed as exhibit
(5)(a)(1) to post effective amendment no. 30 filed
December 14, 1995.
(5)(a)(2) Amendment to Advisory Agreement between NASL Series Trust
and NASL Financial Services, Inc. adding the Growth Trust
- Previously filed as exhibit (5)(a)(1) to post effective
amendment no. 30 filed December 14, 1995.
(5)(a)(3) Amendment to Advisory Agreement between NASL Series Trust
and NASL Financial Services, Inc. dated October 1, 1996,
reducing advisory fee for Blue Chip Growth Trust - Filed
herewith.
(5)(a)(4) Form of Amendment to Advisory Agreement between NASL
Series Trust and NASL Financial Services, Inc. adding
Emerging Growth Trust, Pilgrim Baxter Growth Trust,
Pacific Rim Emerging Markets Trust, International Stock
Trust, Worldwide Growth Trust, Science & Technology
Trust, Common Stock Trust, Real Estate Securities Trust,
Value Trust, Equity Index Trust, Balanced Trust, High
Yield Trust, and Capital Growth Bond Trust - Filed
herewith.
(5)(b)(i) Restated Subadvisory Agreement Between NASL Financial
Services, Inc. and Oechsle International Advisors, L.P.,
previously filed as exhibit (5) (b) (ii) to
post-effective amendment no. 16 on October 23, 1991.
(5)(b)(ii) Subadvisory Agreement Between NASL Financial Services,
Inc. and Wellington Management Company, previously filed
as exhibit (5) (b) (iii) to post-effective amendment no.
16 on October 23, 1991.
(5)(b)(iii)Amendment to Subadvisory Agreement Between NASL Financial
Services, Inc. and Wellington Management Company dated
December 13, 1991, previously filed as exhibit
(5)(b)(iii) to post-effective amendment no. 18 on
December 19, 1991.
(5)(b)(iv) Subadvisory Agreement Between NASL Financial and Fidelity
Management Trust Company dated December 6, 1991,
previously filed as exhibit (5)(b)(iv) to post-effective
amendment no. 18 on December 19, 1991.
(5)(b)(v) Subadvisory Agreement Between NASL Financial and Salomon
Brothers Asset Management Inc dated December 6, 1991,
previously filed as exhibit (5)(b)(v) to post-effective
amendment no. 18 on December 19, 1991.
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<PAGE> 131
(5)(b)(vi) Amendment to Subadvisory Agreement Between NASL Financial
and Salomon Brothers Asset Management Inc dated August
20, 1992 -- previously filed as exhibit no. (5)(a)(3) to
post-effective amendment no. 22 filed on October 30,
1992.
(5)(b)(vii) Subadvisory Consulting Agreement Between Salomon Brothers
Asset Management Inc and Salomon Brothers Asset
Management Limited dated February 19, 1993. -- previously
filed as exhibit (5)(b)(ix) to post effective amendment
24 on April 2, 1993.
(5)(b)(viii) Subadvisory Agreement between NASL Financial Services,
Inc. and J.P. Morgan Investment Management Inc. dated
December 1, 1994 -- previously filed as exhibit
(5)(b)(xi) to post-effective amendment no. 28 on March 2,
1995.
(5)(b)(ix) Form of Subadvisory Agreement between NASL Financial
Services, Inc. and Fred Alger Management, Inc. -
Previously filed as exhibit (5)(b)(xi) to post effective
amendment no. 30 filed December 14, 1995.
(5)(b)(x) Form of Subadvisory Agreement between NASL Financial
Services, Inc. and Founders Asset Management, Inc. --
Previously filed as exhibit (5)(b)(xii) to post
effective amendment no. 30 filed December 14, 1995.
(5)(b)(xi) Amendment to Subadvisory Agreement between NASL Financial
Services, Inc. and Founders Asset Management, Inc.
adding the Growth Trust - Previously filed as exhibit
(5)(b)(xiii) to post effective amendment no. 33 filed
July 10, 1996.
(5)(b)(xii) Form of Amendment to Subadvisory Agreement between NASL
Financial Services, Inc. and Founders Asset Management,
Inc. dated October __, 1996 adding the Worldwide Growth
and Balanced Trusts - Filed herewith..
(5)(b)(xiii) Subadvisory Agreement between NASL Financial Services,
Inc. and T. Rowe Price Associates, Inc. dated October __
, 1996 providing for the Blue Chip Growth and
Equity-Income Trusts and adding the Science & Technology
Trust - [To be filed by amendment].
(5)(b)(xiv) Form of Subadvisory Agreement between NASL Financial
Services, Inc. and Rowe Price-Fleming International, Inc.
dated October ____, 1996 adding the International Stock
Trust - Filed herewith.
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<PAGE> 132
(5)(b)(xv) Subadvisory Agreement between NASL Financial Services,
Inc. and Morgan Stanley Asset Management, Inc. dated
October ____, 1996 providing for the Global Equity Trust
- [To be filed by amendment]
(5)(b)(xvi) Subadvisory Agreement between NASL Financial Services,
Inc. and Miller Anderson & Sherrerd,LLP dated October __
_, 1996 adding the Value and High Yield Trusts - [To be
filed by amendment]
(5)(b)(xvii) Form of Subadvisory Agreement between NASL Financial
Services, Inc. and Warburg Pincus Counsellors, Inc. dated
October ____, 1996 adding the Emerging Growth Trust --
Filed herewith.
(5)(b)(xviii) Form of Subadvisory Agreement between NASL Financial
Services, Inc. and Manufacturers Adviser Corporation
dated October 1, 1996 providing for the Money Market
Trust -- Filed herewith.
(5)(b)(xix) Form of Amendment to Subadvisory Agreement between NASL
Financial Services, Inc. and Manufacturers Adviser
Corporation dated October 1, 1996 adding the Pacific Rim
Emerging Markets , Common Stock, Real Estate Securities,
Equity Index and Capital Growth Bond Trusts - Filed
herewith.
(5)(b)(xx) Subadvisory Agreement between NASL Financial Services,
Inc. and Pilgrim Baxter & Associates, Inc. dated
September ____, 1996 adding the Pilgrim Baxter Growth
Trust - [To be filed by amendment]
(8)(a) Custodian Agreement Between NASL Series Fund, Inc. and
State Street Bank and Trust Company -- previously filed
as exhibit (8)(b) to post-effective amendment no. 6 filed
on March 14, 1988.
(10)(a)(i) Opinion and Consent of Ropes & Gray -- previously filed
as exhibit (10)(a) to post-effective amendment no. 7
filed on October 31, 1988.
(10)(a)(ii) Opinion and Consent of Tina M. Perrino, Esq. --
previously filed as exhibit (10)(a)(ii) to post-effective
amendment no. 14 filed April 15, 1991.
(10)(a)(iii) Opinion and Consent of Tina M. Perrino, Esq. --
previously filed as exhibit (10)(a)(iii) to
post-effective amendment no. 22 filed October 30, 1992.
(10)(a)(iv) Opinion and Consent of Betsy A. Seel, Esq.-- previously
filed as exhibit (10)(a)(iv) to post-effective amendment
no. 27 filed October 20, 1994.
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<PAGE> 133
(10)(a)(v) Opinion and Consent of Betsy A. Seel, Esq. - Previously
filed as exhibit (10)(a)(v) to post effective amendment
no. 30 filed December 14,1995.
(10)(a)(vi) Opinion and Consent of Betsy A. Seel, Esq. - Previously
filed as exhibit (10)(a)(vi) to post effective amendment
no. 33 filed July 10, 1996.
(10)(a)(vii) Opinion and Consent of Betsy Anne Seel, Esq. - [To be
filed by amendment]
(10)(b) Consent of Jones & Blouch L.L.P. - [To be filed by
amendment]
(11) Consent of Coopers & Lybrand - [To be filed by amendment]
(13) Letter Containing Investment Undertaking of North
American Life Assurance Company -- previously filed as
exhibit 13 to post-effective amendment no. 4 filed on
December 24, 1987.
(16)(a) Schedule of computations of Total Return Figures for the
U.S.Government Securities, Growth and Income and
Investment Quality Bond Trusts, previously filed as
exhibit (16) (a) to post-effective amendment no. 16 filed
on October 23, 1991.
(16)(b) Schedule of Computations of Total Return Figures for the
Equity, Global Equity and Global Government Bond --
previously filed as exhibit 16 to post-effective
amendment no. 10 filed on May 19, 1989.
(16)(c) Schedule of Computations of Total Return Figures for the
Asset Allocation Trusts, Value Equity Trust, Pasadena
Growth Trust and the Strategic Bond Trust -- previously
filed as exhibit 16(c) to post-effective amendment no.
25 filed on March 2, 1994.
(16)(d) Schedule of Computations of Total Return Figures for the
International Growth & Income Trust. - previously filed
as Exhibit 16(d) to post-effective amendment no. 29 on
June 29, 1995.
(16)(e) Additional Schedule of Computations - general formula --
previously filed as exhibit (b)(16)(e) to post-effective
amendment no. 31 filed February 28, 1996.
(18)(a) Power of Attorney - Trustees, previously filed as Exhibit
(17) to post-effective amendment no. 23 filed on February
2, 1993.
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<PAGE> 134
(18)(b) Power of Attorney - Richard C. Hirtle, Vice President and
Treasurer (Principal Financial and Accounting Officer) --
previously filed as exhibit 17(b) to post effective
amendment no. 24 filed April 2, 1993.
(18)(c) Power of Attorney - Frederick W. Gorbet -- previously
filed as exhibit 17(c) to post-effective amendment no.
25 filed on March 2, 1994.
(18)(d) Powers of Attorney -- previously filed as exhibit 17(d)
to post effective amendment no. 27 filed October 20,
1994.
(18)(e) Power of Attorney -- John D. DesPrez, President -- Filed
herewith.
(27) Financial Data Schedules for December 31, 1995 and June
30,1996 financials statements. [To be filed by
amendment]
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Trust has three shareholders: (i) North American Security Life
Insurance Company ("Security Life"), (ii) its wholly-owned subsidiary, First
North American Life Assurance Company ("FNAL") and (iii) The Manufacturers Life
Insurance Company of America ("Manulife America"). Security Life, FNAL and
Manulife America hold Trust shares attributable to variable contracts in their
respective separate accounts and will solicit voting instructions from variable
contract owners and vote all shares held in proportion to the instructions
received.
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THE MANUFACTURERS LIFE INSURANCE COMPANY
(Subsidiaries Organization Chart
- - including certain Significant Investments)
The Manufacturers Life Insurance Company (Canada)
1. ManuLife Holdings (Hong Kong) Limited - H.K. (100%)
2. ManuLife Financial Systems (Hong Kong) Limited - H.K. (100%)
3. P.T. Asuransi Jiwa Dharmala Manulife - Indonesia (51%)
4. WT (SW) Properties Ltd. - U.K. (100%)
5. OUB Manulife Pte. Ltd. - Singapore (50%)
6. Manulife (Malaysia) SDN. BHD. - Malaysia (100%)
7. Manulife (Thailand) Ltd. - Thailand (100%)
8. Young Poong Manulife Insurance Company - Korea (50%)
9. Ennal, Inc. - Ohio (100%)
10. First North American Realty, Inc. - Minnesota (100%)
11. NAL Resources Limited - Alberta (100%)
(a) Nottingham Gas Limited - Saskatchewan (31%)
12. Nottingham Gas Limited - Saskatchewan (31%)
13. 484551 Ontario Limited - Ontario (100%)
(a) 911164 Ontario Limited - Ontario (100%)
14. Peel-de Maisonneuve Investments Ltd. - Canada (50%)
(a) 2932121 Canada Inc. - Canada (100%)
15. Balmoral Developments Inc. - Canada (100%)
16. KY Holding Corporation - Canada (100%)
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17. 165351 Canada Limited - Canada (100%)
18. 172846 Canada Limited - Canada (100%)
19. 576986 Ontario Inc. - Ontario (100%)
20. Cantay Holdings Inc. - Ontario (100%)
21. Manufacturers Life Capital Corporation Inc. - Canada (100%)
22. Elliott & Page Asset Management Ltd. - Canada (100%)
23. 495603 Ontario Limited - Ontario (100%)
24. 994744 Ontario Inc. - Ontario (100%)
25. The North American Group Inc. - Ontario (100%)
26. Manulife Investment Management Corporation - Canada (100%)
(a) 159139 Canada Inc. - Canada (50%)
i. Altamira Management Ltd. - Canada (60.96%)
A. ACI2 Limited - Cayman (100%)
a/ Regent Pacific Group Limited-Cayman (63.8%)
a.1 Manulife Regent Investment Corporation -
Barbados (100%) [50% by Regent Pacific Group Limited
and 50% by Manulife Data Services Inc.]
b.1 Manulife Regent Investment Asia Limited -
Hong Kong (100%)
B. Altamira Financial Services Inc. - Ontario (100%)
a/ AIS Securities (Partnership) - Ontario (100%) [5% by
Altamira Financial Services, Inc. and 95% by
Altamira Investment Services Inc.]
b/ Altamira Investment Services Inc. - Ontario (100%)
(a) AIS Securities (Partnership) - Ontario (100%)[95% by
by Altamira Investment Services Inc. and 5% by
Altamira Financial Services Inc.]
(b) Altamira (Alberta) Ltd. - Alberta (100%)
(c) Capital Growth Financial Services Inc. -
Ontario (100%)
27. Manulife International Investment Management Limited - U.K. (100%)
(a) Manulife International Fund Management Limited - U.K. (100%)
28. Manulife (International) Limited - Bermuda (100%)
(a) The Manufacturers (Pacific Asia) Insurance Company Limited
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- Hong Kong (100%)
(b) Newtime Consultants Limited - Hong Kong (100%)
29. Manulife Data Services Inc.- Barbados (100%)
(a) Manulife Regent Investment Corporation - Barbados - (100%)
[50% by Manulife Data Services Inc. and 50% by Regent
Pacific Group Limited]
(b) Manulife Regent Investment Asia Limited - Hong Kong (100%)
30. FNA Financial Inc. - Canada (100%)
(a) NAL Trustco Inc. - Ontario (100%)
(b) First North America Insurance Company - Canada (100%)
(c) Elliott & Page Limited - Ontario (100%)
(d) Seamark Asset Management Ltd. - Canada (69.175%)
(e) NAL Resources Management Limited - Canada (100%)
(i) NAL Energy Inc. - Alberta (100%)
31. ManuCab Ltd. - Canada (100%)
(a) Plazcab Service Limited - Canada (100%)
32. Townvest Inc. - Ontario (100%)
33. Manulife Reinsurance Corporation (U.S.A.) - Michigan (100%)
(a) The Manufacturers Life Insurance Company (U.S.A.) - Michigan (100%)
(b) Manulife Holding Corporation - Delaware (100%)
i. Manufacturers Life Mortgage Securities
Corporation - Delaware (100%)
ii. Manulife Property Management of Washington, D.C., Inc.
- Washington D.C. (100%)
iii. Capital Design Corporation - California - (100%)
iv. ManEquity, Inc. - Colorado (100%)
v. Manulife Service Corporation - Colorado (100%)
vi. Succession Planning International Inc. - Wisconsin (100%)
(c) The Manufacturers Life Insurance Company of America - Michigan (100%)
i. Manulife Series Fund, Inc. - Maryland (100%)
ii. Manufacturers Adviser Corporation - Colorado (100%)
(d) Manulife Reinsurance Limited - Bermuda (100%)
34. The Manufacturers Investment Corporation - Michigan (100%)
35. Capitol Bankers Life Insurance Company - Minnesota (100%)
14
<PAGE> 138
36. NAWL (North American Wood Logan Holding Company) - Delaware (85%)
(a) Wood Logan Associates Inc. - Connecticut (100%)
(i) Wood Logan Distributors - Connecticut (100%)
(b) North American Security Life Insurance Company - Delaware (100%)
(i) NASL Financial Services, Inc. - Massachusetts (100%)
(ii) First North American Life Assurance Company - New York (100%)
37. Manulife (International) Reinsurance Limited - Bermuda (100%)
(a) Manulife (International) P&C Limited - Bermuda (100%)
(b) Manufacturers P&C Limited - Barbados (100%)
38. Manulife Financial Holdings Limited - Ontario (100%)
(a) 742166 Ontario Inc. - Ontario (100%)
(b) Family Realty Firstcorp Limited - Ontario (100%)
(c) Thos. N. Shea Investment Corporation Limited - Ontario (100%)
(d) Manulife Bank of Canada - Canada (100%)
i. Manulife Securities International Ltd. - Canada (100%)
(#6586 - June 30, 1996)
15
<PAGE> 139
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of August 31, 1996 the number of holders of the shares of beneficial
interest of each series of shares of the Registrant is as follows:
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
--------------- ------------------------
<S> <C>
Global Equity Trust Shares of
Beneficial Interest 2
Blue Chip Growth Trust Shares of
Beneficial Interest 2
Equity Trust Shares of
Beneficial Interest 3
Value Equity Trust Shares of
Beneficial Interest 3
Growth and Income Trust Shares
of Beneficial Interest 3
Strategic Bond Trust Shares
of Beneficial Interest 2
Global Government Bond Trust
Shares of Beneficial Interest 2
Investment Quality Bond Trust Shares
of Beneficial Interest 2
U.S. Government Securities Trust
Shares of Beneficial Interest 3
Money Market Trust Shares of
Beneficial Interest 2
Conservative Asset Allocation Trust
Shares of Beneficial Interest 3
Moderate Asset Allocation Trust
Shares of Beneficial Interest 3
Aggressive Asset Allocation Trust
Shares of Beneficial Interest 3
International Growth and Income Trust
Shares of Beneficial Interest 2
Small/Mid Cap Trust
Shares of Beneficial Interest 2
International Small Cap Trust
Shares of Beneficial Interest 2
Growth Trust
Shares of Beneficial Interest 2
</TABLE>
16
<PAGE> 140
ITEM 27. INDEMNIFICATION
Sections 6.4 and 6.5 of the Agreement and Declaration of Trust of the
Registrant provide that the Registrant shall indemnify each of its Trustees and
officers against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and against
all expenses, including but not limited to accountants and counsel fees,
reasonably incurred in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court
or administrative or legislative body, in which such Trustee or officer may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, except that indemnification
shall not be provided if it shall have been finally adjudicated in a decision
on the merits by the court or other body before which the proceeding was
brought that such Trustee or officer (i) did not act in good faith in the
reasonable belief that his or her action was in the best interests of the
Registrant or (ii) is liable to the Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's office.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See "Management of the Trust" in the Prospectus and "Investment
Management Arrangements" in the Statement of Additional Information for
information regarding the business of the Adviser and each of the Subadvisers.
For information as to the business, profession, vocation or employment of a
substantial nature of each director, officer or partner of the Adviser and each
of the Subadvisers, reference is made to the respective Form ADV, as amended,
filed under the Investment Advisers Act of 1940, each of which is herein
incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained
under Section 31(a) of the Investment Company Act of 1940 are kept by NASL
Financial Services, Inc., the Registrant's investment adviser, at its offices
at 116 Huntington Avenue, Boston, Massachusetts 02116, by Fidelity Management
Trust Company, the investment subadviser to the Equity, Conservative Asset
Allocation, Moderate Asset Allocation and Aggressive Asset Allocation Trusts,
at its offices at 82 Devonshire Street, Boston, MA 02109, by Oechsle
International Advisors, L.P., the investment subadviser to the Global
Government Bond Trust, at its offices at One International Place, Boston,
Massachusetts 02110, by Wellington Management Company, the investment
subadviser to the Growth and Income and Investment
17
<PAGE> 141
Quality Bond Trusts, at its offices at 75 State Street, Boston, Massachusetts
02109, by Salomon Brothers Asset Management Inc, the investment subadviser to
the U.S. Government Securities and Strategic Bond Trusts, at its offices at 7
World Trade Center, New York, New York 10048, by Fred Alger Management, Inc.,
the investment subadviser for the Small/Mid Cap Trust, at its offices at 75
Maiden Lane, New York, NY 10038, by Founders Asset Management, Inc., the
investment subadviser for the Growth, International Small Cap, Worldwide Growth
and Balanced Trusts, at its offices at 2930 East Third Avenue, Denver, Colorado
80206, by J.P.Morgan Investment Management Inc., the investment subadviser to
the International Growth and Income Trust, at its offices at 522 5th Avenue,
New York, New York, 10036, by T. Rowe Price Associates, Inc., the investment
subadviser to the Blue Chip Growth, Science & Technology and Equity-Income
Trusts, at its offices at 100 East Pratt Street, Baltimore, MD 21202, by Rowe
Price-Fleming International, Inc., the investment subadviser to the
International Stock Trust, at its offices at 100 East Pratt Street, Baltimore,
MD 21202, by Morgan Stanley Asset Management, Inc., the investment subadviser
of the Global Equity Trust, at its offices at 1221 Avenue of the Americas, New
York, New York 10020, by Miller Anderson & Sherrerd, LLP, the investment
subadviser to the Value and High Yield Trusts, at its offices at One Tower
Bridge, Conshohocken PA 19428, by Warburg Pincus Counsellors, Inc., the
investment subadviser to the Emerging Growth Trust, at its offices at 466
Lexington Avenue, New York, New York 10017-3147, by Pilgrim Baxter &
Associates, Inc., the investment subadviser to the Pilgrim Baxter Growth Trust,
at its offices at 355 Lexington Avenue, NewYork, New York by Manufacturers
Adviser Corporation, the investment subadviser to the Pacific Rim Emerging
Markets, Common Stock, Real Estate Securities, Equity Index, Capital Growth
Bond and Money Market Trusts, at its offices at 200 Bloor Street East, Toronto,
Ontario, Canada M4W lE5, by the Registrant at its principal business office
located at 116 Huntington Avenue, Boston, Massachusetts 02116, or by State
Street Bank and Trust Company, the custodian and transfer agent for the Trust,
at its offices at 225 Franklin Street, Boston, Massachusetts 02110.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to file a post-effective amendment to the
registration statement, using financial statements which need not be certified
for the portfolios being added by this post-effective amendment, within four to
six months after the effective date of this post-effective amendment.
18
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant, NASL Series Trust, has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston, and
Commonwealth of Massachusetts, on the 4th day of October, 1996.
NASL SERIES TRUST
-----------------
(Registrant)
By: /s/ John D. DesPrez III
------------------------
John D. DesPrez III, President
Attest:
/s/ James D. Gallagher
- -----------------------
James D. Gallagher, Secretary
<PAGE> 143
Pursuant to the requirements of the Securities Act of 1933, this
amended Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<S> <C> <C>
* Trustee October 4, 1996
--------------------- ---------------
Don B. Allen (Date)
/s/ JOHN D. DESPREZ III President - October 4, 1996
- ---------------------- (Chief Executive Officer) ---------------
John D. DesPrez III (Date)
* Trustee October 4, 1996
--------------------- ---------------
Charles L. Bardelis (Date)
* Trustee October 4, 1996
--------------------- ----------------
Samuel Hoar (Date)
* Trustee October 4, 1996
--------------------- and Chairman ---------------
Brian L. Moore (Date)
* Trustee October 4, 1996
--------------------- ---------------
Robert J. Myers (Date)
* Vice President and October 4, 1996
--------------------- Treasurer (Prin- ---------------
Richard C. Hirtle cipal Financial and (Date)
Accounting Officer)
*By: /s/ James D. Gallagher October 4, 1996
---------------------- ---------------
James D. Gallagher (Date)
Attorney-in-Fact
Pursuant to Powers
of Attorney
</TABLE>
<PAGE> 144
EXHIBIT INDEX
NO. DESCRIPTION
(1)(j) Establishment and Designation of Additional Series of Shares
of Beneficial Interest - Small/Mid Cap Trust, dated February 1,
1996.
(1)(k) Establishment and Designation of Additional Series of Shares of
Beneficial Interest - International Small Cap Trust dated
February 1, 1996.
(1)(l) Establishment and Designation of Additional Series of Shares of
Beneficial Interest - Growth Trust dated July 9, 1996
(4)(r) Specimen Share Certificate for the Emerging Growth Trust.
(4)(s) Specimen Share Certificate for the Pilgrim Baxter Growth Trust.
(4)(t) Specimen Share Certificate for the Pacific Rim Emerging Markets
Trust.
(4)(u) Specimen Share Certificate for the International Stock Trust.
(4)(v) Specimen Share Certificate for the Worldwide Growth Trust.
(4)(w) Specimen Share Certificate for the Science & Technology Trust.
(4)(x) Specimen Share Certificate for the Common Stock Trust.
(4)(y) Specimen Share Certificate for the Real Estate Securities
Trust.
(4)(z) Specimen Share Certificate for the Value Trust.
(4)(aa) Specimen Share Certificate for the Equity Index Trust.
(4)(bb) Specimen Share Certificate for the Balanced Trust.
(4)(cc) Specimen Share Certificate for the High Yield Trust.
(4)(dd) Specimen Share Certificate for the Capital Growth Bond Trust.
<PAGE> 145
(5)(a)(3) Amendment to Advisory Agreement between NASL Series Trust and
NASL Financial Services, Inc. dated October 1, 1996 reducing
advisory fee for Blue Chip Growth Trust.
(5)(a)(4) Form of Amendment to Advisory Agreement between NASL Series
Trust and NASL Financial Services, Inc. adding Emerging Growth
Trust, Pilgrim Baxter Growth Trust, Pacific Rim Emerging
Markets Trust, International Stock Trust, Worldwide Growth
Trust, Science & Technology Trust, Common Stock Trust, Real
Estate Securities Trust, Value Trust, Equity Index Trust,
Balanced Trust, High Yield Trust, and Capital Growth Bond
Trust
(5)(b)(xii) Form of Amendment to Subadvisory Agreement between NASL
Financial Services, Inc. and Founders Asset Management, Inc.
dated October __, 1996 adding the Worldwide Growth and
Balanced Trusts
(5)(b)(xiv) Form of Subadvisory Agreement between NASL Financial Services,
Inc. and Rowe Price-Fleming International, Inc. dated October
____, 1996 adding the International Stock Trust
(5)(b)(xvii) Form of Subadvisory Agreement between NASL Financial Services,
Inc. and Warburg Pincus Counsellors, Inc. dated October ____,
1996 adding the Emerging Growth Trust
(5)(b)(xviii) Form of Subadvisory Agreement between NASL Financial
Services, Inc. and Manufacturers Adviser Corporation dated
October 1, 1996 providing for the Money Market Trust
(5)(b)(xix) Form of Amendment to Subadvisory Agreement between NASL
Financial Services, Inc. and Manufacturers Adviser Corporation
dated October 1, 1996 adding the Pacific Rim Emerging Markets
, Common Stock, Real Estate Securities, Equity Index and
Capital Growth Bond Trusts
(18)(e) Power of Attorney -- John D. DesPrez III, President
2
<PAGE> 1
EXHIBIT (1)(j)
NASL SERIES TRUST
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.01 par value per share)
The undersigned, being a majority of the Trustees of NASL Series Trust
(the "Trust"), acting pursuant to Section 4.1(a) of the Agreement and
Declaration of Trust of the Trust dated September 29, 1988 (the "Declaration of
Trust") hereby establish and designate a new Series of Shares (as defined in
the Declaration of Trust), such Series of Shares to have the following special
and relative rights:
1. The new Series of Shares shall be designated the "Small/Mid Cap
Trust."
2. The new Series of Shares shall have the relative rights and
preferences described in Section 4.2 of the Declaration of Trust,
provided that the Trustees, in their absolute discretion, may amend
any previously established relative rights and preferences as they may
deem necessary or desirable to enable the Trust to comply with the
Investment Company Act of 1940 or other applicable law.
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 1st day of February, 1996.
/s/ Don B. Allen
- --------------------------
Don B. Allen
/s/ Charles L. Bardelis
- --------------------------
Charles L. Bardelis
/s/ Samuel Hoar
- --------------------------
Samuel Hoar
/s/ Robert J. Myers
- ---------------------------
Robert J. Myers
/s/ Brian L. Moore
- -------------------------
Brian L. Moore
The Agreement and Declaration of Trust of the Trust, September 29, 1988, a copy
of which together with all amendments thereto is on file in the office of the
Secretary of The Commonwealth of Massachusetts, provides that this instrument
was executed by the Trustees of the Trust as Trustees and not individually and
that the obligations of this instrument are not binding upon any of them or the
shareholders of the Trust individually but are binding only upon the assets
belonging to the Trust, or the particular Series of Shares in question, as the
case may be.
<PAGE> 1
EXHIBIT (1)(k)
NASL SERIES TRUST
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.01 par value per share)
The undersigned, being a majority of the Trustees of NASL Series Trust
(the "Trust"), acting pursuant to Section 4.1(a) of the Agreement and
Declaration of Trust of the Trust dated September 29, 1988 (the "Declaration of
Trust") hereby establish and designate a new Series of Shares (as defined in
the Declaration of Trust), such Series of Shares to have the following special
and relative rights:
1. The new Series of Shares shall be designated the "International Small
Cap Trust."
2. The new Series of Shares shall have the relative rights and
preferences described in Section 4.2 of the Declaration of Trust,
provided that the Trustees, in their absolute discretion, may amend
any previously established relative rights and preferences as they may
deem necessary or desirable to enable the Trust to comply with the
Investment Company Act of 1940 or other applicable law.
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 1st day of February, 1996.
/s/ Don B. Allen
- --------------------------
Don B. Allen
/s/ Charles L. Bardelis
- --------------------------
Charles L. Bardelis
/s/ Samuel Hoar
- --------------------------
Samuel Hoar
/s/ Robert J. Myers
- --------------------------
Robert J. Myers
/s/ Brian L. Moore
- -------------------------
Brian L. Moore
The Agreement and Declaration of Trust of the Trust, September 29, 1988, a copy
of which together with all amendments thereto is on file in the office of the
Secretary of The Commonwealth of Massachusetts, provides that this instrument
was executed by the Trustees of the Trust as Trustees and not individually and
that the obligations of this instrument are not binding upon any of them or the
shareholders of the Trust individually but are binding only upon the assets
belonging to the Trust, or the particular Series of Shares in question, as the
case may be.
<PAGE> 1
EXHIBIT (1)(l)
NASL SERIES TRUST
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.01 par value per share)
The undersigned, being a majority of the Trustees of NASL Series Trust
(the "Trust"), acting pursuant to Section 4.1(a) of the Agreement and
Declaration of Trust of the Trust dated September 29, 1988 (the "Declaration of
Trust") hereby establish and designate a new Series of Shares (as defined in
the Declaration of Trust), such Series of Shares to have the following special
and relative rights:
1. The new Series of Shares shall be designated the "Growth Trust."
2. The new Series of Shares shall have the relative rights and
preferences described in Section 4.2 of the Declaration of Trust,
provided that the Trustees, in their absolute discretion, may amend
any previously established relative rights and preferences as they may
deem necessary or desirable to enable the Trust to comply with the
Investment Company Act of 1940 or other applicable law.
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 9th day of July, 1996.
/s/ Don B. Allen
- --------------------------
Don B. Allen
/s/ Charles L. Bardelis
- --------------------------
Charles L. Bardelis
/s/ Samuel Hoar
- --------------------------
Samuel Hoar
/s/ Robert J. Myers
- --------------------------
Robert J. Myers
/s/ Brian L. Moore
- -------------------------
Brian L. Moore
The Agreement and Declaration of Trust of the Trust, September 29, 1988, a copy
of which together with all amendments thereto is on file in the office of the
Secretary of The Commonwealth of Massachusetts, provides that this instrument
was executed by the Trustees of the Trust as Trustees and not individually and
that the obligations of this instrument are not binding upon any of them or the
shareholders of the Trust individually but are binding only upon the assets
belonging to the Trust, or the particular Series of Shares in question, as the
case may be.
<PAGE> 1
EXHIBIT (4)(r)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
EMERGING GROWTH
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(s)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
PILGRIM BAXTER GROWTH
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(t)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
PACIFIC RIM EMERGING MARKETS
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(u)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
INTERNATIONAL STOCK
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(v)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
WORLDWIDE GROWTH
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(w)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
SCIENCE & TECHNOLOGY
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(x)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
COMMON STOCK
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee , shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(y)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
REAL ESTATE SECURITIES
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(z)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
VALUE
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(aa)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
EQUITY INDEX
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(bb)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
BALANCED
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(cc)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
HIGH YIELD
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (4)(dd)
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
CAPITAL GROWTH BOND
THIS CERTIFIES THAT
------------------------------------------------------------
is the owner of
----------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST,
$0.01 PAR VALUE, OF NASL SERIES TRUST
In accordance with, and subject to all the provisions of, an Agreement
and Declaration of Trust dated September 29, 1988, and any amendments thereto,
a copy of which has been filed with the Secretary of the Commonwealth of
Massachusetts, to all of which provisions every shareholder agrees by the
acceptance of share certificate.
The Declaration of Trust provides that the name "NASL Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee
or agent of the Trust may be held to any personal liability, or may resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of the Trust, but the Trust
Property only shall be liable.
This certificate is not valid until countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust,
acting not individually, but as such Trustees have cause to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of
duly authorized officers of the Trust, acting not individually but as such
officers.
TREASURER PRESIDENT
Dated
----------------
<PAGE> 1
EXHIBIT (5)(a)(3)
NASL SERIES TRUST
AMENDMENT TO ADVISORY AGREEMENT
AMENDMENT made this 1st day October, 1996, to the Advisory
Agreement dated January 1, 1996, as amended June 20, 1996 between NASL Series
Trust, a Massachusetts business trust (the "Trust") and NASL Financial
Services, Inc., a Massachusetts corporation ("NASL Financial" or the
"Adviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. CHANGE IN APPENDIX A
Appendix A to this Agreement is revised to reflect the reduction in
the advisory fee for the Blue Chip Growth Portfolio (formerly, the
Pasadena Growth Portfolio) from .975% to .925% as set forth in
Appendix A to this Amendment.
2. EFFECTIVE DATE
This Amendment shall become effective with respect to the Blue Chip
Growth Portfolio on the date of its execution.
NASL SERIES TRUST
BY:
--------------------------
NASL FINANCIAL SERVICES, INC.
BY:
--------------------------
<PAGE> 2
APPENDIX A
1. Global Equity Trust: .90% of the current net assets of the Portfolio.
2. Blue Chip Growth Trust: .925% of the current net assets of the
Portfolio.
3. Equity Trust: .75% of the current net assets of the Portfolio.
4. Value Equity Trust: .80% of the current net assets of the Portfolio.
5. Growth and Income Trust: .75% of the current net assets of the
Portfolio.
6. Strategic Bond Trust: .775% of the current net assets of the
Portfolio.
7. Global Government Bond Trust: .80% of the current net assets of the
Portfolio.
8. Investment Quality Bond Trust: .65% of the current net assets of the
Portfolio.
9. U.S. Government Securities Trust: .65% of the current net assets of
the Portfolio.
10. Money Market Trust: .50% of the current net assets of the Portfolio.
11. Aggressive Asset Allocation Trust: .75% of the current net assets of
the Portfolio.
12. Moderate Asset Allocation Trust: .75% of the net assets of the
Portfolio.
13. Conservative Asset Allocation Trust: .75% of the net assets of the
Portfolio.
14. International Growth and Income Trust: .95% of the net assets of the
Portfolio.
15. Small/Mid Cap Trust: 1.0% of the net assets of the Portfolio.
16. International Small Cap Trust: 1.10% of the net assets of the
Portfolio.
17. Growth Trust: .85% of the net assets of the Portfolio.
The Percentage Fee for each Portfolio shall be accrued for
each calendar day and the sum of the daily fee accruals shall
<PAGE> 3
3
be payable monthly to the Adviser. The daily fee accruals will be computed by
multiplying the fraction of one over the number of calendar days in the year by
the applicable annual rate described in the preceding paragraph, and
multiplying this product by the net assets of the Portfolio as determined in
accordance with the Trust's prospectus and statement of additional information
as of the close of business on the previous business day on which the Trust was
open for business.
If this Agreement becomes effective or terminates before the
end of any month, the fee for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such
period bears to the full month in which such effectiveness or termination
occurs.
<PAGE> 4
APPENDIX B
The Expense Limit for each Portfolio for the purposes of
paragraph 2.d.i(C) shall be:
<TABLE>
<CAPTION>
Portfolio Percent
--------- -------
<S> <C>
Blue Chip Growth Trust .50%
Value Equity Trust .50%
Equity Trust .50%
Growth and Income Trust .50%
Conservative Asset Allocation Trust .50%
Moderate Asset Allocation Trust .50%
Aggressive Asset Allocation Trust .50%
Global Equity Trust .75%
Global Government Bond Trust .75%
Strategic Bond Trust .50%
U.S. Government Securities Trust .50%
Investment Quality Bond Trust .50%
Money Market Trust .50%
International Growth and Income Trust .75%
Small/Mid Cap Trust .50%
International Small Cap Trust .75%
Growth Trust .50%
</TABLE>
<PAGE> 1
EXHIBIT (5)(a)(4)
NASL SERIES TRUST
AMENDMENT TO ADVISORY AGREEMENT
AMENDMENT made this ____ day _______, 199_, to the Advisory Agreement
dated January 1, 1996, as amended June 20, 1996 and October 1, 1996 between
NASL Series Trust, a Massachusetts business trust (the "Trust") and NASL
Financial Services, Inc., a Massachusetts corporation ("NASL Financial" or the
"Adviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. CHANGE IN APPENDIX A
Appendix A to this Agreement is revised to reflect the appointment and
compensation of NASL Financial as investment adviser for the
additional portfolios (the "Portfolios") as set forth in Appendix A to
this Amendment.
2. CHANGE IN APPENDIX B
Appendix B to this Agreement is revised to include the Portfolios as
set forth in Appendix B to this Amendment.
3. EFFECTIVE DATE
This Amendment shall become effective with respect to each Portfolio
on the later of (i) the date of its execution, (ii) the effective date of the
post-effective amendment to the registration statement of NASL Series Trust
under the Securities Act of 1933 that incorporates with respect to the
Portfolio the terms of the Agreement as amended herein and (iii) the date of
the meeting of shareholders (or sole shareholder if applicable) of the
Portfolio called for the purpose of voting on this Amendment, at which meeting
this Amendment shall have been approved by the vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act of
1940, as amended) of the Portfolio.
NASL SERIES TRUST
BY:
--------------------------
NASL FINANCIAL SERVICES, INC.
BY:
--------------------------
<PAGE> 2
APPENDIX A
1. Global Equity Trust: .90% of the current net assets of the Portfolio.
2. Blue Chip Growth Trust: .925% of the current net assets of the
Portfolio.
3. Equity Trust: .75% of the current net assets of the Portfolio.
4. Equity-Income Trust: .80% of the current net assets of the Portfolio.
5. Growth and Income Trust: .75% of the current net assets of the
Portfolio.
6. Strategic Bond Trust: .775% of the current net assets of the
Portfolio.
7. Global Government Bond Trust: .80% of the current net assets of the
Portfolio.
8. Investment Quality Bond Trust: .65% of the current net assets of the
Portfolio.
9. U.S. Government Securities Trust: .65% of the current net assets of
the Portfolio.
10. Money Market Trust: .50% of the current net assets of the Portfolio.
11. Aggressive Asset Allocation Trust: .75% of the current net assets of
the Portfolio.
12. Moderate Asset Allocation Trust: .75% of the net assets of the
Portfolio.
13. Conservative Asset Allocation Trust: .75% of the net assets of the
Portfolio.
14. International Growth and Income Trust: .95% of the net assets of the
Portfolio.
15. Small/Mid Cap Trust: 1.0% of the net assets of the Portfolio.
16. International Small Cap Trust: 1.10% of the net assets of the
Portfolio.
17. Growth Trust: .85% of the net assets of the Portfolio.
18. Value Trust: .80% of the current net assets of the Portfolio.
<PAGE> 3
3
19. High Yield Trust: .775% of the current net assets of the Portfolio.
20. International Stock Trust: 1.05% of the current net assets of the
Portfolio.
21. Science & Technology Trust: 1.10% of the current net assets of the
Portfolio.
22. Balanced Trust: .80% of the current net assets of the Portfolio.
23. Worldwide Growth Trust: 1.00% of the current net assets of the
Portfolio.
24. Emerging Growth Trust: 1.05% of the current net assets of the
Portfolio.
25. Pilgrim Baxter Growth Trust: 1.10% of the current net assets of the
Portfolio.
26. Pacific Rim Emerging Markets Trust: .85% of the current net assets of
the Portfolio.
27. Real Estate Securities Trust: .70% of the current net assets of the
Portfolio.
28. Capital Growth Bond Trust: .65% of the current net assets of the
Portfolio.
29. Equity Index Trust: .25% of the current net assets of the Portfolio.
30. Common Stock Trust: .70% of the current net assets of the Portfolio.
The Percentage Fee for each Portfolio shall be accrued for
each calendar day and the sum of the daily fee accruals shall be payable
monthly to the Adviser. The daily fee accruals will be computed by multiplying
the fraction of one over the number of calendar days in the year by the
applicable annual rate described in the preceding paragraph, and multiplying
this product by the net assets of the Portfolio as determined in accordance
with the Trust's prospectus and statement of additional information as of the
close of business on the previous business day on which the Trust was open for
business.
If this Agreement becomes effective or terminates before the
end of any month, the fee for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such
period bears
<PAGE> 4
4
to the full month in which such effectiveness or termination occurs.
<PAGE> 5
APPENDIX B
The Expense Limit for each Portfolio for the purposes of
paragraph 2.d.i(C) shall be .50% for each Portfolio except the following:
<TABLE>
<CAPTION>
Portfolio Percent
--------- -------
<S> <C>
Global Equity Trust .75%
Global Government Bond Trust .75%
International Growth and Income Trust .75%
International Small Cap Trust .75%
International Stock Trust .75%
Worldwide Growth Trust .75%
Pacific Rim Emerging Markets Trust .75%
Equity Index .15%
</TABLE>
<PAGE> 1
EXHIBIT (5)(b)(xii)
AMENDMENT TO
SUBADVISORY AGREEMENT
NASL SERIES TRUST
AMENDMENT made as of this ____ day of ________, 199_ to the
Subadvisory Agreement dated January 4, 1996, as amended June 20, 1996, (the
"Agreement"), between NASL Financial Services, Inc., a Massachusetts
corporation (the "Adviser"), and Founders Asset Management, Inc., a Delaware
corporation (the "Subadviser"). In consideration of the mutual covenants
contained herein, the parties agree as follows:
1. CHANGE IN APPENDIX A
Providing for the appointment and compensation of the
Subadviser for the new Balanced and Worldwide Growth Portfolios. Section 3 of
the Agreement, "Compensation of Subadviser," is hereby amended by adding an
additional portfolio to Appendix A as follows:
1. Balanced Portfolio: .375% of the first $50,000,000,
.325% between $50,000,000 and $200,000,000, .275% between $200,000,000
and $500,000,000 and .225% on the excess over $500,000,000 of the
average daily value of the net assets of the Portfolio.
2. Worldwide Growth Portfolio: .600% of the first
$50,000,000, .550% between $50,000,000 and $200,000,000, .450% between
$200,000,000 and $500,000,000 and .350% on the excess over
$500,000,000 of the average daily value of the net assets of the
Portfolio.
2. SUBADVISORY AGREEMENT
In all other respects, the Agreement is confirmed and remains
in full force and effect.
3. EFFECTIVE DATE
This Amendment shall become effective with respect to each
Portfolio on the later of: (i) the date of its execution, (ii) the effective
date of the post-effective amendment to the registration statement of NASL
Series Trust under the Securities Act of 1933 that incorporates with respect to
the Portfolio the terms of the Agreement as amended herein and (iii) the date
of the meeting of shareholders (or sole shareholder if applicable) of the
Portfolio called for the purpose of voting on this Amendment, at which meeting
this Amendment shall have been approved by the vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act of
1940, as amended) of the Portfolio.
<PAGE> 2
2
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed under seal by their duly authorized officers as of the
date first mentioned above.
NASL FINANCIAL SERVICES, INC.
By:
--------------------------
Founders Asset Management, Inc.
By:
--------------------------
<PAGE> 1
EXHIBIT (5)(b)(xiv)
NASL SERIES TRUST
SUBADVISORY AGREEMENT
AGREEMENT made this ____ day of ________, 199_, between NASL
Financial Services, Inc., a Massachusetts corporation ("NASL Financial" or the
"Adviser"), and Rowe Price-Fleming International, Inc., a Maryland Corporation
(the "Subadviser"). In consideration of the mutual covenants contained herein,
the parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to,
and, subject to the supervision of the Trustees of NASL Series Trust (the
"Trust") and the terms of this Agreement, to manage the investment and
reinvestment of the assets of the Portfolios specified in Appendix A to this
Agreement as it shall be amended by the Adviser and the Subadviser from time to
time (the "Portfolios"). The Subadviser will be an independent contractor and
will have no authority to act for or represent the Trust or Adviser in any way
except as expressly authorized in this Agreement or another writing by the
Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of
the Trust, the Subadviser will manage the investments and
determine the composition of the assets of the Portfolios in
accordance with the Portfolios' registration statement, as
amended. In fulfilling its obligations to manage the
investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy
generally and individual companies or industries the
securities of which are included in the Portfolios or
are under consideration for inclusion in the
Portfolios;
ii. formulate and implement a continuous investment
program for each Portfolio consistent with the
investment objectives and related investment policies
for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these
investment programs by the purchase and sale of
securities including the placing of orders for such
purchases and sales;
iv. regularly report to the Trustees of the Trust with
respect to the implementation of these investment
programs; and
<PAGE> 2
2
v. provide assistance to the Trust's Custodian regarding
the fair value of securities held by the Portfolios
for which market quotations are not readily
available.
b. The Subadviser, at its expense, will furnish (i) all necessary
investment and management facilities, including salaries of
personnel required for it to execute its duties faithfully,
and (ii) administrative facilities, including bookkeeping,
clerical personnel and equipment necessary for the efficient
conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting
services).
c. The Subadviser will select brokers and dealers to effect all
transactions subject to the following conditions: The
Subadviser will place all orders with brokers, dealers, or
issuers, and will negotiate brokerage commissions if
applicable. The Subadviser is directed at all times to seek
to execute brokerage transactions for the Portfolios in
accordance with such policies or practices as may be
established by the trustees and described in the Trust's
registration statement as amended. The Subadviser may pay a
broker-dealer which provides research and brokerage services a
higher spread or commission for a particular transaction than
otherwise might have been charged by another broker-dealer, if
the Subadviser determines that the higher spread or commission
is reasonable in relation to the value of the brokerage and
research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's
overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the
Subadviser's other clients, or make available to companies
affiliated with the Subadviser or to its directors for the
benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. On occasions when the Subadviser deems the purchase or sale of
a security to be in the best interest of the Portfolio as well
as other clients of the Subadviser, the Subadviser to the
extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities to
be purchased or sold to attempt to obtain a more favorable
price or lower brokerage commissions and efficient execution.
In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction,
will be made by the Subadviser in the manner the Subadviser
considers to be the most
<PAGE> 3
3
equitable and consistent with its fiduciary obligations to the
Portfolio and to its other clients.
e. The Subadviser will maintain all accounts, books and records
with respect to the Portfolios as are required of an
investment adviser of a registered investment company pursuant
to the Investment Company Act of 1940 (the "Investment Company
Act") and Investment Advisers Act of 1940 (the "Investment
Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each
Portfolio the compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its employees shall be
liable to the Adviser or Trust for any loss suffered by the Adviser or Trust
resulting from any error of judgment made in the good faith exercise of the
Subadviser's investment discretion in connection with selecting Portfolio
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the
Subadviser or any of its partners or employees; and neither the Subadviser nor
any of its employees shall be liable to the Adviser or Trust for any loss
suffered by the Adviser or Trust resulting from any other matters to which this
Agreement relates (i.e., those other matters specified in Sections 2 and 8 of
this Agreement), except for losses resulting from willful misfeasance, bad
faith, or gross negligence in the performance of, or from disregard of, the
duties of the Subadviser or any of its partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons
affiliated with the Subadviser to better enable it to fulfill its obligations
under this Agreement for the provision of certain personnel and facilities to
the Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and
shareholders of the Trust are or may be interested in the Subadviser as
trustees, officers, partners or otherwise; that directors, officers, agents and
partners of the Subadviser are or may be interested in the Trust as trustees,
officers, shareholders or otherwise; that the Subadviser may be interested in
the Trust; and that the existence of any such dual interest shall not affect
the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Trust and the
Certificate of
<PAGE> 4
4
Incorporation of the Subadviser, respectively, or by specific provision of
applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and
administrative bodies having jurisdiction over the services provided pursuant
to this Agreement any information, reports or other material which any such
body by reason of this Agreement may request or require pursuant to applicable
laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each
Portfolio on the later of (i) its execution, (ii) the effective date of the
registration statement of the Portfolio and (iii) with respect to each
Portfolio except the Value Equity and Blue Chip Growth Portfolios, the date of
the meeting of the shareholders of the Portfolio, at which meeting this
Agreement is approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Portfolio. The
Agreement will continue in effect for a period more than two years from the
date of its execution only so long as such continuance is specifically approved
at least annually either by the Trustees of the Trust or by a majority of the
outstanding voting securities of each of the Portfolios, provided that in
either event such continuance shall also be approved by the vote of a majority
of the Trustees of the Trust who are not interested persons (as defined in the
Investment Company Act) of any party to this Agreement cast in person at a
meeting called for the purpose of voting on such approval. The required
shareholder approval of the Agreement or of any continuance of the Agreement
shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of the series (as defined in Rule 18f-2(h) under
the Investment Company Act) of shares of that Portfolio votes to approve the
Agreement or its continuance, notwithstanding that the Agreement or its
continuance may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the
Agreement or any continuance of the Agreement, the Subadviser will continue to
act as investment subadviser with respect to such Portfolio pending the
required approval of the Agreement or its continuance or of any contract with
the Subadviser or a different adviser or subadviser or other definitive action;
provided, that the compensation received by the Subadviser in respect of such
Portfolio during such period is in compliance with Rule 15a-4 under the
Investment Company Act.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees of the Trust, by the
<PAGE> 5
5
vote of a majority of the outstanding voting securities of the Trust, or with
respect to any Portfolio by the vote of a majority of the outstanding voting
securities of such Portfolio, on sixty days' written notice to the Adviser and
the Subadviser, or by the Adviser or Subadviser on sixty days' written notice
to the Trust and the other party. This agreement will automatically terminate,
without the payment of any penalty, in the event of its assignment (as defined
in the Investment Company Act) or in the event the Advisory Agreement between
the Adviser and the Trust terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of
the occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any
jurisdiction in which the Subadviser is required to be
registered as an investment adviser in order to perform its
obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or
in equity, before or by any court, public board or body,
involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser
or the portfolio manager of any Portfolio.
10. PROVISION OF CERTAIN INFORMATION BY THE ADVISER
The Adviser shall furnish the Subadviser with copies of the
Trust's Prospectus and Statement of Additional Information, and any reports
made by the Trust to its shareholders, as soon as practicable after such
documents become available. The Adviser shall furnish the Subadviser with any
further documents, materials or information that the Subadviser may reasonably
request to enable it to perform its duties pursuant to this Agreement."
11. SERVICES TO OTHER CLIENTS
The Adviser understands, and has advised the Trust's Board of
Trustees, that the Subadviser now acts, or may in the future act, as an
investment adviser to fiduciary and other managed accounts and as investment
adviser or subadviser to other investment companies. Further, the Adviser
understands, and has advised the Trust's Board of Trustees that the Subadviser
and its affiliates may give advice and take action for its accounts, including
investment companies, which differs from advice given on the timing or nature
of action taken for the Portfolio. The Subadviser is not obligated to initiate
transaction for the
<PAGE> 6
6
Portfolio in any security which the Subadviser, its principals, affiliates or
employees may purchase or sell for their own accounts or other clients.
12. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such
amendment is specifically approved by the vote of a majority of the outstanding
voting securities of each of the Portfolios affected by the amendment and by
the vote of a majority of the Trustees of the Trust who are not interested
persons of any party to this Agreement cast in person at a meeting called for
the purpose of voting on such approval. The required shareholder approval
shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of that Portfolio vote to approve the amendment,
notwithstanding that the amendment may not have been approved by a majority of
the outstanding voting securities of (a) any other Portfolio affected by the
amendment or (b) all the portfolios of the Trust.
13. ENTIRE AGREEMENT
This Agreement contains the entire understanding and
agreement of the parties.
14. HEADINGS
The headings in the sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part hereof.
15. NOTICES
All notices required to be given pursuant to this Agreement
shall be delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
16. SEVERABILITY
Should any portion of this Agreement for any reason be held to
be void in law or in equity, the Agreement shall be construed, insofar as is
possible, as if such portion had never been contained herein.
17. GOVERNING LAW
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of The Commonwealth of Massachusetts,
or any of the applicable provisions of the Investment Company Act. To the
extent that the laws of The
<PAGE> 7
7
Commonwealth of Massachusetts, or any of the provisions in this Agreement,
conflict with applicable provisions of the Investment Company Act, the latter
shall control.
18. LIMITATION OF LIABILITY
The Agreement and Declaration of Trust dated September 28,
1988, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth
of Massachusetts, provides that the name "NASL Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in
connection with the affairs of the Trust or any portfolio thereof, but only the
assets belonging to the Trust, or to the particular portfolio with which the
obligee or claimant dealt, shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed under seal by their duly authorized officers as of the
date first mentioned above.
[SEAL] NASL Financial Services, Inc.
by:
--------------------------
[SEAL] Rowe Price-Fleming International, Inc.
by:
--------------------------
<PAGE> 8
APPENDIX A
The Subadviser shall serve as investment subadviser for the
following portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the
"Subadviser Percentage Fee"):
International Stock Portfolio: .750% of the first
$20,000,000,.600% between $20,000,000 and $50,000,000, .500%
between $50,000,000 and $200,000,000, .500% between
$200,000,000 and $500,000,000 and .450% on the excess over
$500,000,000 of the current value of the net assets of the
Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be
accrued for each calendar day and the sum of the daily fee accruals shall be
paid monthly to the Subadviser. The daily fee accruals will be computed by
multiplying the fraction of one over the number of calendar days in the year by
the applicable annual rate described in the preceding paragraph, and
multiplying this product by the net assets of the Portfolio as determined in
accordance with the Trust's prospectus and statement of additional information
as of the close of business on the previous business day on which the Trust was
open for business.
If this Agreement becomes effective or terminates before the
end of any month, the fee (if any) for the period from the effective date to
the end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
which such period bears to the full month in which such effectiveness or
termination occurs.
<PAGE> 1
EXHIBIT (5)(b)(xvii)
NASL SERIES TRUST
SUBADVISORY AGREEMENT
AGREEMENT made this ____ day of _______, 1996, between NASL
Financial Services, Inc., a Massachusetts corporation ("NASL Financial" or the
"Adviser"), and Warburg Pincus Counsellors, Inc., a __________ Corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to,
and, subject to the supervision of the Trustees of NASL Series Trust (the
"Trust") and the terms of this Agreement, to manage the investment and
reinvestment of the assets of the Portfolios specified in Appendix A to this
Agreement as it shall be amended by the Adviser and the Subadviser from time to
time (the "Portfolios"). The Subadviser will be an independent contractor and
will have no authority to act for or represent the Trust or Adviser in any way
except as expressly authorized in this Agreement or another writing by the
Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of
the Trust, the Subadviser will manage the investments and
determine the composition of the assets of the Portfolios in
accordance with the Portfolios' registration statement, as
amended. In fulfilling its obligations to manage the
investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy
generally and individual companies or industries the
securities of which are included in the Portfolios or
are under consideration for inclusion in the
Portfolios;
ii. formulate and implement a continuous investment
program for each Portfolio consistent with the
investment objectives and related investment policies
for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these
investment programs by the purchase and sale of
securities including the placing of orders for such
purchases and sales;
iv. regularly report to the Trustees of the Trust with
respect to the implementation of these investment
programs; and
<PAGE> 2
2
v. provide assistance to the Trust's Custodian regarding
the fair value of securities held by the Portfolios
for which market quotations are not readily
available.
b. The Subadviser, at its expense, will furnish (i) all necessary
investment and management facilities, including salaries of
personnel required for it to execute its duties faithfully,
and (ii) administrative facilities, including bookkeeping,
clerical personnel and equipment necessary for the efficient
conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting
services).
c. The Subadviser will select brokers and dealers to effect all
transactions subject to the following conditions: The
Subadviser will place all orders with brokers, dealers, or
issuers, and will negotiate brokerage commissions if
applicable. The Subadviser is directed at all times to seek
to execute brokerage transactions for the Portfolios in
accordance with such policies or practices as may be
established by the Trustees and described in the Trust's
registration statement as amended. The Subadviser may pay a
broker-dealer which provides research and brokerage services a
higher spread or commission for a particular transaction than
otherwise might have been charged by another broker-dealer, if
the Subadviser determines that the higher spread or commission
is reasonable in relation to the value of the brokerage and
research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's
overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the
Subadviser's other clients, or make available to companies
affiliated with the Subadviser or to its directors for the
benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. On occasions when the Subadviser deems the purchase or sale of
a security to be in the best interest of the Portfolio as well
as other clients of the Subadviser, the Subadviser to the
extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities to
be purchased or sold to attempt to obtain a more favorable
price or lower brokerage commissions and efficient execution.
In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction,
will be made by the Subadviser in the manner the Subadviser
considers to be the most
<PAGE> 3
3
equitable and consistent with its fiduciary obligations to the
Portfolio and to its other clients.
e. The Subadviser will maintain all accounts, books and records
with respect to the Portfolios as are required of an
investment adviser of a registered investment company pursuant
to the Investment Company Act of 1940 (the "Investment Company
Act") and Investment Advisers Act of 1940 (the "Investment
Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each
Portfolio the compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its employees shall be
liable to the Adviser or Trust for any loss suffered by the Adviser or Trust
resulting from any error of judgment made in the good faith exercise of the
Subadviser's investment discretion in connection with selecting Portfolio
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the
Subadviser or any of its partners or employees; and neither the Subadviser nor
any of its employees shall be liable to the Adviser or Trust for any loss
suffered by the Adviser or Trust resulting from any other matters to which this
Agreement relates (i.e., those other matters specified in Sections 2 and 8 of
this Agreement), except for losses resulting from willful misfeasance, bad
faith, or gross negligence in the performance of, or from disregard of, the
duties of the Subadviser or any of its partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons
affiliated with the Subadviser to better enable it to fulfill its obligations
under this Agreement for the provision of certain personnel and facilities to
the Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and
shareholders of the Trust are or may be interested in the Subadviser as
trustees, officers, partners or otherwise; that directors, officers, agents and
partners of the Subadviser are or may be interested in the Trust as trustees,
officers, shareholders or otherwise; that the Subadviser may be interested in
the Trust; and that the existence of any such dual interest shall not affect
the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Trust and the
Certificate of
<PAGE> 4
4
Incorporation of the Subadviser, respectively, or by specific provision of
applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and
administrative bodies having jurisdiction over the services provided pursuant
to this Agreement any information, reports or other material which any such
body by reason of this Agreement may request or require pursuant to applicable
laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each
Portfolio on the later of (i) its execution, (ii) the effective date of the
registration statement of the Portfolio and (iii) with respect to each
Portfolio except the Value Equity and Blue Chip Growth Portfolios, the date of
the meeting of the shareholders of the Portfolio, at which meeting this
Agreement is approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Portfolio. The
Agreement will continue in effect for a period more than two years from the
date of its execution only so long as such continuance is specifically approved
at least annually either by the Trustees of the Trust or by a majority of the
outstanding voting securities of each of the Portfolios, provided that in
either event such continuance shall also be approved by the vote of a majority
of the Trustees of the Trust who are not interested persons (as defined in the
Investment Company Act) of any party to this Agreement cast in person at a
meeting called for the purpose of voting on such approval. The required
shareholder approval of the Agreement or of any continuance of the Agreement
shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of the series (as defined in Rule 18f-2(h) under
the Investment Company Act) of shares of that Portfolio votes to approve the
Agreement or its continuance, notwithstanding that the Agreement or its
continuance may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the
Agreement or any continuance of the Agreement, the Subadviser will continue to
act as investment subadviser with respect to such Portfolio pending the
required approval of the Agreement or its continuance or of any contract with
the Subadviser or a different adviser or subadviser or other definitive action;
provided, that the compensation received by the Subadviser in respect of such
Portfolio during such period is in compliance with Rule 15a-4 under the
Investment Company Act.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees of the Trust, by the
<PAGE> 5
5
vote of a majority of the outstanding voting securities of the Trust, or with
respect to any Portfolio by the vote of a majority of the outstanding voting
securities of such Portfolio, on sixty days' written notice to the Adviser and
the Subadviser, or by the Adviser or Subadviser on sixty days' written notice
to the Trust and the other party. This agreement will automatically terminate,
without the payment of any penalty, in the event of its assignment (as defined
in the Investment Company Act) or in the event the Advisory Agreement between
the Adviser and the Trust terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of
the occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any
jurisdiction in which the Subadviser is required to be
registered as an investment adviser in order to perform its
obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or
in equity, before or by any court, public board or body,
involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser
or the portfolio manager of any Portfolio.
10. SERVICES TO OTHER CLIENTS
The Adviser understands, and has advised the Trust's Board of
Trustees, that the Subadviser now acts, or may in the future act, as an
investment adviser to fiduciary and other managed accounts and as investment
adviser or subadviser to other investment companies. Further, the Adviser
understands, and has advised the Trust's Board of Trustees that the Subadviser
and its affiliates may give advice and take action for its accounts, including
investment companies, which differs from advice given on the timing or nature
of action taken for the Portfolio. The Subadviser is not obligated to initiate
transaction for the Portfolio in any security which the Subadviser, its
principals, affiliates or employees may purchase or sell for their own accounts
or other clients.
11. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such
amendment is specifically approved by the vote of a majority of the outstanding
voting securities of each of the Portfolios affected by the amendment and by
the vote of a majority of the Trustees of the Trust who are not interested
persons of any party
<PAGE> 6
6
to this Agreement cast in person at a meeting called for the purpose of voting
on such approval. The required shareholder approval shall be effective with
respect to any Portfolio if a majority of the outstanding voting securities of
that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
12. ENTIRE AGREEMENT
This Agreement contains the entire understanding and
agreement of the parties.
13. HEADINGS
The headings in the sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part hereof.
14. NOTICES
All notices required to be given pursuant to this Agreement
shall be delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
15. SEVERABILITY
Should any portion of this Agreement for any reason be held to
be void in law or in equity, the Agreement shall be construed, insofar as is
possible, as if such portion had never been contained herein.
16. GOVERNING LAW
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of The Commonwealth of Massachusetts,
or any of the applicable provisions of the Investment Company Act. To the
extent that the laws of The Commonwealth of Massachusetts, or any of the
provisions in this Agreement, conflict with applicable provisions of the
Investment Company Act, the latter shall control.
17. LIMITATION OF LIABILITY
The Agreement and Declaration of Trust dated September 28,
1988, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth
of Massachusetts, provides that the name "NASL Series Trust" refers to the
Trustees under the Declaration
<PAGE> 7
7
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property, for the
satisfaction of any obligation or claim, in connection with the affairs of the
Trust or any portfolio thereof, but only the assets belonging to the Trust, or
to the particular portfolio with which the obligee or claimant dealt, shall be
liable.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed under seal by their duly authorized officers as of the
date first mentioned above.
[SEAL] NASL Financial Services, Inc.
by:
--------------------------
[SEAL] Warburg Pincus Counsellors, Inc.
by:
--------------------------
<PAGE> 8
APPENDIX A
The Subadviser shall serve as investment subadviser for the
following portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the
"Subadviser Percentage Fee"):
Emerging Growth Portfolio: .55% of the first $50,000,000,
.55% between $50,000,000 and $200,000,000, .55% between
$200,000,000 and $500,000,000 and .55% on the excess over
$500,000,000 of the current value of the net assets of the
Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be
accrued for each calendar day and the sum of the daily fee accruals shall be
paid monthly to the Subadviser. The daily fee accruals will be computed by
multiplying the fraction of one over the number of calendar days in the year by
the applicable annual rate described in the preceding paragraph, and
multiplying this product by the net assets of the Portfolio as determined in
accordance with the Trust's prospectus and statement of additional information
as of the close of business on the previous business day on which the Trust was
open for business.
If this Agreement becomes effective or terminates before the
end of any month, the fee (if any) for the period from the effective date to
the end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
which such period bears to the full month in which such effectiveness or
termination occurs.
<PAGE> 1
EXHIBIT (5)(b)(xviii)
NASL SERIES TRUST
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between NASL
Financial Services, Inc., a Massachusetts corporation ("NASL Financial" or the
"Adviser"), and Manufacturers Adviser Corporation, a Colorado Corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to,
and, subject to the supervision of the Trustees of NASL Series Trust (the
"Trust") and the terms of this Agreement to manage the investment and
reinvestment of the assets of the Portfolios specified in Appendix A to this
Agreement as it shall be amended by the Adviser and the Subadviser from time to
time (the "Portfolios"). The Subadviser will be an independent contractor and
will have no authority to act for or represent the Trust or Adviser in any way
except as expressly authorized in this Agreement or another writing by the
Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of
the Trust, the Subadviser will manage the investments and
determine the composition of the assets of the Portfolios in
accordance with the Portfolios' registration statement, as
amended. In fulfilling its obligations to manage the
investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy
generally and individual companies or industries the
securities of which are included in the Portfolios or
are under consideration for inclusion in the
Portfolios;
ii. formulate and implement a continuous investment
program for each Portfolio consistent with the
investment objectives and related investment policies
for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these
investment programs by the purchase and sale of
securities including the placing of orders for such
purchases and sales;
iv. regularly report to the Trustees of the Trust with
respect to the implementation of these investment
programs; and
<PAGE> 2
2
v. provide determinations, in accordance with procedures
and methods established by the Trustees of the Trust,
of the fair value of securities held by the
Portfolios for which market quotations are not
readily available for purposes of enabling the
Trust's Custodian to calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary
investment and management facilities, including salaries of
personnel required for it to execute its duties faithfully,
and (ii) administrative facilities, including bookkeeping,
clerical personnel and equipment necessary for the efficient
conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting
services).
c. The Subadviser will select brokers and dealers to effect all
transactions subject to the following conditions: the
Subadviser will place all orders with brokers, dealers, or
issuers, and will negotiate brokerage commissions if
applicable. The Subadviser is directed at all times to seek
to execute brokerage transactions for the Portfolios in
accordance with such policies or practices as may be
established by the Trustees and described in the Trust's
registration statement as amended. The Subadviser may pay a
broker-dealer which provides research and brokerage services a
higher spread or commission for a particular transaction than
otherwise might have been charged by another broker-dealer, if
the Subadviser determines that the higher spread or commission
is reasonable in relation to the value of the brokerage and
research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's
overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the
Subadviser's other clients, or make available to companies
affiliated with the Subadviser or to its directors for the
benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. The Subadviser will maintain all accounts, books and records
with respect to the Portfolios as are required of an
investment adviser of a registered investment company pursuant
to the Investment Company Act of 1940 (the "Investment Company
Act") and Investment Advisers Act of 1940 (the "Investment
Advisers Act") and the rules thereunder.
<PAGE> 3
3
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each
Portfolio the compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its officers or employees
shall be liable to the Adviser or Trust for any loss suffered by the Adviser or
Trust resulting from any error of judgment made in the good faith exercise of
the Subadviser's investment discretion in connection with selecting Portfolio
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the
Subadviser or any of its officers or employees; and neither the Subadviser nor
any of its officers or employees shall be liable to the Adviser or Trust for
any loss suffered by the Adviser or Trust resulting from any other matters to
which this Agreement relates (i.e., those other matters specified in Sections 2
and 8 of this Agreement), except for losses resulting from willful misfeasance,
bad faith, or gross negligence in the performance of, or from disregard of, the
duties of the Subadviser or any of its employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons
affiliated with the Subadviser to better enable it to fulfill its obligations
under this Agreement for the provision of certain personnel and facilities to
the Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and
shareholders of the Trust are or may be interested in the Subadviser as
trustees, officers or otherwise; that directors, officers and agents of the
Subadviser are or may be interested in the Trust as trustees, officers,
shareholders or otherwise; that the Subadviser may be interested in the Trust;
and that the existence of any such dual interest shall not affect the validity
hereof or of any transactions hereunder except as otherwise provided in the
Agreement and Declaration of Trust of the Trust and the Certificate of
Incorporation of the Subadviser, respectively, or by specific provision of
applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and
administrative bodies having jurisdiction over the services provided pursuant
to this Agreement any information, reports or other material which any such
body by reason of this Agreement may request or require pursuant to applicable
laws and regulations.
<PAGE> 4
4
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each
Portfolio on the later of (i) its execution, (ii) the effective date of the
registration statement of the Portfolio and (iii) with respect to each
Portfolio except the Money Market Portfolio, the date of the meeting of the
shareholders of the Portfolio, at which meeting this Agreement is approved by
the vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Portfolio. The Agreement will continue in
effect for a period more than two years from the date of its execution only so
long as such continuance is specifically approved at least annually either by
the Trustees of the Trust or by a majority of the outstanding voting securities
of each of the Portfolios, provided that in either event such continuance shall
also be approved by the vote of a majority of the Trustees of the Trust who are
not interested persons (as defined in the Investment Company Act) of any party
to this Agreement cast in person at a meeting called for the purpose of voting
on such approval. The required shareholder approval of the Agreement or of any
continuance of the Agreement shall be effective with respect to any Portfolio
if a majority of the outstanding voting securities of the series (as defined in
Rule 18f-2(h) under the Investment Company Act) of shares of that Portfolio
votes to approve the Agreement or its continuance, notwithstanding that the
Agreement or its continuance may not have been approved by a majority of the
outstanding voting securities of (a) any other Portfolio affected by the
Agreement or (b) all the portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the
Agreement or any continuance of the Agreement, the Subadviser will continue to
act as investment subadviser with respect to such Portfolio pending the
required approval of the Agreement or its continuance or of any contract with
the Subadviser or a different adviser or subadviser or other definitive action;
provided, that the compensation received by the Subadviser in respect of such
Portfolio during such period is in compliance with Rule 15a-4 under the
Investment Company Act.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees of the Trust, by the vote of a majority
of the outstanding voting securities of the Trust, or with respect to any
Portfolio by the vote of a majority of the outstanding voting securities of
such Portfolio, on sixty days' written notice to the Adviser and the
Subadviser, or by the Adviser or Subadviser on sixty days' written notice to
the Trust and the other party. This agreement will automatically terminate,
without the payment of any penalty, in the event of its assignment (as defined
in the Investment Company Act) or in the event the Advisory Agreement between
the Adviser and the Trust terminates for any reason.
<PAGE> 5
5
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of
the occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any
jurisdiction in which the Subadviser is required to be
registered as an investment adviser in order to perform its
obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or
in equity, before or by any court, public board or body,
involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser
or the portfolio manager of any Portfolio.
10. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such
amendment is specifically approved by the vote of a majority of the outstanding
voting securities of each of the Portfolios affected by the amendment and by
the vote of a majority of the Trustees of the Trust who are not interested
persons of any party to this Agreement cast in person at a meeting called for
the purpose of voting on such approval. The required shareholder approval
shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of that Portfolio vote to approve the amendment,
notwithstanding that the amendment may not have been approved by a majority of
the outstanding voting securities of (a) any other Portfolio affected by the
amendment or (b) all the portfolios of the Trust.
11. ENTIRE AGREEMENT
This Agreement contains the entire understanding and
agreement of the parties.
12. HEADINGS
The headings in the sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part hereof.
13. NOTICES
All notices required to be given pursuant to this Agreement
shall be delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given
<PAGE> 6
6
on the date delivered or mailed in accordance with this paragraph.
14. SEVERABILITY
Should any portion of this Agreement for any reason be held to
be void in law or in equity, the Agreement shall be construed, insofar as is
possible, as if such portion had never been contained herein.
15. GOVERNING LAW
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of The Commonwealth of Massachusetts,
or any of the applicable provisions of the Investment Company Act. To the
extent that the laws of The Commonwealth of Massachusetts, or any of the
provisions in this Agreement, conflict with applicable provisions of the
Investment Company Act, the latter shall control.
16. LIMITATION OF LIABILITY
The Agreement and Declaration of Trust dated September 28,
1988, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth
of Massachusetts, provides that the name "NASL Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in
connection with the affairs of the Trust or any portfolio thereof, but only the
assets belonging to the Trust, or to the particular portfolio with which the
obligee or claimant dealt, shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed under seal by their duly authorized officers as of the
date first mentioned above.
[SEAL] NASL Financial Services, Inc.
by:
--------------------------
[SEAL] Manufacturers Adviser Corporation
by:
--------------------------
<PAGE> 7
APPENDIX A
The Subadviser shall serve as investment subadviser for the
following portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the
"Subadviser Percentage Fee"):
Money Market Portfolio: .075% of the first $50,000,000, .075%
between $50,000,000 and $200,000,000, .075% between
$200,000,000 and $500,000,000 and .020% on the excess over
$500,000,000 of the current value of the net assets of the
Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be
accrued for each calendar day and the sum of the daily fee accruals shall be
paid monthly to the Subadviser. The daily fee accruals will be computed by
multiplying the fraction of one over the number of calendar days in the year by
the applicable annual rate described in the preceding paragraph, and
multiplying this product by the net assets of the Portfolio as determined in
accordance with the Trust's prospectus and statement of additional information
as of the close of business on the previous business day on which the Trust was
open for business.
If this Agreement becomes effective or terminates before the
end of any month, the fee (if any) for the period from the effective date to
the end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
which such period bears to the full month in which such effectiveness or
termination occurs.
<PAGE> 1
EXHIBIT (5)(b)(xix)
AMENDMENT TO
SUBADVISORY AGREEMENT
NASL SERIES TRUST
AMENDMENT made as of this ____ day of _______ 199_ to the
Subadvisory Agreement dated October 1, 1996 (the "Agreement"), between NASL
Financial Services, Inc., a Massachusetts corporation (the "Adviser"), and
Manufacturers Adviser Corporation, a Colorado corporation (the "Subadviser").
In consideration of the mutual covenants contained herein, the parties agree as
follows:
1. CHANGE IN APPENDIX A
Providing for the appointment and compensation of the
Subadviser for the new Pacific Rim Emerging Markets, Real Estate Securities,
Capital Growth Bond, Equity Index and Common Stock Portfolios. Section 3 of
the Agreement, "Compensation of Subadviser," is hereby amended by adding an
additional portfolio to Appendix A as follows:
1. Pacific Rim Emerging Markets Portfolio: .400% of the
first $50,000,000, .350% between $50,000,000 and $200,000,000, .275%
between $200,000,000 and $500,000,000 and .225% on the excess over
$500,000,000 of the average daily value of the net assets of the
Portfolio.
2. Real Estate Securities Portfolio: .275% of the first
$50,000,000, .225% between $50,000,000 and $200,000,000, .175% between
$200,000,000 and $500,000,000 and .150% on the excess over
$500,000,000 of the average daily value of the net assets of the
Portfolio.
3. Capital Growth Bond Portfolio: .225% of the first
$50,000,000, .225% between $50,000,000 and $200,000,000, .150% between
$200,000,000 and $500,000,000 and .100% on the excess over
$500,000,000 of the average daily value of the net assets of the
Portfolio.
4. Equity Index Portfolio: .150% of the first
$50,000,000, .150% between $50,000,000 and $200,000,000, .100% between
$200,000,000 and $500,000,000 and .100% on the excess over
$500,000,000 of the average daily value of the net assets of the
Portfolio.
5. Common Stock Portfolio: .275% of the first
$50,000,000, .225% between $50,000,000 and $200,000,000, .175% between
$200,000,000 and $500,000,000 and .150% on the excess over
$500,000,000 of the average daily value of the net assets of the
Portfolio.
<PAGE> 2
2
2. SUBADVISORY AGREEMENT
In all other respects, the Agreement is confirmed and remains
in full force and effect.
3. EFFECTIVE DATE
This Amendment shall become effective with respect to each
Portfolio on the later of: (i) the date of its execution, (ii) the effective
date of the post-effective amendment to the registration statement of NASL
Series Trust under the Securities Act of 1933 that incorporates with respect to
the Portfolio the terms of the Agreement as amended herein and (iii) the date
of the meeting of shareholders (or sole shareholder if applicable) of the
Portfolio called for the purpose of voting on this Amendment, at which meeting
this Amendment shall have been approved by the vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act of
1940, as amended) of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed under seal by their duly authorized officers as of the
date first mentioned above.
NASL Financial Services, Inc.
By:
--------------------------
Manufacturers Adviser Corporation
By:
--------------------------
<PAGE> 1
NASL SERIES TRUST
POWER OF ATTORNEY
I, John D. DesPrez III, do hereby constitute and appoint James. D.
Gallagher, Richard C. Hirtle, Brian L. Moore, John G. Vyrsen and James Boyle,
or any one of them, my true and lawful attorneys to execute registration
statements to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act") and/or the Investment
Company Act of 1940, as amended (the "1940 Act"), and to do any and all acts
and things and to execute any and all instruments for me and in my name in the
capacities indicated below, which said attorney, may deem necessary or
advisable to enable NASL Series Trust (the "Trust") to comply with the 1933 Act
and the 1940 Act, and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with such registration statement,
including specifically, but without limitation, power and authority to sign for
me or in my name and in the capacities indicated below, any and all amendments
(including post-effective amendments); and I do hereby ratify and confirm all
that the said attorneys, or any of them, shall do or cause to be done by virtue
of this power of attorney.
<TABLE>
<CAPTION>
Signature Title Date
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<S> <C> <C>
John D. DesPrez III President September 26, 1996
- ------------------- ------------------
John D. DesPrez III
</TABLE>
