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Registration No. 2-94157/811-4146
As filed with the Securities and Exchange Commission
on May 13, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 32
and
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 33
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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)
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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 April 30, 1996 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
__X__ 75 days after filing pursuant to paragraph (a)
_____ on (date) pursuant to paragraph (a) 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 (Small/Mid Cap
Trust, International Small Cap Trust,
Global Equity Trust; Pasadena Growth
Trust; Equity Trust; Value Equity
Trust; Growth and Income Trust;
International Growth and Income Trust,
Strategic Bond Trust; Global Government
Bond Trust; Investment Quality Bond
Trust; U.S. Government Securities
Trust; Money Market Trust; Automatic
Asset Allocation 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
5. Management of the Trust (Advisory
Agreement; Subadvisory Agreements;
Expenses); General Information
(Custodian and Transfer and Dividend
Disbursing Agent)
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)
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)
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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
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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 seventeen separate investment portfolios, each of which issues its own
series of shares of beneficial interest.
The SMALL/MID CAP TRUST seeks long-term capital appreciation by
investing at least 65% of its assets in companies that at the time of purchase
have total market capitalization between $500 million and $5 billion
The INTERNATIONAL SMALL CAP TRUST seeks long term capital appreciation
by investing primarily in securities issued by foreign companies which have
total market capitalization or annual revenue of $1 billion or less.
THE GLOBAL EQUITY TRUST seeks long-term capital appreciation, by
investing primarily in a globally diversified portfolio of common stocks and
securities convertible into or exercisable for common stocks.
THE PASADENA GROWTH TRUST seeks to achieve long-term growth of capital
by emphasizing investments in companies with rapidly growing earnings per share,
some of which may be smaller emerging growth companies.
THE EQUITY TRUST seeks growth of capital, by investing primarily in
common stocks of United States issuers and securities convertible into or
carrying the right to buy common stocks.
The GROWTH TRUST seeks long-term growth of capital by investing at
least 65% of its assets in common stocks of well-established, high-quality
growth companies.
THE VALUE EQUITY TRUST seeks long-term growth of capital by investing
primarily in common stocks and securities convertible into or carrying the right
to buy common stocks.
THE GROWTH AND INCOME TRUST seeks long-term growth of capital and
income, consistent with prudent investment risk, by investing primarily in a
diversified portfolio of common stocks of United States issuers which the
Subadviser believes are of high quality.
THE INTERNATIONAL GROWTH AND INCOME TRUST seeks long-term growth of
capital and income by investing primarily in a portfolio of securities of
foreign issuers.
THE STRATEGIC BOND TRUST seeks a high level of total return consistent
with preservation of capital by giving its Subadviser broad discretion to deploy
the portfolio's assets among certain segments of the fixed-income market as the
Subadviser believes will best contribute to achievement of the portfolio's
investment objective.
THE GLOBAL GOVERNMENT BOND TRUST seeks a high level of total return by
placing primary emphasis on high current income and the preservation of capital,
by investing primarily in a global portfolio of high-quality, fixed-income
securities of foreign and United States governmental entities and supranational
issuers.
THE INVESTMENT QUALITY BOND TRUST seeks a high level of current income
consistent with the maintenance of principal and liquidity, by investing
primarily in a diversified portfolio of investment grade corporate bonds and
U.S. Government bonds with intermediate to longer term maturities. Up to 20% of
the portfolio's assets may be invested in below investment grade debt
securities.
THE U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current
income consistent with preservation of capital and maintenance of liquidity, by
investing 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 MONEY MARKET TRUST seeks maximum current income consistent with
preservation of principal and liquidity, by investing in high quality money
market instruments with maturities of 397 days or less issued primarily by
United States entities.
THE AGGRESSIVE ASSET ALLOCATION TRUST seeks the highest total return
consistent with an aggressive level of risk tolerance. This Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 15%
over any twelve month period.
THE MODERATE ASSET ALLOCATION TRUST seeks 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
twelve month period.
THE CONSERVATIVE ASSET ALLOCATION TRUST seeks 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 twelve month period. THERE CAN BE NO ASSURANCE THAT THE LIMITS IN
PORTFOLIO DECLINE SET FORTH ABOVE FOR THE AUTOMATIC ASSET ALLOCATION TRUSTS WILL
NOT BE EXCEEDED.
In pursuing their investment objectives, the Strategic Bond Trust reserves the
right to invest without limitation, and the Investment Quality Bond Trust may
invest up to 20% of its 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 Strategic Bond Trust. 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. 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 July __, 1996.
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NASL SERIES TRUST
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SYNOPSIS ..........................................................................................................
FINANCIAL HIGHLIGHTS ..............................................................................................
INVESTMENT OBJECTIVES AND POLICIES.................................................................................
Small/Mid Cap Trust.........................................................................................
International Small Cap Trust...............................................................................
Global Equity Trust ........................................................................................
Pasadena Growth Trust ......................................................................................
Equity Trust ...............................................................................................
Growth Trust................................................................................................
Value Equity Trust .........................................................................................
Growth and Income Trust ....................................................................................
International Growth and Income Trust ......................................................................
Strategic Bond Trust .......................................................................................
Global Government Bond Trust ...............................................................................
Investment Quality Bond Trust ..............................................................................
U.S. Government Securities Trust ...........................................................................
Money Market Trust .........................................................................................
Automatic Asset Allocation 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 ...........................................................................................
GENERAL INFORMATION ...............................................................................................
Shares of the Trust ........................................................................................
Taxes ......................................................................................................
Dividends ..................................................................................................
Purchase and Redemption of Shares ..........................................................................
Custodian ..................................................................................................
Appendix I - Debt Security Ratings ................................................................................
Appendix II - Strategic Bond Trust Debt Ratings....................................................................
</TABLE>
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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.
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SYNOPSIS
NASL Series Trust (the "Trust") is a series trust, which means that it
has several portfolios, each with a stated investment objective which it pursues
through separate investment policies. Currently, there are seventeen such
portfolios: the Small/Mid Cap Trust, the International Small Cap Trust, the
Global Equity Trust, the Pasadena Growth Trust, the Equity Trust, the Growth
Trust, the Value Equity Trust, the Growth and Income Trust, the International
Growth and Income Trust, the Strategic Bond Trust, the Global Government Bond
Trust, the Investment Quality Bond Trust, the U.S. Government Securities Trust,
the Money Market Trust, the Aggressive Asset Allocation Trust, the Moderate
Asset Allocation Trust and the Conservative Asset Allocation Trust. (The
Aggressive, Moderate and Conservative Asset Allocation Trusts are referred to
collectively as the "Automatic Asset Allocation Trusts.") The investment
objective of each of the seventeen portfolios is as described on the cover page
of this Prospectus.
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 "Investment Restrictions."
The investment adviser of the Trust is NASL Financial Services, Inc.
("NASL Financial" or the "Adviser"). The Trust currently has nine Subadvisers.
Fred Alger Management, Inc. ("Alger") serves as Subadviser to the Small/Mid Cap
Trust. Founders Asset Management, Inc. ("Founders") serves as Subadviser to the
Growth and the International Small Cap Trusts. Oechsle International Advisors,
L.P. ("Oechsle International") serves as Subadviser to the Global Equity and
Global Government Bond Trusts. Roger Engemann Management Co., Inc. ("REMC")
serves as Subadviser to the Pasadena Growth Trust. Fidelity Management Trust
Company ("FMTC") serves as Subadviser to the Equity, and the three Automatic
Asset Allocation Trusts. Goldman Sachs Asset Management ("GSAM") serves as
Subadviser to the Value Equity Trust. Wellington Management Company ("Wellington
Management") serves as Subadviser to the Growth and Income, Investment Quality
Bond and Money Market Trusts. Salomon Brothers Asset Management ("SBAM") serves
as Subadviser to the U.S. Government Securities and Strategic Bond Trusts. J.P.
Morgan Investment Management Inc. ("J.P. Morgan") serves as Subadviser to the
International Growth and Income Trust. The Adviser receives a fee from the Trust
computed separately for each portfolio 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 Equity, Value Equity,
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, is diversified for purposes of the Investment Company Act of 1940.
See "Global Government Bond Trust."
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.
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[FINANCIALS STATEMENTS TO BE FILED BY AMENDMENT]
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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 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.
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 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
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 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 or 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-deonominated 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.
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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 SMALL CAP TRUST
The investment objective of the International Small Cap Trust is to
seek long term capital appreciation. Founder 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
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 values 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. The portfolio is not required
to dispose of debt securities whose ratings are down-graded below these ratings
subsequent to the portfolio's purchase of the securities. 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 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. When the portfolio is in a defensive position,
the opportunity to achieve capital growth will be limited, and, to the exent
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."
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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, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Czech
Republic, Ecuador, Egypt, Greece, Hong Kong, Hungary, India, Indonesia, Ireland,
Israel, Jordan, Malaysia, Mexico, New Zealand, Nigeria, North Korea, Pakistan,
Paraguay, Peru, Philippines, Poland, Portugal, Singapore, Slovak Republic. South
Africa, South Korea, Spain, Sri Lanka, Taiwan, Thailand, Turkey, Uruaguay,
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.
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.
GLOBAL EQUITY TRUST
The investment objective of the Global Equity Trust is long-term
capital appreciation. Oechsle International manages the Global Equity Trust and
intends to pursue this objective by investing primarily in a globally
diversified portfolio of common stocks and securities convertible into or
exercisable for common stocks.
At least 65% of the assets of the Global Equity Trust will generally be
invested in a globally diversified portfolio of equity securities (e.g., common
and preferred stocks). Up to 35% of the assets of the Global Equity Trust may be
invested in securities convertible into or exercisable for common stocks and in
fixed income securities. Fixed income securities are discussed in the
description of the Global Government Bond Trust below. Under normal
circumstances, at least 65% of the Global Equity Trust's assets will be invested
in securities of at least three different countries. However, the Global Equity
Trust may for temporary defensive purposes choose to invest substantially all of
its assets in U.S. securities or cash and cash items. Cash is an actively
managed portfolio asset. The Global Equity Trust's cash position will reflect
Oechsle International's overall measure of optimism in the global equity
markets. If Oechsle International foresees unusual market risks, cash reserves
will be increased to reduce portfolio volatility. Cash reserves are generally
held in U.S. short-term government instruments, although non-U.S. government
securities may be held for this purpose from time to time.
Oechsle International seeks to achieve the Global Equity Trust's
investment objective of long-term capital appreciation by making investment
decisions based on a two-pronged approach of (i) choosing a limited group of
countries with strong and stable national financial markets, generally with
total capitalization in excess of $5 billion, and (ii) identifying a select
group of companies in such countries with attractive investment potential and
typical capitalization of $200 million or more. The following is a brief
description of the Oechsle International two-pronged investment approach.
Country Selection. The Global Equity Trust will seek to maximize
returns by significantly overweighing markets identified as attractive, while
reducing overall portfolio risk through broad diversification of investments
across a limited group of national markets. Broad diversification provides a
prudent method of reducing volatility while allowing the Global Equity Trust to
take advantage of the different movements of major equity markets to maximize
returns. Opportunities for global investing have broadened in recent years. For
example, in 1980 the U.S. stock market capitalization represented approximately
70% of the total world stock market capitalization and by 1990 such share had
fallen to approximately 30%.
Generally, investments will be limited to companies in countries where
total market capitalization exceeds $5 billion. The Global Equity Trust's focus
will normally be on the largest, most liquid international equity markets
including, but not limited to, the United States, Japan, the United Kingdom, the
Federal Republic of Germany, Canada, France and Italy.
Security Selection. Investments will generally be made in companies
with market capitalizations of at least $200 million. Oechsle International
focuses its research effort on exchange listed U.S. companies and a universe of
approximately 1,000 non-U.S. companies, most of which are included in either the
Morgan Stanley Capital International Europe, Australia and Far East Index or
other major international indices. The Global Equity Trust intends to purchase
and hold securities for long-term capital appreciation and does not expect to
trade for short-term gain.
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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. The
Global Equity 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. In order to
comply with limitations imposed by the State of California Insurance Department,
the Global Equity Trust will comply with the restrictions regarding foreign
investments set forth under "Risk Factors - Additional Investment Restrictions
on Borrowing and Foreign Investing."
Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Taxes" in this Prospectus. The
ability to diversify its investments among the equity markets in different
countries may, however, reduce the overall level of market risk to the extent it
may reduce the Global Equity Trust's exposure to a single market.
PASADENA GROWTH TRUST
The principal investment objective of the Pasadena Growth Trust is
long-term growth of capital by emphasizing investments in companies with rapidly
growing earnings per share, some of which may be smaller emerging growth
companies.
The Pasadena Growth Trust emphasizes the purchase of common stocks of
domestic corporations with rapidly growing earnings per share. Some of the
companies in the portfolio may be unseasoned, although most are generally
well-known and established. The Pasadena Growth Trust also invests in stocks of
companies with a market capitalization of less than $500 million and companies
that, although not growing rapidly, are undervalued by other criteria of their
fundamental net worth in the opinion of its Subadviser. The volatility of its
investment portfolio is likely to be greater than that of the Standard & Poor's
500 Stock Index and greater than that of the Value Equity or Equity Trust. For
this reason, the net asset value per share of the Pasadena Growth Trust may
fluctuate substantially and the portfolio may not be appropriate for short-term
investments. Dividend and interest income received from portfolio securities is
largely incidental.
The Pasadena Growth Trust's investments may also include preferred
stocks, warrants, convertible debt obligations and other debt obligations that,
in the Subadviser's opinion, offer the possibility of capital appreciation over
the course of approximately two or more years because of the timing of such
investments. In addition to the interest received from such debt instruments, if
interest rates fall, these instruments are likely to increase in value.
Conversely, if interest rates rise, a decrease in value can be expected. The
Pasadena Growth Trust does not, however, anticipate investing a significant
portion of its total assets in such instruments.
The debt obligations which may be acquired by the Pasadena Growth Trust
include direct and indirect obligations of the U.S. Government and its agencies,
states and municipalities and their agencies, or corporate issuers. Any
corporate debt obligations in which the Pasadena Growth Trust may invest must be
rated at least BBB or Baa or better by national agencies, or, if unrated, are,
in the Subadviser's opinion, of equivalent investment quality. Securities which
are rated "BBB" or "Baa" are generally regarded as having an adequate capacity
to pay interest and repay principal in accordance with the terms of the
obligation, but may have some speculative characteristics. In addition, such
securities are generally more sensitive to changes in economic conditions than
securities rated in the higher categories, which tend to be more sensitive to
interest rate changes. In the event that the rating for any security held in the
Pasadena Growth Trust's portfolio drops below "BBB" or "Baa" such change will be
considered by the Trust's Subadviser in evaluating the overall composition of
the Trust's portfolio.
From time to time, depending on the Subadviser's analysis of market and
other considerations, all or part of the assets of the portfolio may be held in
cash and short-term money market instruments, including obligations of the U.S.
Government, high quality commercial paper, certificates of deposit, bankers'
acceptances, bank interest bearing demand accounts, and repurchase agreements
secured by U.S. Government securities. All such investments will be made for
temporary defensive purposes to protect against the erosion of capital and
pending investment in other securities.
As a matter of operating policy, the Trust may invest in securities of
unseasoned companies. The Subadviser regards a company as unseasoned when, for
example, it is relatively new to or not yet well established in its primary line
of business. Such companies generally are smaller and younger than companies
whose shares are traded on the major stock exchanges. Accordingly, their shares
are often traded over-the-counter and their share prices may be more volatile
than those of larger, exchange-listed companies. In order to avoid undue risks,
the portfolio normally will not purchase securities of any company with a record
of fewer than three years' continuous operation (including that of
predecessors).
The Pasadena Growth Trust does not intend to engage in the purchase of
securities on a when-issued or delayed delivery basis or engage in any hedging
or other transactions described in the Statement of Additional Information under
the caption "Hedging and Other Strategic Transactions." The Pasadena Growth
Trust will be subject to certain risks as a result of its ability to invest up
to 20% of its assets in
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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.
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.
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 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 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. The Trust is not required to
dispose of debt securities whose ratings are down-graded below these ratings
subsequent to the Portfolio's purchase of the securities. See "Risk Factors -
High Yield Securities."
The Growth Trust may invest 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. When the Trust is in a defensive position, the opportunity to
achieve capital growth will be limited, and, to the extent that this assessment
of
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market conditions is incorrect, the 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 Trust 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.
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.
VALUE EQUITY TRUST
The principal investment objective of the Value Equity Trust is
long-term growth of capital. GSAM manages the Value Equity Trust and will seek
to attain its objective by investing under normal circumstances at least 65% of
its total assets in equity securities, consisting of common or preferred stocks,
including options and warrants.
The Value Equity Trust will invest primarily in securities listed on
national securities exchanges and securities traded in the "over-the-counter"
market. Under normal market conditions the Value Equity Trust may invest up to
35% of its total assets in preferred stocks, government securities, short-term
debt securities, money market instruments, cash or investment grade bonds (i.e.,
the four highest bond ratings assigned by Moody's or S&P or determined to be of
comparable quality by GSAM.) When in GSAM's opinion market or economic
conditions warrant a temporary defensive posture, the Value Equity Trust may
place any portion of its assets in these types of non-equity securities. 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 Value Equity Trust is not required to dispose of such instruments in
the event they are downgraded.
The Value Equity Trust will be subject to special 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 Value Equity 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.
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
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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.
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.
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.
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.
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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. 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.
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.
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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 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.
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
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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 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
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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."
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 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.
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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
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.
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
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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.
Wellington Management 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 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" by S&P) or, if not rated,is issued by a company which
Wellington Management 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.
Commerical 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
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Wellington Management 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 Fund 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."
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 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 twelve month 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
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(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 portfolio value in very
adverse market conditions to 15% in any twelve month 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 twelve month 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 twelve month 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 determied 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 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,
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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."
The portfolio turnover rate of each of the Trust's portfolios may vary
from year to year, as well as within a year. Higher portfolio turnover rates can
result in corresponding increases in portfolio transaction costs for a
portfolio. See "Portfolio Turnover" in the Statement of Additional Information.
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 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 similiar transactions) exceed
5% of total assets. In addition, each of the portfolios except the Global
Government Bond Trust 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 and bank obligations) 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, 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. 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.
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
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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 Trust may invest without limitation, and
the Investment Quality Bond Trust may invest up to 20% of its assets, in "high
yield" (high risk) securities. The Growth and the International Small Cap Trust
may also invest in "high yield" (high risk) securities to the extent described
above under the description of the portfolio. 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 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 Trust may invest without limitation in high yield debt
securities, an investment in that portfolio should not be considered as a
complete investment program for all investors.
Because the Strategic Bond 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
Strategic Bond and Investment Quality Bond Trusts' ability to dispose of
particular portfolio
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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 the Strategic Bond Trust or the Investment Quality Bond Trust is not
able to obtain precise or accurate market quotations for a particular security,
it will become more difficult for the Board of 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 and Investment Quality Bond Trusts 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.
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 Strategic Bond or Investment Quality
Bond Trust 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
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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, the
Strategic Bond and Investment Quality Bond Trusts may also 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
Trust, 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, Global Equity, Global Government Bond,
International Growth and Income and Strategic Bond 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 assets, the Moderate Asset
Allocation Trust up to 25% of its assets, the Conservative Asset Allocation
Trust up to 15% of its assets, and each of the other portfolios other than the
U.S. Government Securities Trust up to 20% of its assets in such securities. (In
the case of the Small/Mid Cap Trust, ADRs and U.S. dollar denominated securities
are not included in this 20% 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. Each of the portfolios, except for the Growth, International
Small Cap, Global Equity, International Growth and Income, Global Government
Bond and Strategic Bond Trusts, anticipates that its foreign investments will
consist primarily of ADRs that are regularly traded on recognized U.S. exchanges
or in the U.S. "over-the-counter" market.
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
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the repatriation of investment income, capital or the 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
and Investment Quality Bond 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 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
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
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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) 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. Although these strategies are regularly used by some
investment companies and other institutional investors, it is not presently
anticipated that any of these strategies will be used to a significant degree by
any portfolio unless otherwise specifically indicated in the description of the
portfolio contained in this Prospectus. 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.
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
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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 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.
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.
39
<PAGE> 43
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 and International Growth and Income Trusts or .50% in the case of all other
portfolios 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
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 the portfolios of the Trust.
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 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:
<TABLE>
PORTFOLIO
- -----------------------------------------------------------------------------------------------
<S> <C>
Small/Mid Cap Trust........................................... 1.000%
International Small Cap Trust................................. 1.100%
Global Equity Trust........................................... .900%
Pasadena Growth Trust......................................... .975%
Equity Trust.................................................. .750%
Growth Trust.................................................. .950%
Value Equity Trust............................................ .800%
Growth and Income Trust....................................... .750%
International Growth and Income Trust ........................ .950%
Strategic Bond Trust.......................................... .775%
Global Government Bond Trust ................................. .800%
Investment Quality Bond Trust................................. .650%
U.S. Government Securities Trust ............................. .650%
Money Market Trust............................................ .500%
Aggressive Asset Allocation Trust............................. .750%
Moderate Asset Allocation Trust............................... .750%
Conservative Asset Allocation Trust .......................... .750%
</TABLE>
The fees shown above, other than those paid by the Investment Quality Bond and
U.S. Government Securities Trusts and the Money Market Trust, are higher than
those paid by most funds to their advisers, but are not higher than the fees
paid by many funds with similar investment objectives and policies.
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-- Pasadena Growth Trust,
$5,643,363-- Equity Trust, $2,459,247-- Value Equity, $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,
40
<PAGE> 44
$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.
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 February 29, 1996 FMTC had investment management responsibility
for approximately $31.8 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 February 29, 1996 had assets under management exceeding $428.4 billion.
Fidelity Investments maintains a staff of over 100 in-house research analysts
and follows some 7000 companies worldwide.
Robert Stansky has been primarily responsible for the day-to-day
management of the Equity Trust since December 1991. 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.
Robert Stansky is presently the Portfolio Manager of the Fidelity
Growth Company Fund and the Fidelity Advisor Equity Portfolio: Growth. In
addition, Mr. Stansky has worked as an assistant on the Magellan Fund, managed
both the Emerging Growth Fund and the Fidelity Select Defense and Aerospace
Fund. Mr. Stansky has worked for Fidelity since 1983.
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"), the
subadviser to the Global Equity and Global Government Bond Trusts, 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 March 31, 1996 manages approximately $8.7 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 25 different countries, averaging 600 visits to companies annually.
Steven H. Schaefer has been primarily responsible for the day-to-day
management of the Global Equity Trust since March 1988 and since 1991 Stephen J.
Butters has shared this responsibility. Astrid Vogler has been primarily
responsible for the day-to-day management of the Global Government Bond Trust
since March 1988. Messrs. Schaefer and Butters are also portfolio managers to
North American Funds' Global Growth Fund.
Mr. Schaefer has been a General Partner and Portfolio Manager at
Oechsle International and Managing Director for the firm's London subsidiary
since 1986.
Mr. Butters works in the U.S. Equity management sector of Oechsle
International. Prior to joining Oechsle International in 1991, Mr. Butters
worked at the Putnam Management Company as Senior Vice President and Portfolio
Manager from 1982 to 1988. He also founded his own firm, Butters Lyons, in 1988
where he provided investment management services to individuals and small
business corporations.
Ms. Vogler has been a Fixed Income Portfolio Manager at Oechsle
International in Frankfurt, West Germany since 1988.
Roger Engemann Management Co., Inc. ("REMC") is the subadviser for the
Pasadena Growth Trust. The business address of REMC is 600 North Rosemead
Boulevard, Pasadena, California 91107-2138. Roger Engemann & Associates, Inc.
("RE&A"), which is a wholly-owned subsidiary of Pasadena Capital Corporation,
owns 93.5% of REMC's capital stock. Roger Engemann, controlling shareholder of
Pasadena Capital Corporation, is the Chairman of the Board and President of RE&A
and REMC. RE&A has been engaged in the business of investment management since
1969, and provides investment counseling services to retirement plans, colleges,
corporations, trusts and individuals. REMC has been in business since 1985 and
manages The Pasadena Group of Mutual Funds. The portfolio managers, research
analysts and supporting staff are substantially the same for both REMC and RE&A.
The combined assets under management of REMC and RE&A as of March 31, 1996 are
approximately $4.6 billion.
41
<PAGE> 45
Roger Engemann, James E. Mair and John S. Tilson are primarily
responsible for the day-to-day management of the Pasadena Growth Trust, and have
been since its inception.
Mr. Engemann has been the president of the Subadviser, REMC, since its
organization in 1985, and has been President of its parent, REA, since its
organization in 1969. Messrs. Mair and Tilson are both Executive Vice Presidents
and Managing Directors of portfolio management of REMC and REA, and both have
been with REMC since its inception and with REA since 1983.
Goldman Sachs Asset Management ("GSAM"), the subadviser to the Value
Equity Trust, is a separate operating division of Goldman, Sachs & Co., located
at 85 Broad Street, New York, New York 10004. The main business address of GSAM
is One New York Plaza, New York, New York 10004. GSAM also has offices in
London, Tokyo, Singapore and Sydney. Goldman, Sachs & Co. was registered as an
investment adviser in 1981 and together with its affiliates currently acts as an
investment adviser, administrator or distributor to 75 mutual fund portfolios.
As of March 27, 1996, GSAM and its affiliates managed a total of approximately
$58.5 billion of assets; approximately $39.4 billion in mutual fund assets and
approximately $19.1 billion in assets for various individual and institutional
accounts including 9 of the 50 largest U.S. Pension funds and three central
banks. Goldman, Sachs & Co. was founded in 1869, has 32 offices worldwide,
employs over 8900 individuals, and is one of the leading worldwide investment
banking and brokerage organizations and provides a broad range of financing and
investing services both in the U.S. and abroad. GSAM has access to the resources
of Goldman Sachs & Co., including its highly regarded staff of over 504 research
professionals that cover more than 1,600 companies in over 60 industries.
Mitch Cantor and Paul Farrell have been primarily responsible for the
day-to-day management of the Value Equity Trust since February 1993. Messrs.
Cantor and Farrell are senior portfolio managers for the Value Equity Trust as
well as North American Funds' Value Equity Fund.
Mitch Cantor is also a senior equity portfolio manager for the North
American Funds' Asset Allocation Fund. Mr. Cantor joined Goldman Sachs Asset
Management in 1991. Before joining GSAM, he was a senior partner at Sanford C.
Bernstein & Co. where he served as Research Director for the Investment
Management Division. Mr. Cantor was at Sanford C. Bernstein & Co. from August
1983 to October 1991.
Before joining GSAM in 1991, Paul Farrell served as a managing director
at Plaza Investments, the investment subsidiary of GEICO Corp., a major
insurance company, from February 1991 to August 1991. Mr. Farrell was previously
employed in the Investment Research Department at Goldman Sachs from June 1986
to February 1991. Mr. Farrell is a Certified Financial Analyst as well.
Wellington Management Company ("Wellington Management"), the subadviser
to the Growth and Income, Investment Quality Bond and Money Market 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 March 31, 1996, Wellington Management had
investment management authority with respect to approximately $109.2 billion of
client assets. The managing partners of Wellington Management are Robert W.
Doran, Duncan M. McFarland and John R. Ryan.
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.
John C. Keogh, Senior Vice President of Wellington Management, serves
as portfolio manager to the Money Market Trust. He has served as portfolio
manager to the Money Market Trust since December 1991, when Wellington
Management became subadviser to the Money Market Trust. Mr. Keogh also serves as
the portfolio manager for the North American Funds' Money Market Fund. Mr. Keogh
has been a portfolio manager with Wellington Management since 1983.
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 $179 billion as of
December 31, 1995. J.P. Morgan has managed international securities for
institutional investors since 1974. As of December 31, 1995, the non-U.S.
securities under J.P. Morgan's
42
<PAGE> 46
management was approximately $42 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 $2.9 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 $1.5 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 ("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 March 31, 1996, SBAM Limited, SBAM and their advisory affiliates
had investment advisory responsibility for approximately $14.3 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 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
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<PAGE> 47
sovereign debt portions of North American Fund's Strategic Income Fund, Salomon
Brothers High Income Fund, Inc, The Emerging Markets 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 employee related benefit issues. He received a BSc in
Mathematics and Economics from Nottingham University.
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 December 31, 1995 had approximately $4.8
billion under management, including $3 billion in mutual fund accounts and $ 1.8
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.
Investment decisions for the Growth and International Small Cap Trust
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, Chief Investment Officer and Chairman of Founders, owns 100% of the
voting stock of Founders. As of March 31, 1996, Founders had approximatelly $3.5
billion of assets under management, including $2.8 billion in mutual fund
accounts and $.7 billion in other advisory accounts.
To facilitate the day-to-day investment management of the Growth and
the International Small Cap Trust, 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 Trust. Mr. Gerding is a
chartered financial analyst who has been part of Founders' investment department
for five years. Mr. Gerding is the lead portfolio manager of the International
Small Cap Trust. 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.
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 art degree in economics.
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. In addition, the subadviser
to the Pasadena Growth Trust has agreed to reimburse the Pasadena Growth
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<PAGE> 48
Trust for its "Other Expenses," as defined in the Subadvisory Agreement and set
forth in the Statement of Additional Information, to a maximum on an annual
basis of .15% of the average net assets of the Pasadena Growth Trust.
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>
Small/Mid Cap Trust ............. .525% .500% .475% .450%
International Small Cap Trust ... .650% .600% .500% .400%
Global Equity Trust ............. .500% .450% .375% .325%
Pasadena Growth Trust ........... .550% .500% .450% .375%
Equity Trust .................... .325% .275% .225% .150%
Growth Trust .................... .500% .450% .425% .400%
Value Equity Trust .............. .400% .300% .200% .200%
Growth and Income Trust ......... .325% .275% .225% .150%
International Growth and
Income Trust ................. .500% .450% .400% .350%
Strategic Bond Trust* ........... .350% .300% .250% .200%
Global Government Bond Trust .... .375% .350% .300% .250%
Investment Quality Bond Trust ... .225% .225% .150% .100%
U.S. Government Securities Trust .225% .225% .150% .100%
Money Market Trust .............. .075% .075% .075% .020%
Aggressive Asset Allocation Trust .325% .275% .225% .150%
Moderate Asset Allocation Trust . .325% .275% .225% .150%
Conservative Asset Allocation
Trust ........................ .325% .275% .225% .150%
</TABLE>
* 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, Pasadena Growth Trust - $978,146, Equity Trust
- - $1,628,673, Value Equity 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, Goldman, Alger, Fidelity 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
45
<PAGE> 49
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 was as
follows: 1.05% -- Global Equity Trust, .975% -- Pasadena Growth Trust, .80% --
Equity Trust .85% -- Value Equity Trust, .80% -- Growth and Income Trust 1.47%
(annualized) -- International 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 was as follows: .15% --
Global Equity Trust, 0% --Pasadena Growth Trust, .05% -- Equity Trust .05% --
Value Equity 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, Pasadena Growth,
Equity, Value Equity and Growth and Income porfolios, anticipate that their
annual portfolio turnover rates will exceed 100%. A high portfolio turnover rate
generally involves correspondingly greater brokerage commission expenses, which
must be borne directly by the portfolio.
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. 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 Fund
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
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 seventeen series of shares, one for each
portfolio. Shares of each
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<PAGE> 50
portfolio have equal rights with regard to redemptions, dividends,
distributions and liquidations with respect to that portfo lio. 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 Fund 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.
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
47
<PAGE> 51
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 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 Security Life 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
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<PAGE> 52
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, 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.
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")
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<PAGE> 53
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 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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<PAGE> 54
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> <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> <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.
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
51
<PAGE> 55
PART B
<PAGE> 56
- --------------------------------------------------------------------------------
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 July ____, 1996 which
may be obtained from NASL Series Trust, 116 Huntington Avenue, Boston,
Massachusetts, 02116.
The date of this Statement of Additional Information is July ____, 1996.
1
<PAGE> 57
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES ................................................................ 3
Money Market Instruments .................................................... 3
Other Instruments ........................................................... 4
HEDGING AND OTHER STRATEGIC TRANSACTIONS ........................................... 9
General Characteristics of Options .......................................... 9
General Characteristics of Futures Contracts and Options on Futures Contracts 11
Options on Securities Indices and Other Financial Indices ................... 11
Currency Transactions ....................................................... 11
Combined Transactions ....................................................... 12
Swaps, Caps, Floors and Collars ............................................. 12
Eurodollar Instruments ...................................................... 13
Risk Factors ................................................................ 13
Risks of Hedging and Other Strategic Transactions Outside the United States . 14
Use of Segregated and Other Special Accounts ................................ 14
Other Limitations ........................................................... 15
INVESTMENT RESTRICTIONS ............................................................ 15
Fundamental ................................................................. 15
Nonfundamental .............................................................. 16
PORTFOLIO TURNOVER ................................................................. 17
MANAGEMENT OF THE TRUST ............................................................ 18
Compensation of Trustees .................................................... 19
INVESTMENT MANAGEMENT ARRANGEMENTS ................................................. 19
The Advisory Agreement ...................................................... 20
The Subadvisory Agreements .................................................. 21
Agreement With Prior Subadviser ............................................. 24
PORTFOLIO BROKERAGE ................................................................ 24
PURCHASE AND REDEMPTION OF SHARES .................................................. 28
DETERMINATION OF NET ASSET VALUE ................................................... 28
PERFORMANCE DATA ................................................................... 29
ORGANIZATION OF THE TRUST .......................................................... 30
Shares of the Trust ......................................................... 30
Principal Holders of Securities ............................................. 31
REPORTS TO SHAREHOLDERS ............................................................ 32
INDEPENDENT ACCOUNTANTS ............................................................ 32
LEGAL COUNSEL ...................................................................... 32
FINANCIAL STATEMENTS ............................................................... 33
</TABLE>
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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 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 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.
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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.
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 the Growth, International Small Cap, Value Equity,
Strategic Bond, International Growth and Income, U.S. Government Securities,
Investment Quality Bond and Automatic Asset Allocation Trusts may invest.
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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 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 Trust 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 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 Trust 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.
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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 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 Fund 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.
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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.
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 and Investment Quality Bond Trusts expect that a
significant portion of their emerging market governmental debt obligations will
consist of "Brady Bonds." In addition, the Moderate 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.
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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
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 Trusts
will purchase Brady Bonds in secondary markets, as de scribed 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.
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 Strate gic Transactions"). The description in this 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.
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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.
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.
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
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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
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.
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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".
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 de faults, a portfolio may
have
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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.
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 Counter party 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 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.
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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 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.
14
<PAGE> 70
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.
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. [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 is not subject to
this restriction.
(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.
15
<PAGE> 71
(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. 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.
(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% of the value of the
portfolio's total assets and then only to secure borrow ings 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 Moderate Asset Allocation Trust may invest up to
25% of its assets in such securities; (C) the Conservative Asset
Allocation Trust may invest up to 15% of its assets in such securities;
(D) each other portfolio other than the U.S. Government Securities
Trust may invest up to 20% of its total assets in such securities (in
the case of the Small/Mid Cap Trust, ADRs and U.S. dollar-denominated
securities are not included in the 20% limit); and (E) this restriction
shall not apply to the International Small Cap, Global Equity, Global
Government Bond, International Growth and Income and Strategic Bond
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.
16
<PAGE> 72
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 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 Growth, Small/Mid Cap and the
International Small Cap Trusts anticipate that their turnover rates generally
will not exceed 175%, 120%, and 100%, respectively. High portfolio turnover
rates (100% or more) can result in corresponding increases in brokerage
commissions for the portfolio. The portfolio turnover rates for the other
portfolios of the Trust for the years ended December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1994 1995
- ------------------------------------------------------------
<S> <C> <C>
Global Equity Trust ............... 52% 63%
Pasadena Growth Trust ............. 33% 57%
Equity Trust ...................... 132% 88%
Value Equity Trust ................ 26% 52%
Growth and Income Trust ........... 42% 39%
International Growth and Income ... NA 112%*
Strategic Bond Trust .............. 197% 181%
Global Government Bond Trust ...... 157% 171%
Investment Quality Bond Trust ..... 140% 137%
U.S. Government Securities Trust .. 387% 212%
Aggressive Asset Allocation Trust . 136% 111%
Moderate Asset Allocation Trust ... 180% 129%
Conservative Asset Allocation Trust 220% 110%
</TABLE>
*Annualized
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.
17
<PAGE> 73
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. Simon
136 Knickerbocker Road Graduate School of Business
Pittsford, NY 14534 Administration, University of
Age: 67 Rochester
- ------------------------------------------------------------------------------------------------------------------
William J. Atherton* President President and Director, North
116 Huntington Avenue American Security Life Insurance
Boston, MA 02116 Company; Vice President, U.S.
Age: 56 Annuities (Boston), Manulife,
January 1, 1996 to date
- ------------------------------------------------------------------------------------------------------------------
Charles L. Bardelis Trustee President and Executive Officer,
297 Dillingham Ave. Island Commuter Corp.(Marine
Falmouth, MA 02540 Transport)
Age: 54
- ------------------------------------------------------------------------------------------------------------------
Samuel Hoar** Trustee Senior Mediator, Judicial
73 Tremont Street Arbitration Mediation Services
Boston, MA 02109 "JAMS/Endispute," June 1, 1994
Age: 67 to date; Partner, Goodwin, Proctor
and Hoar, prior to June 1, 1994
- ------------------------------------------------------------------------------------------------------------------
Brian L. Moore* Chairman of Trustees Executive Vice President,
5650 Yonge Street Canadian Insurance Operations,
North York, Ontario, Canada, M2M 4G4 The Manufacturers Life Insurance
Age: 51 Company, January 1, 1996 to date;
Chief Executive Officer, The
North American Group, Oct. 1993
to December 31, 1995; Executive
Vice President and Chief Financial
Officer, Sept. 1988 to Oct. 1993,
North American Life Assurance
Company
- ------------------------------------------------------------------------------------------------------------------
Robert J. Myers Trustee Consulting Actuary (self-
9610 Wire Avenue employed), April 1983 to date;
Silver Springs, MD 20921 Chairman, Commission on
Age: 82 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 1996 to date;
Age: 40 Vice President and Actuary,
January 1986 to date, North
American Security Life Insurance
Company.
==================================================================================================================
</TABLE>
18
<PAGE> 74
<TABLE>
==========================================================================================================================
<S> <C> <C>
James D. Gallagher Secretary Vice President, Legal Services, of
116 Huntington Avenue Manulife, January 1996 to date;
Boston, MA 02116 Vice President, Secretary and
Age: 41 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 Manulife,
Boston, MA 02116 January 1996 to date; Vice
Age: 39 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
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 $18,000, a fee of $4,750 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, POSTION AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST
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 Security Life is the investment advisor.
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 Massachu setts business trust effective
December 31, 1988. Pursuant to such reorganization, the Trust assumed all the
assets and liabilities of the Fund and
19
<PAGE> 75
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.
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 the Founders
Asset Management, Inc. Subadvisory Agreement and the Fred Alger Management, Inc.
Subadvisory Agreement) 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 Financials as a result of the
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.
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 two global and two international portfolios or .50% in the
case of all other portfolios of the average net asset value 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.
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. 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 following is a schedule
of the management fees each portfolio currently is obligated to pay the Adviser:
20
<PAGE> 76
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<PAGE> 77
<TABLE>
PORTFOLIO
- --------------------------------------------------------
<S> <C>
Small/Mid Cap Trust ................. 1.000%
International Small Cap Trust ....... 1.100%
Global Equity Trust ................. .900%
Pasadena Growth Trust ............... .975%
Equity Trust ........................ .750%
Growth Trust ........................ .950%
Value Equity Trust .................. .800%
Growth and Income Trust ............. .750%
International Growth and Income Trust .950%
Strategic Bond Trust ................ .775%
Global Government Bond Trust ........ .800%
Investment Quality Bond Trust ....... .650%
U.S. Government Securities Trust .... .650%
Money Market Trust .................. .500%
Aggressive Asset Allocation Trust ... .750%
Moderate Asset Allocation Trust ..... .750%
Conservative Asset Allocation Trust . .750%
</TABLE>
The fees shown above, other than those paid by the Investment Quality
Bond and U.S. Government Securities Trusts and the Money Market Trust, are
higher than those paid by most funds to their advisers, but are not higher than
the fees paid by many funds with similar investment objectives and policies. 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
Pasadena Growth ............. $2,115,434 $1,255,314 $ 675,183
Equity ...................... $5,643,363 $3,483,279 $1,953,233
Value Equity ................ $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
Prior to April 23, 1991, the investment advisory fees paid by the Trust
were generally lower than the fees set forth above and were subject to a
different expense limitation. Pursuant to the Advisory Agreement, no advisory
fee was charged to the Growth and Income Trust until the portfolio reached
$10,000,000 in net assets, which occurred on June 21, 1991.
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 portfo lios, 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
22
<PAGE> 78
the investment affairs of the assigned portfolios. With regards to the Pasadena
Growth Trust subadvisory agreement, the subadviser shall reimburse the Pasadena
Growth Trust for its "Other Expenses" to a maximum on an annual basis of .15% of
the average net assets of the portfolio. For purposes of this provision, "Other
Expenses" means all the expenses of the portfolio excluding: (1) taxes, (ii)
portfolio brokerage commissions, (iii) interest, (iv) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the portfolio's business, (v) advisory fees, and (vi)
expenses for services assumed by the Adviser under the Advisory Agreement. The
Adviser shall be entitled to deduct such reimbursement from the amount of
subadviser's subadvisory fees payable pursuant to the subadvisory agreement.
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 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>
Small/Mid Cap Trust ............. .525% .500% .475% .450%
International Small Cap Trust ... .650% .600% .500% .400%
Global Equity Trust ............. .500% .450% .375% .325%
Pasadena Growth Trust ........... .550% .500% .450% .375%
Equity Trust .................... .325% .275% .225% .150%
Growth Trust .................... .500% .450% .425% .400%
Value Equity Trust .............. .400% .300% .200% .200%
Growth and Income Trust ......... .325% .275% .225% .150%
International Growth and
Income Trust ................. .500% .450% .400% .350%
Strategic Bond Trust ............ .350% .300% .250% .200%
Global Government Bond Trust .... .375% .350% .300% .250%
Investment Quality Bond Trust ... .225% .225% .150% .100%
U.S. Government Securities Trust .225% .225% .150% .100%
Money Market Trust .............. .075% .075% .075% .020%
Aggressive Asset Allocation Trust .325% .275% .225% .150%
Moderate Asset Allocation Trust . .325% .275% .225% .150%
Conservative Asset Allocation
Trust ........................ .325% .275% .225% .150%
</TABLE>
*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.
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:
23
<PAGE> 79
<TABLE>
<CAPTION>
PORTFOLIO 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity ............... $2,415,918 $2,192,713 $ 905,318
Pasadena Growth ............. $ 978,146 $ 558,057 $ 280,422
Equity ...................... $1,628,673 $1,166,032 $ 710,703
Value Equity ................ $ 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, or Oechsle
International, the compensation received by the Adviser or Subadviser 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 or
Subadvisory Agreement in respect of such portfolio, whichever is less. In the
case of Alger, Founders, J.P. Morgan, Wellington Management, FMTC, SBAM, GSAM or
REMC, the compensation received by it 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. With respect to REMC, in the event the subadvisory
agreement with REMC is terminated the Adviser has agreed to take any action
necessary to cause the Trust to discontinue the use of the name "Pasadena" in
any portfolio. The Adviser has further agreed that it will use such name in
connection with any portfolio of the Trust only so long as REMC serves as the
subadviser to such portfolio.
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.
24
<PAGE> 80
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' perfor mance 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. 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 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.
25
<PAGE> 81
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
Pasadena Growth ....................... $ 388,904 $ 187,089 $ 114,811
Equity ................................ $ 861,497 $1,011,437 $ 600,555
Value Equity .......................... $ 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.
Goldman Sachs & Co. ("Goldman"), Salomon Brothers Inc. ("Salomon"), J.P. Morgan
Securities Inc and J.P. Morgan Securities Ltd. (J.P. Morgan"), Dresdner Bank and
Fidelity Capital Markets are affiliated brokers of the Trust due to the
positions of Goldman, Salomon, J.P. Morgan, Oechsle International and FMTC
respectively, as Subadviser to Trust Portfolios.
For the years ended December 31, 1995, 1994 and 1993, brokerage commissions were
paid to GOLDMAN, SACHS & CO. by the portfolios as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
% OF AGGREGATE
% OF TRUST'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%
Pasadena Growth ................... $24,855 6.39% 0.52%
Equity ............................ $13,799 1.60% 0.62%
Value Equity ...................... $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%
Agressive Asset Allocation ........ $ 7,202 2.51% 0.43%
Moderate Asset Allocaton .......... $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.
26
<PAGE> 82
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
% OF AGGREGATE
% OF TRUST'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pasadena Growth ................ $ 6,376 3.41% 5.71%
Equity ......................... $ 8,032 0.79% 0.03%
Value Equity ................... $20,741 5.41% 3.98%
Growth and Income .............. $12,612 2.59% 1.14%
Agressive Asset Allocation ..... $10,644 3.79% 0.53%
Moderate Asset Allocaton ....... $25,501 3.73% 3.21%
Conservative Asset Allocation .. $ 676 0.57% 0.08%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
% OF AGGREGATE
% OF TRUST'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%
Pasadena Growth ................ $ 4,500 3.92% 9.33%
Equity ......................... $ 5,755 0.96% 1.71%
Value Equity ................... $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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
% OF AGGREGATE
% OF TRUST'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%
Pasadena ....................... $ 16,380 4.21% 0.26%
Equity ......................... $ 13,968 1.62% 0.14%
Value Equity ................... $ 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 Allocaton ... $ 999 0.96% 1.87%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
% OF AGGREGATE
% OF TRUST'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%
Pasadena ....................... $ 4,200 2.24% 2.08%
Equity ......................... $24,110 2.38% 2.59%
Value Equity ................... $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 Allocaton ... $ 607 0.51% 2.07%
</TABLE>
27
<PAGE> 83
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
% OF AGGREGATE
% OF TRUST'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%
Value Equity ................... $ 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
% OF AGGREGATE
% OF TRUST'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%
Pasadena ....................... $ 2,482 0.64% 0.03%
Equity ......................... $ 8,890 1.03% 0.06%
Value Equity ................... $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 Allocaton ... $ 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 TRUST'S BROKERAGE $ AMOUNT OF
COMMISSIONS REPRESENTED TRANSACTIONS
PORTFOLIO COMMISSIONS FOR THE PERIOD FOR THE PERIOD
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity ......................... $277 0.03% 0.00%
International Growth & Income .. 408* 0.11% 0.04%
</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 TRUST'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.
28
<PAGE> 84
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 and all debt instruments held by the
Money Market Trust 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.
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 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
29
<PAGE> 85
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. 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 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. For the
same reasons, the Trust may elect to quote performance for the Equity, U.S.
Government Securities, Money Market, and the three Asset Allocation Trusts only
since December 13, 1991 when such portfolios changed portfolio managers.
30
<PAGE> 86
TOTAL ANNUALIZED RETURN
<TABLE>
<CAPTION>
==============================================================================================================
Trust One Year Ended Five Years Ended Since Inception or Date first Available
12/31/95 12/31/95 10 Years, whichever
is shorter through
12/31/95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity 7.68% 10.27% 8.07% 03/18/88
- --------------------------------------------------------------------------------------------------------------
Pasadena Growth 26.53% N/A 4.70% 12/11/92
- --------------------------------------------------------------------------------------------------------------
Equity 42.79% 16.03% 13.73%** 06/18/85
- --------------------------------------------------------------------------------------------------------------
Value Equity 23.69% N/A 12.75% 02/19/93
- --------------------------------------------------------------------------------------------------------------
Growth and Income 29.20% N/A 13.06% 04/23/91
- --------------------------------------------------------------------------------------------------------------
International Growth 6.98%* N/A N/A 01/9/95
and Income
- --------------------------------------------------------------------------------------------------------------
Strategic Bond 19.22% N/A 7.17% 02/19/93
- --------------------------------------------------------------------------------------------------------------
Global Government Bond 23.18% 10.36% 9.13% 03/18/88
- --------------------------------------------------------------------------------------------------------------
Investment Quality 19.49% N/A 9.46% 04/23/91
Bond
- --------------------------------------------------------------------------------------------------------------
U.S. Government 15.57% 8.26% 8.54% 05/01/89
Securities
- --------------------------------------------------------------------------------------------------------------
Money Market 5.62% 4.23% 5.60%** 06/18/85
- --------------------------------------------------------------------------------------------------------------
Cons. Asset Allocation 18.07% 10.01% 7.25% 08/03/89
- --------------------------------------------------------------------------------------------------------------
Mod. Asset Allocation 20.68% 11.40% 7.75% 08/03/89
- --------------------------------------------------------------------------------------------------------------
Aggr. Asset Allocation 22.77% 12.35% 8.02% 08/03/89
==============================================================================================================
</TABLE>
* Aggregate total return from January 9, 1995 (inception date).
** 10 Years
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 seventeen series of
shares: the Small/Mid Cap, the International Small Cap, the Global Equity Trust,
the Pasadena Growth Trust, the Growth Trust, the Equity Trust, the Value Equity
Trust, the Growth and Income Trust, the International Growth and Income Trust,
the Strategic Bond Trust, the Global Government Bond Trust, the Investment
Quality Bond Trust, the Money Market Trust, the U.S. Government Securities
Trust, the Conservative Asset Allocation
31
<PAGE> 87
Trust, the Moderate Asset Allocation Trust and the Aggressive Asset Allocation
Trust. 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. Shares held in
Security Life's registered separate account are voted in accordance with
instructions from variable contract owners.
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
Security Life, a Delaware corporation and a wholly-owned subsidiary of
North American Life, provided the initial capital for the Fund, the Trust's
corporate predecessor, by purchasing for its general account 100,000 shares of
the Equity Portfolio, 100,000 shares of the Bond Portfolio and 100,000 shares of
the Money Market Portfolio, each at a price of $10.00 per share. On March 20,
1987, North American Life purchased all of Security Life's shares from Security
Life at a price equal to the net asset value of the shares at the close of
business on March 20, 1987. On December 23, 1987, the Fund redeemed all of the
shares of the Equity and Bond Portfolios owned by North American Life. On
February 12, 1988 North American Life provided the initial capital to the Global
Equity, Global Government Bond and Convertible Securities Portfolios (now the
U.S. Government Securities Trust) by purchasing 25,000 shares of each such
portfolio at a price of $10.00 per share. On April 1, 1991 Security Life
provided the initial capital to the Growth and Income Trust by purchasing 10,000
shares at the price of $10.00 per share. On January 6, 1995 and January 9, 1995,
Security Life provided the initial capital to the International Growth and
Income Trust by purchasing one share and 500,000 shares, respectively, at 10.00
per share. On March 1, 1996, Security Life purchased one share of the Small/Mid
Cap Trust and one share of the International Small Cap Trust at $12.50 per
share. On March 4, 1996, Security Life provided the initial capital for the
Small/Mid Cap and the International Small Cap Trusts by purchasing 80,000 shares
of each Trust at $12.50 per share. On July ___, 1996 Security Life provided the
initial capital for the Growth Trust by purchasing one share of the ______ Trust
at $ ____ per share.
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
registered under the Investment Company Act of 1940. 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
32
<PAGE> 88
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.,
N.W., Washington, DC 20007, have passed upon certain legal matters relating to
the federal securities laws.
33
<PAGE> 89
PART C. OTHER INFORMATION
<PAGE> 90
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(1) Audited Financials at December 31, 1995 - Parts A and B. [To
Be Filed By Amendment]
(2) Audited Financials [To Be Filed By Amendment]
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
(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.
(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.
<PAGE> 91
(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.
(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.
<PAGE> 92
(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-e ffective
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.
(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 - Filed
herewith.
<PAGE> 93
(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) Form of Amendment to Advisory Agreement between NASL Series
Trust and NASL Financial Services, Inc. adding the Growth
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.
(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 Agreement Between NASL Financial and Goldman
Sachs Asset Management dated December 3, 1992 -- previously
filed as exhibit no. (5)(b)(vii) to post-effective
amendment no. 23 filed on February 2, 1993.
<PAGE> 94
(5)(b)(viii) Subadvisory Agreement Between NASL Financial and Roger
Engemann Management Co., Inc. dated August 31, 1992 -
previously filed as exhibit (5)(b)(v) to post-effective
amendment no. 18 on December 19, 1991.
(5)(b)(ix) 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)(x) 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)(xi) 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)(xii) 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)(xiii) Form of Amendment to Subadvisory Agreement between NASL
Financial Services, Inc. and Founders Asset Management,
Inc. adding the Growth Trust - Filed herewith.
(8)(a) Custodian Agreement Between NASL Series Trust and
Boston Safe Deposit and Trust Company, previously filed
as exhibit (8) (a) to post effective amendment no. 16
filed on October 23, 1991.
(8)(b) 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 on April 15,
1991.
<PAGE> 95
(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.
(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. [To Be Filed By
Amendment]
(10)(b) Consent of Jones & Blouch [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-effec tive
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.
<PAGE> 96
(18)(a) Power of Attorney - Trustees, previously filed as
Exhibit (17) to post- effective amendment no. 23 filed
on February 2, 1993.
(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.
(27) Financial Data Schedule for financial statements for
the period ended December 31, 1995 [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 registered under the Investment Company Act of 1940
and will solicit voting instructions from variable contract owners and vote all
shares held in proportion to the instructions received.
<PAGE> 97
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. ManuLife (International) Limited - Bermuda (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. 495603 Ontario Limited - Ontario (100%)
11. 994744 Ontario Inc. - Ontario (100%)
12. 1056416 Ontario Limited - Ontario (100%)
13. 484551 Ontario Limited - Ontario (100%)
(a) 911164 Ontario Limited - Ontario (100%)
14. NAWL (North American Wood Logan Holding Company) - Delaware (100%)
(a) Wood Logan Associate Inc. - Connecticut (85%)
(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%)
(iii) North American Funds - Massachusetts (100%)
(iv) NASL Series Trust - Massachusetts (100%)
15. Domlife Realty Limited - Canada (100%)
16. Balmoral Developments Inc. - Canada (100%)
<PAGE> 98
17. Cantay Holdings Inc. - Ontario (100%)
18. 576986 Ontario Inc. - Ontario (100%)
19. KY Holding Corporation - Canada (100%)
20. 172846 Canada Limited - Canada (100%)
21. First North American Realty, Inc. - Minnesota (100%)
22. North American Capital Corporation - Ontario (100%)
23. Elliott & Page Mutual Fund Corporation - Ontario (100%)
24. TBD Life Insurance Company - Canada (100%)
25. The North American Group Inc. - Canada (100%)
26. Capitol Bankers Life Insurance Company - Minnesota (100%)
27. 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
Altamir Investments Services Inc. and 5% by Altamira
Financial Services Inc.)
(b) Altamira (Alberta) Ltd. - Alberta (100%)
(c) Capital Growth Financial Services Inc. -
Ontario (100%)
28. Manulife International Investment Management Limited - U.K. (100%)
(a) Manulife International Fund Management Limited - U.K. (100%)
<PAGE> 99
29. ManuCab Ltd. - Canada (100%)
(a) Plazcab Service Limited - Canada (100%)
30. 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%)
31. 16351 Canada Limited - Canada (100%)
32. Manufacturers Life Capital Corporation Inc. - Canada (100%)
33. Townvest Inc. - Ontario (100%)
34. Manulife Financial Holdings Limited - Ontario (100%)
(a) Family Financial Services Limited - Ontario (100%)
i. 742166 Ontario Inc. - Ontario (100%)
ii. Family Trust Corporation - Ontario (100%)
A. Family Financial Mortgage Corporation - Ontario (100%)
B. Family Realty Firstcorp Limited - Ontario (100%)
C. Thos. N. Shea Investment Corporation Limited - Ontario (100%)
(b) Manulife Bank of Canada - Canada (100%)
i. Manulife Securities International Ltd. - Canada (100%)
ii. Cabot Financial Services Corporation - Ontario (100%)
iii.Cabot Investments Limited - Ontario (100%)
35. NALACO Mortgage Corporation - Ontario (100%)
(a) Underwater Gas Developers Limited - Ontario (100%)
36. Manulife (International) Reinsurance Limited - Bermuda (100%)
(a) Manulife (International) P&C Limited - Bermuda (100%)
(b) Manufacturers P&C Limited - Bermuda (100%)
37. FNA Financial Inc. - Canada (100%)
(a) NAL Resources Management Limited - Canada (100%)
(b) First North America Insurance Company - Canada (100%)
(c) NAL Trustco Inc. - Ontario (100%)
(d) North American Life Financial Services Inc. - Ontario (100%)
(e) Nalafund Investors Limited - Canada - (100%)
(f) Seamark Asset Management Ltd. - Canada (69.175%)
(g) Elliott & Page Limited - Ontario (100%)
38. NAL Resources Limited - Alberta (100%)
<PAGE> 100
39. Manulife Reinsurance Corporation (U.S.A.) - Michigan (100%)
(a) Manulife Reinsurance Limited - Bermuda (100%)
(b) Manulife Holding Corporation - Delaware (100%)
i. Manufacturers Life Mortgage Securities
Corporation - Delaware (100%)
ii. Underwriters International Inc. - Delaware (50%)
iii. Capital Design Corporation - California - (100%)
iv. ManEquity, Inc. - Colorado (100%)
v. Manulife Service Corporation - Colorado (100%)
(c) The Manufacturers Life Insurance Company (U.S.A.) - Michigan (100%)
(d) The Manufacturers Life Insurance Company of America - Michigan (100%)
i. Manulife Series Fund, Inc. - Maryland (100%)
ii. Manufacturers Adviser Corporation - Colorado (100%)
40. The Manufacturers Investment Corporation - Michigan (100%)
41. The Manulife Property Management of Washington, D.C., Inc. - Washington,
D.C. (100%)
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of April 30, 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
Pasadena 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
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
--------------- ------------------------
<S> <C>
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
</TABLE>
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.
<PAGE> 102
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 Equity and Global Government Bond
Trusts, at its offices at One International Place, Boston, Massachusetts 02110,
by Wellington Management Company, the investment subadviser to the Growth and
Income , Money Market and Investment 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 Goldman Sachs Asset Management, the investment subadviser for the Value
Equity Trust, at 32 Old Slip, New York, New York 10005, by Roger Engemann
Management Co., Inc., the investment subadviser for the Pasadena Growth Trust,
at 600 North Rosemead Boulevard, Pasadena, California 91107, by Fred Alger
Management, Inc., the investment subadviser for the Small/Mid Cap Trust, at 30
Montgomery Street, Jersey City, New Jersey, by Founders Asset Management, Inc.,
the investment subadviser for the Growth and International Small Cap Trusts, at
2930 East Third Avenue, Denver, Colorado, 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 the Registrant at
its principal business office located at 116 Huntington Avenue, Boston,
Massachusetts 02116, by Boston Safe Deposit and Trust Company, One Boston Place,
Boston, Massachusetts 02108, custodian for the Global Equity and Global
Government Bond Trusts' assets, or by State Street Bank and Trust Company, the
custodian and transfer agent for all the other portfolio's of the Trust, at its
offices at 225 Franklin Street, Boston, Massachusetts 02110.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
<PAGE> 103
ITEM 32. UNDERTAKINGS
(a) not applicable
(b) Registrant undertakes to file a post-effective amendment containing
financial statements with respect to the Growth Trust, which need not be
certified, within four to six months from the effective date of this Amendment
to its Registration Statement under the Securities Act of 1933.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's Annual Report to Shareholders, upon
request and without charge.
<PAGE> 104
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 13th day of May, 1996.
NASL SERIES TRUST
-----------------
(Registrant)
By: /s/ William J. Atherton
------------------------------
William J. Atherton, President
Attest:
/s/ Kimberly Skidmore
- --------------------------------------
Kimberly Skidmore, Assistant Secretary
<PAGE> 105
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 May 13, 1996
- ---------------------- ------------------
Don B. Allen (Date)
* President - May 13, 1996
- ---------------------- (Chief Executive Officer) ------------------
William J. Atherton (Date)
* Trustee May 13, 1996
- ---------------------- ------------------
Charles L. Bardelis (Date)
* Trustee May 13, 1996
- ---------------------- ------------------
Samuel Hoar (Date)
* Trustee May 13, 1996
- ---------------------- and Chairman ------------------
Brian L. Moore (Date)
* Trustee May 13, 1996
- ---------------------- ------------------
Robert J. Myers (Date)
* Vice President and May 13, 1996
- ---------------------- Treasurer (Prin- ------------------
Richard C. Hirtle cipal Financial and (Date)
Accounting Officer)
</TABLE>
*By: /s/ James D. Gallagher May 13, 1996
---------------------- ------------
James D. Gallagher (Date)
Attorney-in-Fact
Pursuant to Powers
of Attorney
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
<S> <C>
(b)(4)(q) Specimen Share Certificate for the Growth Trust
(b)(5)(a)(2) Form of Amendment to Advisory Agreement between NASL
Series Trust and NASL Financial Services, Inc.
(b)(5)(b)(xiii) Form of Amendment to Subadvisory Agreement between NASL
Financial Services, Inc. and Founders Asset Management Inc.
</TABLE>
<PAGE> 1
Certificate Number____
ORGANIZED AS A VOLUNTARY ASSOCIATION
UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
NASL SERIES TRUST
Growth Trust
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 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 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
NASL SERIES TRUST
AMENDMENT TO ADVISORY AGREEMENT
AMENDMENT made this 20th day June, 1996, to the Advisory Agreemetn
dated January 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 Growth
Trust as set forth in Appendix A to this Amendment.
2. CHANGE IN APPENDIX B
Appendix B to this Agreement is revised to include the Growth Trust as
set forth in Appendix B to this Amendment.
3. EFFECTIVE DATE
This Amendment shall become effective with respect to the Growth Trust
(the "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 Growth Trust 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 Growth Trust.
NASL SERIES TRUST
BY:
-----------------
William J. Atherton,
President
NASL FINANCIAL SERVICES, INC.
BY:
------------------------
William J. Atherton,
President
<PAGE> 2
APPENDIX A
1. Global Equity Trust: .90% of the current net assets of the Portfolio.
2. Pasadena Growth Trust: .975% 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: .95% 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 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
<PAGE> 3
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>
Pasadena Growth Trust .50%
Growth 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
AMENDMENT TO
SUBADVISORY AGREEMENT
NASL SERIES TRUST
AMENDMENT made this ___ day of ______ 199__ to the Subadvisory
Agreement dated January 4, 1996 (the "Agreement"), between NASL Financial
Services, Inc., a Massachusetts corporation (the "Adviser"), and Founders Asset
Management, Inc., a Delaware Corporation (the "Subadvisers"). In considertion 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 Growth Trust. Section 3 of the Agreement, "Compensation of Subadviser,"
is hereby amended by adding an additional portfolio to Appendix A as follows:
2. Growth Trust: .500% of the first $50,000,000, .450% between
$50,000,000 and $200,000,000, .425% between $200,000,000 and
$500,000,000 and .400% 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. EFFFECTIVE DATE
This Amendment shall become effective with respect to the Growth Trust
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 Growth
Trust the terms of the Agreement as amended herein and (iii) the date of the
meeting of shareholders (or sole shareholder if applicable) of the Growth Trust
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 Growth Trust.
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:
-------------------------
