<PAGE>
Filed Pursuant to Rule 497(e)
Registration File No.: 2-94996
<PAGE>
THE HUDSON RIVER TRUST
Principal Office Located at
1345 Avenue of the Americas -- New York, New York 10105
The Hudson River Trust (Trust) is a mutual fund, currently issuing separate
series of shares of beneficial interest, each representing a separate
investment portfolio (Portfolio). There are ten Portfolios currently
available through your variable annuity product. The Portfolios are The Asset
Allocation Series: Conservative Investors and Growth Investors; The Equity
Series: Growth and Income, Equity Index, Global and International; and The
Fixed Income Series: Money Market, Intermediate Government Securities,
Quality Bond and High Yield. An investment in the Money Market Portfolio is
neither insured nor guaranteed by the U.S. Government.
This prospectus sets forth concisely the investment objectives and policies
of these ten Portfolios and the information about the Trust a prospective
investor should know before investing. It should be read and retained for
future reference.
A Statement of Additional Information (SAI) dated May 1, 1995 has been filed
with the Securities and Exchange Commission (SEC). This SAI is incorporated
by reference into this prospectus and is available at no charge by writing
the Trust at the above address.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Financial Highlights ....................... 2
The Trust .................................. 8
Investment Objectives and Policies ........ 8
Investment Techniques ...................... 20
Certain Investment Restrictions ............ 25
Management of the Trust .................... 27
Description of the Trust's Shares .......... 30
Dividends, Distributions and Taxes ........ 31
Investment Performance ..................... 31
Appendix A -- Description of Bond Ratings . A-1
</TABLE>
An investment in the Trust is not a deposit or obligation of, or guaranteed
or endorsed by, any bank and is 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.
PROSPECTUS DATED MAY 1, 1995
-----------------------------------------------------------------------------
HRT103 (5/95)--#5 Copyright 1995 The Hudson River Trust. All rights reserved.
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables give information regarding income, expenses and capital
changes in the Money Market Portfolio attributable to a Portfolio share of
beneficial interest outstanding throughout the periods indicated, based upon
monthly average shares outstanding, and other supplementary data. The
information is presented under the continuing entity basis of accounting as
if the reorganization described in "General Information and History" in the
SAI had always been in effect.
The succeeding tables also give equivalent information for a share of
beneficial interest in each of the other Portfolios outstanding throughout
the periods indicated. No information is given with respect to the
International Portfolio, which commenced operations on April 3, 1995.
Information regarding portfolio turnover rates, some of which exceeded 100%
during 1994 and 1993, is also included. Higher levels of portfolio activity
result in higher transaction costs, including higher brokerage expenses.
On December 16, 1992, the Trust's Board of Trustees declared a 10-for-1 stock
split of the outstanding shares of the Money Market, High Yield, and Global
Portfolios (Split Portfolios). The split was effected on January 1, 1993 for
shareholders of record on that date. Consequently, the shares of beneficial
interest outstanding and net asset value per share presented in the Financial
Highlights for a Split Portfolio share outstanding throughout each period
(other than the periods ended December 31, 1993 and December 31, 1994), and
the shares outstanding at the end of such periods presented for the Split
Portfolios, have been restated.
The financial information in the tables below for the fiscal years ended
December 31, 1993 and December 31, 1994 has been audited by Price Waterhouse
LLP, the Trust's independent accountants. Financial highlights for prior
years have been audited by Deloitte & Touche LLP. The audited financial
statements for the Trust appear in the SAI. The Trust's annual report, which
contains additional performance information, is available without charge upon
request.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)(C)
ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER
2,
YEAR ENDED DECEMBER 31, 1989 TO
----------------------- DECEMBER 31,
1994 1993* 1992 1991 1990 1989
-------------- -------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) ......... $ 11.12 $ 10.94 $ 11.29 $ 10.23 $10.26 $10.00
-------------- -------------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................ 0.55 0.52 0.64 0.69 0.72 0.15
Net realized and unrealized gain (loss) on
investments ..................................... (1.00) 0.65 (0.01) 1.28 (0.09) 0.16
-------------- -------------- --------- --------- --------- ---------
Total from investment operations ................. (0.45) 1.17 0.63 1.97 0.63 0.31
-------------- -------------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dvidends from net investment income ............. (0.52) (0.50) (0.62) (0.66) (0.66) (0.05)
Dividends in excess of net investment income ..... -- (0.00) -- -- -- --
Distributions from realized gains ................ -- (0.49) (0.36) (0.25) -- --
-------------- -------------- --------- --------- --------- ---------
Total dividends and distributions ................ (0.52) (0.99) (0.98) (0.91) (0.66) (0.05)
-------------- -------------- --------- --------- --------- ---------
Net asset value, end of period ..................... $ 10.15 $ 11.12 $ 10.94 $ 11.29 $10.23 $10.26
============== ============== ========= ========= ========= =========
Total return (d) ................................... (4.10)% 10.76% 5.64% 19.80% 6.30% 3.10%
============== ============== ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) .................. $173,691 $114,418 $70,675 $50,279 $29,971 $13,984
Ratio of expenses to average net assets ............ 0.59% 0.60% 0.61% 0.64% 0.73% 0.26%
Ratio of net investment income to average net
assets ........................................... 5.22% 4.49% 5.77% 6.45% 7.06% 1.54%
Portfolio turnover rate ............................ 228% 178% 136% 171% 88% 0%
<FN>
---------------
Footnotes appear on page 7.
</TABLE>
2
<PAGE>
GROWTH INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1989 TO
----------------------- DECEMBER 31,
1994 1993* 1992 1991 1990 1989
---------- ---------- ---------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) $ 15.61 $ 14.69 $ 15.17 $ 11.03 $10.33 $10.00
---------- ---------- ---------- --------- --------- --------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.50 0.43 0.44 0.41 0.44 0.11
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... (0.98) 1.79 0.28 4.93 0.64 0.29
---------- ---------- ---------- --------- --------- --------------
Total from investment operations ....... (0.48) 2.22 0.72 5.34 1.08 0.40
---------- ---------- ---------- --------- --------- --------------
LESS DISTRIBUTIONS:
Dividends from net investment income ... (0.46) (0.42) (0.41) (0.37) (0.38) (0.06)
Dividends in excess of net investment
income ................................ (0.01) -- -- -- -- --
Distributions from realized gains ...... -- (0.88) (0.79) (0.83) -- (0.01)
---------- ---------- ---------- --------- --------- --------------
Total dividends and distributions ...... (0.47) (1.30) (1.20) (1.20) (0.38) (0.07)
---------- ---------- ---------- --------- --------- --------------
Net asset value, end of period ........... $ 14.66 $ 15.61 $ 14.69 $ 15.17 $11.03 $10.33
========== ========== ========== ========= ========= ==============
Total return (d) ......................... (3.15)% 15.26% 4.85% 48.83% 10.70% 4.00%
========== ========== ========== ========= ========= ==============
RATIOS/SUPPLEMENTAL DATA:
Net asset, end of period (000's) ........ $492,478 $278,467 $148,650 $84,338 $24,539 $6,018
Ratio of expenses to average net assets . 0.59% 0.62% 0.60% 0.66% 0.78% 0.29%
Ratio of net investment income to average
net assets ............................. 3.32% 2.71% 3.00% 3.03% 4.11% 1.01%
Portfolio turnover rate .................. 131% 118% 129% 139% 92% 6%
</TABLE>
EQUITY SERIES
GROWTH AND INCOME PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 1, 1993 TO
DECEMBER 31, DECEMBER 31,
1994 1993**
---------------- ------------------
<S> <C> <C>
Net asset value, beginning of period (a) .............. $ 9.95 $10.00
---------------- ------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................ 0.31 0.03
Net realized and unrealized gain (loss) on
investments .......................................... (0.36) (0.06)
---------------- ------------------
Total from investment operations ..................... (0.05) (0.03)
---------------- ------------------
LESS DISTRIBUTIONS:
Dividends from net investment income ................. (0.20) (0.02)
Dividends in excess of net investment income ........ -- (0.00)
Tax return of capital distribution ................... -- (0.00)
---------------- ------------------
Total dividends and distributions .................... (0.20) (0.02)
---------------- ------------------
Net asset value, end of period ........................ $ 9.70 $ 9.95
================ ==================
Total return (d) ...................................... (0.58)% (0.25)%
================ ==================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................... $31,522 $1,456
Ratio of expenses to average net assets ............... 0.78% 2.70%(b)
Ratio of net investment income to average net assets . 3.13% 1.12%(b)
Portfolio turnover rate ............................... 52% 48%
----------
Footnotes appear on page 7.
</TABLE>
3
<PAGE>
EQUITY INDEX PORTFOLIO:
<TABLE>
<CAPTION>
MARCH 1, 1994 TO
DECEMBER 31, 1994
--------------------
<S> <C>
Net asset value, beginning of period (a) .......... $10.00
--------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................. 0.20
Net realized and unrealized loss on investments .. (0.09)
--------------------
Total from investment operations .................. 0.11
--------------------
LESS DISTRIBUTIONS:
Dividends from net investment income .............. (0.20)
Distributions of realized gains ................... (0.03)
Distributions in excess of realized gains ........ (0.01)
--------------------
Total dividends and distributions ................. (0.24)
--------------------
Net asset value, end of period ..................... $ 9.87
====================
Total return (d) ................................... (1.08)%
====================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) .................. $36,748
Ratio of expenses to average net assets ............ 0.49%(b)
Ratio of net investment income to average net
assets ............................................ 2.42%(b)
Portfolio turnover rate ............................ 7%
</TABLE>
GLOBAL PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993* 1992 1991
------------ -------------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period (a) ...................... $13.62 $ 11.41 $ 11.64 $ 9.76
------------ -------------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.20 0.08 0.14 0.22
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions . 0.52 3.58 (0.20) 2.74
------------ -------------- --------- ---------
Total from investment operations 0.72 3.66 (0.06) 2.96
------------ -------------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (0.17) (0.15) (0.11) (0.23)
Distributions from realized
gains ......................... (0.28) (1.30) (0.06) (0.85)
Distributions in excess of
realized gains ................ (0.00) (0.00) -- --
Tax return of capital
distributions ................. (0.02) -- -- --
------------ -------------- --------- ---------
Total dividends and
distributions ................. (0.47) (1.45) (0.17) (1.08)
------------ -------------- --------- ---------
Net asset value, end of period .. $13.87 $ 13.62 $ 11.41 $ 11.64
============ ============== ========= =========
Total return (d) ................. 5.23% 32.09% (0.50)% 30.54%
============ ============== ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $421,698 $141,257 $49,171 $39,487
Ratio of expenses to average net
assets ......................... 0.69% 0.84% 0.70% 0.75%
Ratio of net investment income to
average net assets ............. 1.41% 0.62% 1.20% 1.94%
Portfolio turnover rate .......... 71% 150% 216% 267%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AUGUST 27,
1987 TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
-----------------------
<S> <C> <C> <C> <C>
1990 1989 1988 1987
------------- ------------- ------------- ----------------
Net asset value, beginning of
period (a) ...................... $ 10.74 $ 9.57 $ 8.67 $ 10.00
------------- ------------- ------------- ----------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.38 0.17 0.13 0.01
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions . (1.03) 2.38 0.82 (1.34)
------------- ------------- ------------- ----------------
Total from investment operations (0.65) 2.55 0.95 (1.33)
------------- ------------- ------------- ----------------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (0.33) (0.14) (0.05) --
Distributions from realized
gains ......................... -- (1.24) -- --
Distributions in excess of
realized gains ................ -- -- -- --
Tax return of capital
distributions ................. -- -- -- --
------------- ------------- ------------- ----------------
Total dividends and
distributions ................. (0.33) (1.38) (0.05) --
------------- ------------- ------------- ----------------
Net asset value, end of period .. $ 9.76 $ 10.74 $ 9.57 $ 8.67
============= ============= ============= ================
Total return (d) ................. (6.06)% 26.73% 10.88% (13.30)%
============= ============= ============= ================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $24,097 $15,409 $9,212 $6,030
Ratio of expenses to average net
assets ......................... 0.75% 0.80% 1.06% 0.40%
Ratio of net investment income to
average net assets ............. 3.67% 1.49% 1.30% 0.19%
Portfolio turnover rate .......... 502% 399% 235% 11%
<FN>
---------------
Footnotes appear on page 7.
</TABLE>
4
<PAGE>
FIXED INCOME SERIES
MONEY MARKET PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993* 1992 1991 1990
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year(a) .................... $10.12 $10.11 $10.13 $10.17 $10.14
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.41 0.30 0.37 0.61 0.81
Net realized and unrealized
gain (loss) on investments .. -- -- (0.01) -- 0.01
---------- ---------- ---------- ---------- ----------
Total from investment
operations ................... 0.41 0.30 0.36 0.61 0.82
---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS:
Dividends from net investment
income ........................ (0.39) (0.29) (0.38) (0.65) (0.79)
---------- ---------- ---------- ---------- ----------
Total dividends ............... (0.39) (0.29) (0.38) (0.65) (0.79)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $10.14 $10.12 $10.11 $10.13 $10.17
========== ========== ========== ========== ==========
Total return (d) ............... 4.02% 3.00% 3.57% 6.20% 8.22%
========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's) $325,391 $248,460 $268,584 $302,395 $359,426
Ratio of expenses to average
net assets .................... 0.42% 0.42% 0.43% 0.43% 0.44%
Ratio of net investment income
to average net assets ......... 4.01% 2.91% 3.63% 5.96% 7.85%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1989 1988 1987 1986 1985
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR(A) .................... $10.13 $10.09 $10.02 $10.01 $ 9.83
---------- ---------- ---------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.89 0.73 0.64 0.67 0.79
Net realized and unrealized
gain (loss) on investments .. 0.01 (0.01) 0.01 (0.01) (0.01)
---------- ---------- ---------- --------- ---------
Total from investment
operations ................... 0.90 0.72 0.65 0.66 0.78
---------- ---------- ---------- --------- ---------
LESS DIVIDENDS:
Dividends from net investment
income ........................ (0.89) (0.68) (0.58) (0.65) (0.60)
---------- ---------- ---------- --------- ---------
Total dividends ............... (0.89) (0.68) (0.58) (0.65) (0.60)
---------- ---------- ---------- --------- ---------
Net asset value, end of year $10.14 $10.13 $10.09 $10.02 $10.01
========== ========== ========== ========= =========
Total return (d) ............... 9.18% 7.32% 6.63% 6.60% 8.15%
========== ========== ========== ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's) $289,338 $234,378 $154,606 $91,743 $87,652
Ratio of expenses to average
net assets .................... 0.44% 0.48% 0.46% 0.46% 0.48%
Ratio of net investment income
to average net assets ......... 8.70% 7.14% 6.29% 6.45% 7.91%
</TABLE>
<PAGE>
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO (E):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, APRIL 1, 1991 TO
----------------------- DECEMBER 31, 1991
1994 1993* 1992 -----------------
--------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period (a) .............. $ 10.08 $ 10.53 $ 10.73 $ 10.00
--------- ---------- ---------- -----------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................ 0.65 0.59 0.60 0.52
Net realized and unrealized gain (loss) on
investments .......................................... (1.08) 0.51 (0.02) 0.66
--------- ---------- ---------- -----------------
Total from investment operations ..................... (0.43) 1.10 0.58 1.18
--------- ---------- ---------- -----------------
LESS DISTRIBUTIONS:
Dividends from net investment income ................. (0.78) (0.68) (0.60) (0.34)
Distributions from realized gains .................... -- (0.87) (0.18) (0.11)
--------- ---------- ---------- -----------------
Total dividends and distributions .................... (0.78) (1.55) (0.78) (0.45)
--------- ---------- ---------- -----------------
Net asset value, end of period ........................ $ 8.87 $ 10.08 $ 10.53 $ 10.73
========= ========== ========== =================
Total return (d) ...................................... (4.37)% 10.58% 5.53% 12.10%
========= ========== ========== =================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................... $48,518 $158,511 $293,587 $241,290
Ratio of expenses to average net assets ............... 0.56% 0.53% 0.52% 0.43%
Ratio of net investment income to average net assets . 6.75% 5.43% 5.63% 4.88%
Portfolio turnover rate ............................... 133% 254% 316% 174%
<FN>
---------------
Footnotes appear on page 7.
</TABLE>
5
<PAGE>
QUALITY BOND PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER 1, 1993
YEAR ENDED TO
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period (a) ............ $ 9.82 $ 10.00
----------------- -----------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .............................. 0.66 0.11
Net realized and unrealized loss on investments ... (1.16) (0.16)
----------------- -----------------
Total from investment operations ................... (0.50) (0.05)
----------------- -----------------
LESS DISTRIBUTIONS:
Dividends from net investment income ............... (0.55) (0.12)
Distributions in excess of realized gains ......... -- (0.01)
Tax return of capital distributions ................ (0.05) --
----------------- -----------------
Total dividends and distributions .................. (0.60) (0.13)
----------------- -----------------
Net asset value, end of period ...................... $ 8.72 $ 9.82
================= =================
Total return (d) .................................... (5.10)% (0.51)%
================= =================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................... $127,575 $104,832
Ratio of expenses to average net assets ............. 0.59% 0.69%(b)
Ratio of net investment income to average net assets 7.17% 4.62%(b)
Portfolio turnover rate ............................. 222% 77%
</TABLE>
HIGH YIELD PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993* 1992 1991 1990
-------------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) .. $ 10.08 $ 9.15 $ 8.96 $ 7.97 $ 9.14
-------------- -------------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................... 0.89 0.94 0.89 0.89 1.04
Net realized and unrealized gain (loss) on
investments .............................. (1.17) 1.10 0.19 0.99 (1.14)
-------------- -------------- --------- --------- ---------
Total from investment operations .......... (0.28) 2.04 1.08 1.88 (0.10)
-------------- -------------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income ...... (0.88) (0.92) (0.89) (0.89) (1.07)
Dividends in excess of net investment
income ................................... (0.01) -- -- -- --
Distributions from realized gains ......... -- (0.19) -- -- --
-------------- -------------- --------- --------- ---------
Total dividends and distributions ......... (0.89) (1.11) (0.89) (0.89) (1.07)
-------------- -------------- --------- --------- ---------
Net asset value, end of period .............. $ 8.91 $ 10.08 $ 9.15 $ 8.96 $ 7.97
============== ============== ========= ========= =========
Total return (d) ............................ (2.79)% 23.15% 12.31% 24.46% (1.10)%
============== ============== ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........... $73,895 $67,169 $47,687 $45,066 $36,569
Ratio of expenses to average net assets .... 0.61% 0.63% 0.60% 0.61% 0.62%
Ratio of net investment income to average
net assets ................................ 9.23% 9.52% 9.58% 10.31% 12.04%
Portfolio turnover rate ..................... 248% 280% 177% 187% 53%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
JANUARY 2,
YEAR ENDED DECEMBER 31, 1987 TO
----------------------- DECEMBER 31,
1989 1988 1987
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of period (a) .. $ 9.72 $ 9.67 $ 10.00
-------------- -------------- --------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................... 1.09 1.00 1.06
Net realized and unrealized gain (loss) on
investments .............................. (0.60) (0.08) (0.60)
-------------- -------------- --------------
Total from investment operations .......... 0.49 0.92 0.46
-------------- -------------- --------------
LESS DISTRIBUTIONS:
Dividends from net investment income ...... (1.07) (0.87) (0.79)
Dividends in excess of net investment
income ................................... -- -- --
Distributions from realized gains ......... -- -- --
-------------- -------------- --------------
Total dividends and distributions ......... (1.07) (0.87) (0.79)
-------------- -------------- --------------
Net asset value, end of period .............. $ 9.14 $ 9.72 $ 9.67
============== ============== ==============
Total return (d) ............................ 5.14% 9.73% 4.68%
============== ============== ==============
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........... $41,280 $34,810 $10,687
Ratio of expenses to average net assets .... 0.62% 0.73% 0.98%
Ratio of net investment income to average
net assets ................................ 11.22% 10.05% 10.62%
Portfolio turnover rate ..................... 116% 209% 235%
<FN>
---------------
Footnotes appear on page 7.
</TABLE>
6
<PAGE>
---------------
FOOTNOTES TO FINANCIAL HIGHLIGHTS
* Prior to July 22, 1993, Equitable Capital Management Corporation
(Equitable Capital) served as the investment adviser to the Trust. On
July 22, 1993, Alliance Capital Management L.P. acquired the business and
substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
** Restated.
(a) Date as of which funds were first allocated to the Portfolios are as
follows:
Money Market Portfolio -- July 13, 1981
High Yield Portfolio -- January 2, 1987
Global Portfolio -- August 27, 1987
Conservative Investors Portfolio -- October 2, 1989
Growth Investors Portfolio -- October 2, 1989
Intermediate Government Securities Portfolio -- April 1, 1991
Quality Bond Portfolio -- October 1, 1993
Growth and Income Portfolio -- October 1, 1993
Equity Index Portfolio -- March 1, 1994
(b) Annualized.
(c) Net investment income and capital changes per share are based upon
monthly average shares outstanding.
(d) Total return is calculated assuming an initial investment made at the
net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Total return calculated for a
period of less than one year is not annualized.
(e) On February 22, 1994 shares of the Intermediate Government Securities
Portfolio of the Trust were substituted for shares of the Trust's
Short-Term World Income Portfolio.
7
<PAGE>
THE TRUST
The Trust is an open-end management investment company under the Investment
Company Act of 1940 (Investment Company Act). As a "series" type of mutual
fund, the Trust issues shares of beneficial interest currently divided among
thirteen Portfolios. Each Portfolio is a separate diversified series of the
Trust. The Trust's assets and liabilities are divided among these Portfolios.
Additional Portfolios may be established. Originally organized as a Maryland
corporation which commenced operations on March 22, 1985, the Trust was
formed as a Massachusetts business trust on July 10, 1987.
The Trust's shares are sold only to separate accounts of insurance companies
in connection with variable life insurance contracts and variable annuity
certificates and contracts (collectively, the Contracts) issued by The
Equitable Life Assurance Society of the United States (Equitable), Equitable
Variable Life Insurance Company (Equitable Variable), an affiliate of
Equitable, and certain insurance companies unaffiliated with Equitable or
Equitable Variable. Equitable and Equitable Variable were the record owners
of approximately 99.5% of the Trust's shares as of March 31, 1995, and
consequently may be deemed to control the Trust.
Shares of the Trust are sold to insurance company separate accounts of
companies that are not affiliated with each other. The Trust does not
currently foresee any disadvantages to policy owners arising from offering
the Trust's shares to separate accounts of insurance companies that are
unaffiliated with each other; however, it is theoretically possible that the
interests of owners of various policies participating in the Trust through
their separate accounts might at some time be in conflict. In the case of a
material irreconcilable conflict, one or more separate accounts might
withdraw their investments in the Trust, which would possibly force the Trust
to sell portfolio securities at disadvantageous prices.
INVESTMENT OBJECTIVES AND POLICIES
FUNDAMENTAL INVESTMENT OBJECTIVES
The following investment objectives of each Portfolio are fundamental and,
unless permitted by law, will not be changed without a vote of the holders of
the majority of the voting securities of that Portfolio. There can, of
course, be no assurance that a Portfolio will achieve its investment
objective.
THE ASSET ALLOCATION SERIES
o The Conservative Investors Portfolio's fundamental investment objective
is to achieve a high total return without, in the investment adviser's
opinion, undue risk to principal. It will pursue this objective by
investing in a diversified mix of publicly traded equity and debt
securities.
o The Growth Investors Portfolio's fundamental investment objective is to
achieve the highest total return consistent with the investment adviser's
determination of reasonable risk. It will pursue this objective by
investing in a diversified mix of publicly traded equity and fixed income
securities, including at times common stocks issued by intermediate and
small-sized companies and at times fixed income securities that are
medium and lower quality debt securities known as "junk bonds."
THE EQUITY SERIES
o The Growth and Income Portfolio's fundamental investment objective is to
provide a high total return through a combination of current income and
capital appreciation by investing primarily in income-producing common
stocks and securities convertible into common stocks.
o The Equity Index Portfolio's fundamental investment objective is to seek
a total return before expenses that approximates the total return
performance of the Standard & Poor's Corporation (S&P) 500 Index,
including reinvestment of dividends, at a risk level consistent with that
of the Index.
o The Global Portfolio's fundamental investment objective is to achieve
long-term growth of capital. The Global Portfolio will pursue this
objective by investing primarily in equity securities of non-United
States companies as well as United States issuers.
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o The International Portfolio's fundamental investment objective is to
achieve long-term growth of capital by investing primarily in a
diversified portfolio of equity securities selected principally to permit
participation in non-United States companies with prospects for growth.
THE FIXED INCOME SERIES
o The Money Market Portfolio's fundamental investment objective is to
obtain a high level of current income, preserve its assets and maintain
liquidity. The Money Market Portfolio will pursue this objective by
investing in primarily high quality U.S. dollar denominated money market
instruments.
o The Intermediate Government Securities Portfolio's fundamental investment
objective is to achieve high current income consistent with relative
stability of principal through investment primarily in debt securities
issued or guaranteed as to principal and interest by the U.S. Government
or any of its agencies or instrumentalities. The Portfolio's investments
will each have a final maturity of not more than ten years or a duration
not exceeding that of a 10-year Treasury note.
o The Quality Bond Portfolio's fundamental investment objective is to
achieve high current income consistent with preservation of capital by
investing primarily in investment grade fixed income securities. The
Quality Bond Portfolio reserves the right to invest in convertible debt
securities, preferred stocks and dividend-paying common stocks.
o The High Yield Portfolio's fundamental investment objective is to achieve
high return by maximizing current income and, to the extent consistent
with that objective, capital appreciation. The High Yield Portfolio will
pursue this objective by investing primarily in a diversified mix of high
yield, fixed income securities involving greater volatility of price and
risk of principal and income than high quality fixed income securities.
The medium and lower quality debt securities in which the Portfolio may
invest are known as "junk bonds."
INVESTMENT POLICIES
The following investment policies and restrictions, unless otherwise noted,
are not fundamental policies of the Portfolios. They may be changed by the
Board of Trustees without a shareholder vote, except as otherwise stated in
this Prospectus or in the Trust's SAI.
THE ASSET ALLOCATION SERIES
The Conservative Investors Portfolio and the Growth Investors Portfolio
together are called the Asset Allocation Series. These Portfolios invest in a
variety of fixed income and equity securities, each pursuant to a different
asset allocation strategy, as described below. The term "asset allocation" is
used to describe the process of shifting assets among discrete categories of
investments in an effort to reduce risk while producing desired return
objectives. Portfolio management, therefore, will consist not only of
specific securities selection but also of setting, monitoring and changing,
when necessary, the asset mix.
Each Portfolio has been designed with a view toward a different "investor
profile." The "conservative investor" has a relatively short-term investment
bias, either because of a limited tolerance for market volatility or a short
investment horizon. This investor is averse to taking risks that may result
in principal loss, even though such aversion may reduce the potential for
higher long-term gains and result in lower performance during periods of
equities market strength. Consequently, the asset mix for the Conservative
Investors Portfolio attempts to reduce volatility while providing modest
upside potential. The "growth investor" has a longer-term investment horizon
and is therefore willing to take more risks in an attempt to achieve
long-term growth of principal. This investor wishes, in effect, to be risk
conscious without being risk averse. The asset mix for the Growth Investors
Portfolio attempts to provide for upside potential without excessive
volatility.
The Trust's investment adviser has established an asset allocation committee
(the Committee), all the members of which are employees of the investment
adviser, which is responsible for setting and continually reviewing the asset
mix ranges of each Portfolio. The Committee meets at least twice each
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month. Under normal market conditions, the Committee is expected to change
allocation ranges approximately three to five times per year. However, the
Committee has broad latitude to establish the frequency, as well as the
magnitude, of allocation changes within the guidelines established for each
Portfolio. During periods of severe market disruption, allocation ranges may
change frequently. It is also possible that in periods of stable and
consistent outlook no change will be made. The Committee's decisions are
based on a variety of factors, including liquidity, portfolio size, tax
consequences and general market conditions, always within the context of the
appropriate investor profile for each Portfolio. Consequently, asset mix
decisions for the Conservative Investors Portfolio particularly emphasize
risk assessment of each asset class viewed over the shorter term, while
decisions for the Growth Investors Portfolio are principally based on the
longer term total return potential for each asset class.
When the Committee establishes a new allocation range for a Portfolio, it
also prescribes the length of time during which that Portfolio should achieve
an asset mix within the new range. To achieve a new asset mix, the Portfolios
look first to available cash flow. If cash flow proves insufficient to
achieve the desired asset mix, the Portfolios will sell securities and
reinvest the proceeds in the appropriate asset class.
The Asset Allocation Series Portfolios are permitted to use a variety of
hedging techniques to attempt to control stock market, interest rate and
currency risks. Each of the Portfolios in the Asset Allocation Series may
make loans of up to 50% of its total portfolio securities. Each of the
Portfolios in the Asset Allocation Series may write covered call and put
options and may purchase call and put options on all the types of securities
in which it may invest, as well as securities indexes and foreign currencies.
Each Portfolio may also purchase and sell stock index, interest rate and
foreign currency futures contracts and options thereon, as well as forward
foreign currency exchange contracts. See "Investment Techniques--Forward
Foreign Currency Exchange Contracts," below.
Risk Factors. In addition to the risk factors associated with certain types
of securities in which the Portfolios in the Asset Allocation Series may
invest, and in addition to the risk of loss inherent in any securities
ownership, there is associated with these Portfolios the risk that the
investment adviser will not accurately assess and respond to changing market
conditions. While the investment adviser has established the Committee to
help it anticipate and respond positively to changes in market conditions,
there can be no assurance that this goal will be achieved. Furthermore, there
may be additional operating expenses for these Portfolios during periods of
frequently changing asset mix ranges.
CONSERVATIVE INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Conservative Investors Portfolio attempts to achieve its investment
objective by allocating varying portions of its assets to high quality,
publicly traded fixed income securities (including money market instruments
and cash) and publicly traded common stocks and other equity securities of
United States and non-United States issuers. All fixed income securities held
by the Portfolio will be of investment grade. This means that they will be in
one of the top four rating categories assigned by S&P or Moody's Investors
Service, Inc. (Moody's). Equity securities invested in by the Portfolio will
consist of the types of securities in which the Common Stock Portfolio may
invest and may include convertible securities. No more than 15% of the
Portfolio's assets will be invested in securities of non-United States
issuers. See "Investment Techniques--Foreign Securities and Currencies,"
below.
The Portfolio will at all times hold at least 40% of its assets in investment
grade fixed income securities, each having a duration of less than that of a
10-year Treasury bond (the Fixed Income Core). Duration is a measure that
relates the price volatility of a bond to changes in interest rates. The
duration of a bond is the weighted average term to maturity, expressed in
years, of the present value of all future cash flows, including coupon
payments and principal repayments. Thus, by definition, duration is always
less than or equal to full maturity. As of December 31, 1994, the duration of
a 10-year Treasury bond was considered to be 7.0 years.
The Portfolio is generally expected to hold approximately 70% of its assets
in fixed income securities (including the Fixed Income Core) and 30% in
equity securities. Actual asset mixes will be adjusted in
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response to economic and credit market cycles. The fixed income asset class
will always comprise at least 50%, but never more than 90%, of the
Portfolio's total assets. The equity class will always comprise at least 10%,
but never more than 50%, of the Portfolio's total assets.
GROWTH INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Growth Investors Portfolio attempts to achieve its investment objective
by allocating varying portions of its assets to a number of asset classes.
Equity investments will include common stocks that are listed on national
securities exchanges as well as those that are traded over-the-counter and
also equity-type securities, which may include preferred stock and
convertible securities, and include securities issued by intermediate and
small-sized companies with favorable growth prospects. More risk is
associated with investment in intermediate and small-sized companies because
they are often dependent on only one or two products. They are more
vulnerable to competition from larger companies with greater resources and to
economic conditions affecting their market sector. Intermediate and
small-sized companies may be new, without long business or management
histories, and perceived by the market as unproven. Their securities may be
held primarily by insiders or institutional investors, which may affect
marketability. The prices of these stocks often fluctuate more than the
overall stock market. Fixed income investments will include investment grade
fixed income securities (including cash and money market instruments) as well
as securities that have a high current yield and that are either rated in the
lower categories by nationally recognized statistical rating organizations
NRSROs (i.e., Baa or lower by Moody's or BBB or lower by S&P) or are unrated.
For a discussion of the risks associated with investment in these higher
yielding securities, see "Investment Techniques--Fixed Income Securities";
"Investment Techniques--Risk Factors of Lower Rated Fixed Income Securities,"
below. For the fiscal year ended December 31, 1994, approximately 20.4% of
the Portfolio was invested in fixed income securities in the following rating
categories, determined on a dollar weighted basis: 12.9% in securities rated
AAA or its equivalent, 6.4% in securities rated BB or its equivalent and 1.1%
in securities rated B or its equivalent. Of these securities, all were rated
by an NRSRO. No more than 30% of the Portfolio's assets will be invested in
securities of non-United States issuers. See "Investment Techniques--Foreign
Securities and Currencies," below.
The Portfolio will at all times hold at least 40% of its assets in publicly
traded common stocks and other equity securities of the type purchased by the
Common Stock Portfolio (the Equity Core). The Portfolio is generally expected
to hold approximately 70% of its assets in equity securities (including the
Equity Core) and 30% in fixed income securities. Actual asset mixes will be
adjusted in response to economic and credit market cycles. The fixed income
asset class will always comprise at least 10%, but never more than 60%, of
the Portfolio's total assets. The equity class will always comprise at least
40%, but never more than 90%, of the Portfolio's total assets.
THE EQUITY SERIES
GROWTH AND INCOME PORTFOLIO--INVESTMENT POLICIES
The Growth and Income Portfolio seeks to maintain a portfolio yield above
that of issuers comprising the S&P 500 Index and to achieve (in the long run)
a rate of growth in portfolio income that exceeds the rate of inflation. The
Growth and Income Portfolio will generally invest in common stocks of "blue
chip" issuers, i.e., those (1) which have a total market capitalization of at
least $1 billion, (2) which pay periodic dividends and (3) whose common stock
is in the highest four issuer ratings for S&P (i.e., A+, A, A-or B+) or
Moody's (i.e., High Grade, Investment Grade, Upper Medium Grade or Medium
Grade) or, if unrated, is determined to be of comparable quality by the
Trust's investment adviser. It is expected that on average the dividend rate
of these issuers will exceed the average rate of issuers constituting the S&P
500 Index.
The Growth and Income Portfolio may invest without limit in securities
convertible into common stocks which include convertible bonds, convertible
preferred stocks and warrants convertible into common stocks. The Growth and
Income Portfolio may invest up to 30% of its total assets in high yield, high
risk convertible securities rated at the time of purchase below investment
grade (i.e., rated Ba or lower by
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Moody's or BB or lower by S&P or determined by the Trust's investment adviser
to be of comparable quality). Convertible securities normally provide a
higher yield than the underlying stock but lower than a fixed income security
without the convertible feature. Also, the price of a convertible security
will normally vary to some degree with changes in the price of the underlying
common stock although in some market conditions the higher yield tends to
make the convertible security less volatile than the underlying common stock.
In addition, the price of a convertible security will also vary to some
degree inversely with interest rates. For additional discussion of the risks
associated with investment in lower- rated securities, see "Investment
Techniques--Fixed Income Securities" and "Investment Techniques--Risk Factors
of Lower Rated Fixed Income Securities," below. For more information
concerning the bond ratings assigned by Moody's and S&P, see Appendix B.
The Growth and Income Portfolio does not expect to invest more than 25% of
its total assets in foreign securities, although it may do so without limit.
It may enter into foreign currency futures contracts (and related options),
forward foreign currency exchange contracts and options on currencies for
hedging purposes. See "Investment Techniques--Forward Foreign Currency
Exchange Contracts," below.
The Growth and Income Portfolio may write covered call and put options on
securities and securities indexes for hedging purposes or to enhance its
return and may purchase call and put options on securities and securities
indexes for hedging purposes. The Growth and Income Portfolio may also
purchase and sell securities index futures contracts and may write and
purchase options thereon for hedging purposes. See "Investment
Techniques--Options," "Investment Techniques--Futures," and "Investment
Techniques-- Risk Factors in Options and Futures," below.
For temporary defensive purposes, the Growth and Income Portfolio may invest
in certain money market instruments. See "Investment Techniques--Certain
Money Market Instruments," below.
EQUITY INDEX PORTFOLIO--INVESTMENT POLICIES
The Equity Index Portfolio's investment objective is to seek a total return
before expenses that approximates the total return performance of the S&P 500
Index (Index), including reinvestment of dividends, at a risk level
consistent with that of the Index. The Index is a widely publicized index
that tracks 500 companies traded on the New York and American Stock Exchanges
and in the over-the- counter market. It is weighted by market value so that
each company's stock influences the Index in proportion to its market
importance. While most issuers are among the 500 largest U.S. companies in
terms of aggregate market value, some other stocks are included by S&P for
purposes of diversification. The value of the Index may change over time due
to a variety of factors, including economic factors and events affecting
issuers included in the Index.
In managing the Equity Index Portfolio, the Trust's investment adviser will
not utilize customary economic, financial or market analyses or other
traditional investment techniques. Rather, the investment adviser will use
proprietary modeling techniques to construct a portfolio which it believes
will, in the aggregate, approximate the performance results of the Index. The
investment adviser will first select from the largest capitalization
securities in the Index on a capitalization-weighted basis. Generally, the
largest capitalization securities reasonably track the Index because the
Index is significantly influenced by a small number of securities. However,
selecting securities on the basis of their capitalization alone would distort
the Equity Index Portfolio's industry diversification, and therefore economic
events could potentially have a dramatically different impact on the
performance of the Equity Index Portfolio from that of the Index. Recognizing
this fact, the modeling techniques also consider industry diversification
when selecting investments for the Equity Index Portfolio. The investment
adviser also seeks to diversify the Equity Index Portfolio's assets with
respect to market capitalization. As a result, the Equity Index Portfolio
will include securities of smaller and medium-sized capitalization companies
in the Index.
Although the modeling techniques are intended to produce a portfolio whose
performance approximates that of the Index (before expenses), there can be no
assurance that these techniques will reduce "tracking error" (i.e., the
difference between the Equity Index Portfolio's investment results (before
expenses) and the Index's). Tracking error may arise as a result of brokerage
costs, fees and operating expenses and a lack of correlation between the
Equity Index Portfolio's investments and the Index.
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Cash may be accumulated in the Equity Index Portfolio until it reaches
approximately 1% of the value of the Equity Index Portfolio at which time
such cash will be invested in common stocks as described above. Accumulation
of cash increases tracking error. The Equity Index Portfolio will, however,
remain substantially fully invested in common stocks even when common stock
prices are generally falling. Also, adverse performance of a stock will
ordinarily not result in its elimination from the Equity Index Portfolio.
In order to reduce brokerage costs, maintain liquidity to meet shareholder
redemptions or minimize tracking error when the Equity Index Portfolio holds
cash, the Equity Index Portfolio may from time to time buy and hold futures
contracts on the Index and options on such futures contracts. See "Investment
Techniques--Futures" and "Investment Techniques--Risk Factors in Options and
Futures," below. The contract value of futures contracts purchased by the
Equity Index Portfolio plus the contract value of futures contracts
underlying call options purchased by the Equity Index Portfolio will not
exceed 20% of the Equity Index Portfolio's total assets.
The Equity Index Portfolio may seek to increase income by lending securities
with a value of up to 50% of its total assets to brokers-dealers. See
"Investment Techniques--Securities Lending," below.
GLOBAL PORTFOLIO--INVESTMENT POLICIES
The Global Portfolio attempts to achieve its objective by investing primarily
in a diversified portfolio of equity securities selected principally to
permit participation in established non-United States companies with
prospects for growth, as well as in securities issued by United States
companies. These non-United States companies may have operations in the
United States, in their country of incorporation or in other countries. The
Global Portfolio intends to diversify investments among several countries and
to have represented in the Portfolio business activities in not less than
three different countries (including the United States). For temporary or
defensive purposes, the Global Portfolio may at times invest substantially
all of its assets in securities issued by United States companies or in cash
or cash equivalents, including money market instruments issued by foreign
entities.
The Global Portfolio may invest in any type of security including, but not
limited to, shares, preferred or common, as well as shares of mutual funds
which invest in foreign securities, bonds and other evidences of
indebtedness, and other securities of issuers wherever organized and
governments and their political subdivisions. Although no particular
proportion of stocks, bonds or other securities is required to be maintained,
the Global Portfolio, in view of its investment objective, intends under
normal conditions to maintain a portfolio consisting primarily of a
diversified list of equity securities. The Portfolio may make secured loans
of up to 50% of its total portfolio securities. See "Investment
Techniques--Securities Lending," below. The Global Portfolio may write
covered call and put options and may purchase call and put options on
individual equity securities, securities indexes, and foreign currencies. The
Global Portfolio may also purchase and sell stock index, foreign currency and
interest rate futures contracts and options on such contracts, as well as
forward foreign currency exchange contracts. See "Investment
Techniques--Options," "Investment Techniques--Forward Foreign Currency
Exchange Contracts," "Investment Techniques--Futures," and "Investment
Techniques--Risk Factors in Options and Futures," below.
Risk Factors. For a discussion of the risks associated with investments in
foreign securities, see "Investment Techniques--Foreign Securities and
Currencies," below.
INTERNATIONAL PORTFOLIO--INVESTMENT POLICIES
The International Portfolio attempts to achieve its objective by investing
primarily in a diversified portfolio of equity securities selected
principally to permit participation in non-United States companies or foreign
governmental enterprises with prospects for growth. These non-United States
companies may have operations in the United States, in their country of
incorporation and/or in other countries. The International Portfolio intends
to have represented in the Portfolio business activities in not less than
three different countries and may invest anywhere in the world, including
Europe, Canada, Australia, Asia, Latin America and Africa. The International
Portfolio may purchase securities of developing
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countries, which include, among others, Mexico, Brazil, Hong Kong, India,
Poland, Turkey and South Africa. The International Portfolio intends to
diversify investments among several countries, although for temporary
defensive purposes, the International Portfolio may at times invest
substantially all of its assets in securities issued by a single major
developed country (e.g., the United States) or in cash or cash equivalents,
including money market instruments issued by that country.
The International Portfolio may invest in any type of investment grade, fixed
income security including, but not limited to, preferred stock, convertible
securities, bonds, notes and other evidences of indebtedness of foreign
issuers, including obligations of foreign governments. The International
Portfolio may also establish and maintain temporary cash balances in U.S. and
foreign short-term high-grade money market instruments for defensive purposes
or to take advantage of buying opportunities. Although no particular
proportion of stocks, bonds or other securities is required to be maintained,
the International Portfolio, in view of its investment objective, intends
under normal market conditions to maintain a portfolio consisting primarily
of a diversified list of equity securities. The International Portfolio may
make loans of up to 50% of its portfolio securities. See "Investment
Techniques--Securities Lending," below. The International Portfolio may write
covered call and put options and may purchase call and put options on
individual equity securities, securities indexes, and foreign currencies. See
"Investment Techniques--Options," below. The International Portfolio may also
purchase and sell stock index, foreign currency and interest rate futures
contracts and options on such contracts, as well as forward foreign currency
exchange contracts. See "Investment Techniques--Forward Foreign Currency
Exchange Contracts," "Investment Techniques--Futures," and "Investment
Techniques--Risk Factors in Options and Futures," below.
Risk Factors. For a discussion of the risks associated with investments in
foreign securities, see "Investment Techniques--Foreign Securities and
Currencies," below.
THE FIXED INCOME SERIES
MONEY MARKET PORTFOLIO--INVESTMENT POLICIES
The Money Market Portfolio attempts to achieve its objective by investing
primarily in a diversified portfolio of high-quality U.S. dollar-denominated
money market instruments. The instruments in which the Portfolio invests
include: (1) marketable obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities (collectively, the U.S.
Government); (2) certificates of deposit, bankers' acceptances, bank notes,
time deposits and interest bearing savings deposits issued or guaranteed by
(a) domestic banks (including their foreign branches) or savings and loan
associations having total assets of more than $1 billion and which are
members of the Federal Deposit Insurance Corporation (FDIC) in the case of
banks, or insured by the FDIC, in the case of savings and loan associations
or (b) foreign banks (either by their foreign or U.S. branches) having total
assets of at least $5 billion and having an issue of either commercial paper
rated at least A-1 by S&P or Prime-1 by Moody's or long term debt rated at
least AA by S&P or Aa by Moody's; (3) commercial paper (rated at least A-1 by
S&P or Prime-1 by Moody's or, if not rated, issued by domestic or foreign
companies having outstanding debt securities rated at least AA by S&P or Aa
by Moody's) and participation interests in loans extended by banks to such
companies; (4) mortgage-backed securities and asset-backed securities; (5)
corporate debt obligations with remaining maturities of less than one year,
rated at least AA by S&P or Aa by Moody's, as well as corporate debt
obligations rated at least A by S&P or Moody's, provided the corporation also
has outstanding an issue of commercial paper rated at least A-1 by S&P or
Prime-1 by Moody's; (6) floating rate or master demand notes; and (7)
repurchase agreements covering securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (see "Investment
Techniques--Repurchase Agreements," below). Time deposits with maturities
greater than seven days are considered to be illiquid securities.
Investments by the Money Market Portfolio are limited to those which present
minimal credit risk. If a security held by the Money Market Portfolio is no
longer deemed to present minimal credit risk, the Money Market Portfolio will
dispose of the security as soon as practicable unless the Trustees determine
that such action would not be in the best interest of the Portfolio.
Purchases of securities that are unrated must be ratified by the Trustees of
the Trust. Because the market value of debt obligations fluctuates as
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an inverse function of changing interest rates, the Portfolio seeks to
minimize the effect of such fluctuations by investing only in instruments
with a remaining maturity of 397 calendar days or less at the time of
investment, except for obligations of the U.S. Government, its agencies, and
instrumentalities which may have a remaining maturity of 762 calendar days or
less. The Portfolio will maintain a dollar- weighted average portfolio
maturity of 90 days or less. The Money Market Portfolio may invest up to 20%
of its total assets in U.S. dollar-denominated foreign money market
instruments. See "Investment Techniques--Foreign Securities and Currencies,"
below. The Portfolio may make secured loans of up to 50% of its total
portfolio securities. See "Investment Techniques--Securities Lending," below.
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO--INVESTMENT POLICIES
The Intermediate Government Securities Portfolio (Government Portfolio)
attempts to achieve its investment objective by investing primarily in debt
securities issued or guaranteed as to the timely payment of principal and
interest by the U.S. Government or any of its agencies or instrumentalities
(U.S. Government Securities). The Government Portfolio may also invest in
repurchase agreements and forward commitments related to U.S. Government
Securities. The Portfolio may seek to enhance its current return and may seek
to hedge against changes in interest rates by engaging in transactions
involving related options, futures and options on futures.
The Government Portfolio expects that under normal market conditions it will
invest at least 80% of its total assets in U.S. Government Securities and
repurchase agreements and forward commitments relating to U.S. Government
Securities. U.S. Government Securities include, without limitation, the
following:
o U.S. Treasury Bills--Direct obligations of the U.S. Treasury which are
issued in maturities of one year or less. No interest is paid on Treasury
Bills; instead, they are issued at a discount and repaid at full face
value when they mature. They are backed by the full faith and credit of
the U.S. Government.
o U.S. Treasury Notes--Direct obligations of the U.S. Treasury issued in
maturities which vary between one and ten years, with interest payable
every six months. They are backed by the full faith and credit of the
U.S. Government.
o U.S. Treasury Bonds--These direct obligations of the U.S. Treasury are
issued in maturities more than ten years from the date of issue, with
interest payable every six months. They are backed by the full faith and
credit of the U.S. Government.
o "Ginnie Maes"--Ginnie Maes are debt securities issued by a mortgage
banker or other mortgagee and represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the Farmer's
Home Administration or guaranteed by the Veteran's Administration. The
Government National Mortgage Association (GNMA) guarantees the timely
payment of principal and interest. Ginnie Maes, although not direct
obligations of the U.S. Government, are guaranteed by the U.S. Treasury.
o "Fannie Maes"--The Federal National Mortgage Association (FNMA) is a
government- sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Pass-through securities issued by FNMA are guaranteed
as to timely payment of principal and interest by FNMA and supported by
FNMA's right to borrow from the U.S. Treasury, at the discretion of the
U.S. Treasury. Fannie Maes are not backed by the full faith and credit of
the U.S. Government.
o "Freddie Macs"--The Federal Home Loan Mortgage Corporation (FHLMC), a
corporate instrumentality of the U.S. Government, issues participation
certificates (PCs) which represent an interest in residential mortgages
from FHLMC's National Portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by
the full faith and credit of the U.S. Government.
o Governmental Collateralized Mortgage Obligations--These are securities
issued by a U.S. Government instrumentality or agency which are backed by
a portfolio of mortgages or mortgage-backed securities held under an
indenture. See "Other Investments," below.
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o "Sallie Maes"--The Student Loan Marketing Association (SLMA) is a
government-sponsored corporation owned entirely by private stockholders
that provides liquidity for banks and other institutions engaged in the
Guaranteed Student Loan Program. These loans are either directly
guaranteed by the U.S. Treasury or guaranteed by state agencies and
reinsured by the U.S. Government. SLMA issues both short term notes and
longer term public bonds to finance its activities.
The Portfolio may also invest in "zero coupon" U.S. Government Securities
which have been stripped of their unmatured interest coupons and receipts or
in certificates representing undivided interests in such stripped U.S.
Government Securities and coupons. These securities tend to be more volatile
than other types of U.S. Government Securities.
Guarantees of the Portfolio's securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of principal at
maturity and interest when due on the guaranteed securities, and do not
guarantee the securities' yield or value or the yield or value of the
Government Portfolio's shares.
The Portfolio buys and sells securities with a view to maximizing current
return without, in the view of the investment adviser, undue risk to
principal. Potential capital gains resulting from possible changes in
interest rates will not be a major consideration. The Portfolio may take full
advantage of a wide range of maturities of U.S. Government Securities and may
adjust the dollar-weighted average maturity of its portfolio from time to
time, depending on its assessment of relative yields on securities of
different maturities and the expected effect of future changes in interest
rates on the market value of the Portfolio's portfolio. However, at all
times, each instrument in the Portfolio will have either a final maturity of
not more than ten years or a duration not exceeding that of a 10-year
Treasury note. Duration is a measure that relates the price volatility of a
security to changes in interest rates. The duration of a security is the
weighted average term to maturity, expressed in years, of the present value
of all future cash flows, including coupon payments and principal repayments.
Thus, by definition, duration is always less than or equal to full maturity.
As of December 31, 1994, the duration of a 10-year Treasury bond was
considered to be 7.0 years. The Portfolio may also invest a substantial
portion of its assets in money market instruments. See "Investment
Techniques--Certain Money Market Instruments," below.
It is a fundamental policy of the Government Portfolio that under normal
market conditions it will invest at least 65% of its total assets in U.S.
Government Securities and repurchase agreements and forward commitments
relating to U.S. Government Securities.
Other Investments. The Government Portfolio may also purchase collateralized
mortgage obligations (CMOs) issued by non-governmental issuers and securities
issued by a real estate mortgage investment conduit (REMIC). See "Investment
Techniques--Mortgage-Backed and Asset-Backed Securities," below. The
Government Portfolio will purchase only CMOs collateralized by U.S.
Government Securities. However, CMOs issued by entities other than U.S.
Government agencies or instrumentalities and securities issued by REMICs are
not considered U.S. Government Securities for purposes of the investment
policies of the Government Portfolio even though the CMOs may be
collateralized by U.S. Government Securities. Such securities will generally
be investment grade. In the event such securities fall below investment
grade, the Portfolio will not be obligated to dispose of such securities and
may continue to hold such securities if, in the opinion of the investment
adviser, such investment is considered appropriate under the circumstances.
In order to enhance its current return and to reduce fluctuations in net
asset value, the Portfolio may write call and put options on U.S. Government
Securities which are "covered" as described herein and may purchase call and
put options on U.S. Government Securities. The Portfolio may also enter into
interest rate futures contracts with respect to U.S. Government Securities,
and may write and purchase options thereon. See "Investment
Techniques--Options" and "Investment Techniques--Futures," below.
The Portfolio may also enter into forward commitments for the purchase of
U.S. Government Securities, purchase such securities on a when-issued or
delayed delivery basis, make secured loans of its portfolio
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securities without limitation and enter into repurchase agreements with
respect to U.S. Government Securities with commercial banks and registered
broker-dealers. See "Investment Techniques--Forward Commitments and
When-Issued and Delayed Delivery Securities," below.
The Portfolio may make short sales involving either securities retained in
the Portfolio's portfolio or securities which the Portfolio has the absolute
right to acquire without additional consideration.
Special Considerations. U.S. Government Securities are considered among the
safest of fixed income investments. As a result, however, their yields are
generally lower than the yields available from corporate debt securities. As
with other mutual funds, the value of the Portfolio's shares will fluctuate
with the value of its investments. The value of the Portfolio's investments
will change as the general level of interest rates fluctuates. During periods
of falling interest rates, the values of U.S. Government Securities generally
rise. Conversely, during periods of rising interest rates, the values of U.S.
Government Securities generally decline. In an effort to preserve the capital
of the Portfolio when interest rates are generally rising, the investment
adviser may shorten the average maturity of the U.S. Government Securities in
the Portfolio's portfolio. Because the principal values of U.S. Government
Securities with shorter maturities are less affected by rising interest
rates, a portfolio with a shorter average maturity will generally diminish
less in value during such periods than a portfolio of longer average
maturity. Since U.S. Government Securities with shorter maturities, however,
generally have a lower yield to maturity, the Portfolio's current return
based on its net asset value will generally be lower as a result of such
action than it would have been had such action not been taken. Ginnie Maes
and other mortgage-backed or mortgage related securities in which the
Portfolio invests may not be an effective means of "locking in" favorable
long-term interest rates since the Portfolio must reinvest scheduled and
unscheduled principal payments relating to such securities. At the time
principal payments or prepayments are received by the Portfolio and
reinvested, prevailing interest rates may be higher or lower than the
Portfolio's current yield.
At times when the Portfolio has written call options, its ability to profit
from declining interest rates will be limited. Any resulting appreciation in
the value of the Portfolio would likely be partially or wholly offset by the
losses on call options written by the Portfolio. The termination of option
positions under such conditions would result in the realization of capital
losses, which would reduce the amounts available for distribution to
shareholders.
QUALITY BOND PORTFOLIO--INVESTMENT POLICIES
The Quality Bond Portfolio expects to invest in readily marketable securities
with relatively attractive yields, but which do not, in the opinion of the
Trust's investment adviser, involve undue risk of loss of capital. The
Quality Bond Portfolio will follow a policy of investing at least 65% of its
total assets in securities which at the time of purchase are rated at least
Baa by Moody's or BBB by S&P, or in unrated fixed income securities
determined by the investment adviser to be of comparable quality. In the
event that the credit rating of a security held by the Quality Bond Portfolio
falls below investment grade (or, in the case of unrated securities, the
investment adviser determines that the quality of such security has
deteriorated below investment grade), the Quality Bond Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the investment adviser, such investment is considered
appropriate in the circumstances. The Quality Bond Portfolio will also seek
to maintain an average aggregate quality rating of its portfolio securities
of at least A (Moody's and S&P). For more information concerning the bond
ratings assigned by Moody's and S&P, see Appendix B.
The Quality Bond Portfolio has complete flexibility as to the types of
securities in which it will invest and the relative proportions thereof, and
the Quality Bond Portfolio plans to vary the proportions of its holdings of
long- and short-term fixed income securities (including debt securities,
convertible debt securities and U.S. Government obligations) and preferred
stocks in order to reflect its assessment of prospective cyclical changes
even if such action may adversely affect current income. The Quality Bond
Portfolio will not, however, invest more than 5% of its total assets in the
securities of any one issuer, excepting U.S. Government obligations, although
up to 25% of the total assets of the Portfolio may be invested without regard
to this restriction. Further, the Quality Bond Portfolio will not own more
than 10% of the outstanding voting securities of any issuer.
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The Quality Bond Portfolio may invest in foreign securities. The Quality Bond
Portfolio will not invest more than 20% of its total assets in securities
denominated in currencies other than the U.S. dollar. See "Investment
Techniques--Foreign Securities and Currencies," below. The Quality Bond
Portfolio may enter into foreign currency futures contracts (and related
options), forward foreign currency exchange contracts and options on foreign
currencies for hedging purposes. See "Investment Techniques--Forward Foreign
Currency Exchange Contracts," below.
For temporary defensive purposes, the Quality Bond Portfolio may invest in
certain money market instruments. See "Investment Techniques--Certain Money
Market Instruments," below.
The Quality Bond Portfolio may purchase put and call options written by
others and write covered put and call options overlying the types of
securities in which the Quality Bond Portfolio may invest. The Quality Bond
Portfolio also intends to write covered call options for cross-hedging
purposes. A call option is for cross-hedging purposes if it is designed to
provide a hedge against a decline in value of another security which the
Portfolio owns or has the right to acquire. See "Investment
Techniques--Options," below.
Interest Rate Transactions. The Quality Bond Portfolio may seek to protect
the value of its investments from interest rate fluctuations by entering into
various hedging transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio. The Quality Bond Portfolio may also
enter into these transactions to protect against an increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Quality
Bond Portfolio intends to use these transactions as a hedge and not as a
speculative investment. Interest rate swaps involve the exchange by the
Quality Bond Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
The Quality Bond Portfolio may enter into interest rate swaps, caps and
floors on either an asset-based or liability-based basis depending on whether
it is hedging its assets or its liabilities, and will only enter into such
swaps, caps and floors on a net basis, i.e., the two payment streams are
netted out, with the Quality Bond Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Quality Bond Portfolio's obligations over its
entitlements with respect to each interest rate swap, cap or floor will be
accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the custodian. The Quality Bond
Portfolio will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of
the other party thereto is rated in the highest rating category of at least
one NRSRO at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Quality Bond Portfolio
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and agents. As a result, the swap market has become well established and
provides a degree of liquidity. Caps and floors are more recent innovations
which tend to be less liquid than swaps.
Zero Coupon Securities. To the extent consistent with its investment
objective, the Quality Bond Portfolio may invest in "zero coupon" securities,
which are debt securities that have been stripped of their unmatured interest
coupons, and receipts or certificates representing interests in such stripped
debt obligations and coupons. A zero coupon security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face
value. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of
comparable
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maturities that make current distributions of interest. The Quality Bond
Portfolio may also invest in "pay-in-kind" debentures (i.e., debt obligations
the interest on which may be paid in the form of additional obligations of
the same type rather than cash) which have characteristics similar to zero
coupon securities.
The Quality Bond Portfolio may invest in collateralized mortgage obligations
or CMOs. See "Investment Techniques--Mortgage-Backed and Asset-Backed
Securities," below. The Portfolio may purchase and sell interest rate futures
contracts and options thereon and may make loans of securities with a value
of up to 50% of its total assets. See "Investment Techniques--Futures,"
"Investment Techniques--Risk Factors in Options and Futures" and "Investment
Techniques--Securities Lending," below.
HIGH YIELD PORTFOLIO--INVESTMENT POLICIES
The High Yield Portfolio attempts to achieve its objective by investing
primarily in a diversified mix of high yield, fixed income securities
potentially involving greater volatility of price and risk of principal and
income than high quality fixed income securities.
Ordinarily, the Portfolio will invest a portion of its funds in fixed income
securities which have a high current yield and that are either rated in the
lower categories of NRSROs (i.e., rated Baa or lower by Moody's or BBB or
lower by S&P) or are unrated. The Portfolio may also make temporary
investments in money market instruments of the same type as the Money Market
Portfolio. The Portfolio will not invest more than 10% of its total assets in
(i) fixed income securities which are rated lower than B3 or B- or their
equivalents by one NRSRO or if unrated are of equivalent quality as
determined by the investment adviser, and (ii) money market instruments of
any entity which has an outstanding issue of unsecured debt that is rated
lower than B3 or B- or their equivalents by an NRSRO or if unrated is of
equivalent quality as determined by the investment adviser; however, this
restriction will not apply to (i) fixed income securities which, in the
opinion of the investment adviser, have similar characteristics to securities
which are rated B3 or higher by Moody's or B- or higher by S&P, or (ii) money
market instruments of any entity that has an unsecured issue of outstanding
debt which, in the opinion of the investment adviser, has similar
characteristics to securities which are so rated. See Appendix B,
"Description of Bond Ratings," for a description of each rating category. In
the event that any securities held by the High Yield Portfolio fall below
those ratings, the Portfolio will not be obligated to dispose of such
securities and may continue to hold such securities if, in the opinion of the
investment adviser, such investment is considered appropriate under the
circumstances.
For the fiscal year ended December 31, 1994, the approximate percentages of
the Portfolio's average assets invested in securities of each rating
category, determined on a dollar weighted basis, were as follows: 8.5% in
securities rated AAA or its equivalent, 16.5% in securities rated BB or its
equivalent, 64.2% in securities rated B or its equivalent and 1.6% in
securities rated C or its equivalent. Of these securities, 90.8% were rated
by an NRSRO and 9.2% were unrated. All of the unrated securities were
considered by the investment adviser to be of comparable quality to the
Portfolio's investments rated by an NRSRO.
The Portfolio may also invest in fixed income securities which are providing
high current yields because of risks other than credit, such as prepayment
risks, in the case of mortgage-backed securities, or currency risks, in the
case of non-U.S. dollar denominated foreign securities. Smaller amounts may
also be invested in common stocks and other equity-type securities (such as
convertible debt securities). See "Investment Techniques--Fixed Income
Securities" and "Investment Techniques--Risk Factors of Lower Rated Fixed
Income Securities," below.
The High Yield Portfolio will be managed to maximize current income by taking
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. Substantially all of the Portfolio's investments
will be income producing. The Portfolio will use various strategies in
attempting to achieve its objective. The Portfolio may make secured loans of
its portfolio securities without limitation. See "Investment
Techniques--Securities Lending," below. In order to enhance its current
return and to reduce fluctuations in net asset value, the Portfolio may write
covered call and put options and may purchase call and put options on
individual fixed income securities, securities indexes and foreign
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currencies. The Portfolio may also purchase and sell stock index, interest
rate and foreign currency futures contracts and options thereon. See
"Investment Techniques--Options," "Investment Techniques-- Futures," and
"Risk Factors in Options and Futures," below.
INVESTMENT TECHNIQUES
The Portfolios have the flexibility to invest, within limits, in a variety of
instruments designed to enhance their investment capabilities. All of the
Portfolios, other than the Equity Index Portfolio, may make investments in
repurchase agreements, and all of the Portfolios may purchase or sell
securities on a when-issued, delayed delivery or forward commitment basis.
The Portfolios, other than the Money Market and the Equity Index Portfolios,
may write (i.e., sell) covered put and call options and buy put and call
options on securities and securities indexes. The Portfolios, other than the
Money Market, Equity Index and Government Portfolios, may also write covered
put and call options and buy put and call options on foreign currencies. The
High Yield, Global, International, Conservative Investors, Growth Investors,
Government, Quality Bond, Growth and Income and Equity Index Portfolios may
use exchange-traded financial futures contracts, and options thereon. A brief
description of certain of these investment instruments and their risks
appears below. More detailed information is to be found in the SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Portfolios, other than the Equity Index Portfolio, may invest in
mortgage-backed securities, which are mortgage loans made by banks, savings
and loan institutions and other lenders that are assembled into pools, that
are (i) issued by an agency of the U.S. Government (such as GNMA) whose
securities are guaranteed by the U.S. Treasury, (ii) issued by an
instrumentality of the U.S. Government (such as FNMA) whose securities are
supported by the instrumentality's right to borrow from the U.S. Treasury, at
the discretion of the U.S. Treasury, though not backed by the full faith and
credit of the U.S. Government itself, or (iii) collateralized by U.S.
Treasury obligations or U.S. Government agency securities. Interests in such
pools are described in this prospectus as mortgage-backed securities. The
Portfolios, other than the Equity Index Portfolio, may invest in (i)
mortgage-backed securities, including GNMA, FNMA and FHLMC certificates, (ii)
CMOs that are issued by non-governmental entities and collateralized by U.S.
Treasury obligations or by U.S. Government agency or instrumentality
securities, (iii) REMICs and (iv) other asset-backed securities. Other
asset-backed securities (unrelated to mortgage loans) may include securities
such as certificates for automobile receivables (CARS) and credit card
receivable securities (CARDS) as well as other asset-backed securities that
may be developed in the future.
The rate of return on mortgage-backed securities, such as GNMA, FNMA and
FHLMC certificates and CMOs, and, to a lesser extent, asset-backed securities
may be affected by early prepayment of principal on the underlying loans or
receivables. Prepayment rates vary widely and may be affected by changes in
market interest rates. It is not possible to accurately predict the average
life of a particular mortgage pool or pool of loans or receivables.
Reinvestment of principal may occur at higher or lower rates than the
original yield. Therefore, the actual maturity and realized yield on
mortgage-backed securities and, to a lesser extent, asset-backed securities
will vary based upon the prepayment experience of the underlying pool of
mortgages or pool of loans or receivables.
The fixed rate mortgage-backed and asset-backed securities in which the Money
Market Portfolio invests will have remaining maturities of less than one
year. The Portfolios may also invest in floating or variable rate
mortgage-backed and asset-backed securities on the same terms as they may
invest in floating or variable rate notes, described below under "Certain
Money Market Instruments."
CERTAIN MONEY MARKET INSTRUMENTS
All of the Portfolios may utilize money market instruments, including
certificates of deposit, time deposits, bankers' acceptances, bank notes and
other short-term debt obligations issued by commercial banks and certificates
of deposit, time deposits, and other short-term obligations issued by savings
and
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loan associations (S&Ls). Certificates of deposit are receipts from a bank or
an S&L for funds deposited for a specified period of time at a specified rate
of return. Time deposits in banks or S&Ls are generally similar to
certificates of deposit, but are uncertificated. Bankers' acceptances are
time drafts drawn on commercial banks by borrowers, usually in connection
with international commercial transactions.
The Portfolios, other than the Equity Index Portfolio, may also use
commercial paper, meaning short- term, unsecured promissory notes issued by
corporations to finance their short-term credit needs. In addition, these
Portfolios may invest in variable or floating rate notes. Variable and
floating rate notes provide for automatic establishment of a new interest
rate at fixed periodic intervals (e.g., daily, monthly) or whenever some
specified interest rate changes. The interest rate on variable or floating
rate securities is ordinarily determined by reference to some other objective
measure such as the U.S. Treasury bill rate. Many floating rate notes have
put or demand features which allow the holder to put the note back to the
issuer or the broker who sold it at certain specified times and upon notice.
Floating rate notes without such a put or demand feature, or in which the
notice period is greater than seven days, may be considered illiquid
securities.
FIXED INCOME SECURITIES
Fixed income securities include preferred and preference stocks and all types
of debt obligations of both domestic and foreign issuers (such as bonds,
debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper, mortgage-backed
securities and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
Corporate debt securities may bear fixed, contingent or variable rates of
interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer or participation based on revenues, sales or profits or the purchase
of common stock in a unit transaction (where corporate debt securities and
common stock are offered as a unit).
RISK FACTORS OF LOWER RATED FIXED INCOME SECURITIES
Fixed income investments that have a high current yield and that are either
rated in the lower categories by NRSROs (i.e., Baa or lower by Moody's or BBB
or lower by S&P) or are unrated are known as "junk bonds" and are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in medium and lower
quality bonds involves greater investment risk, achievement of a Portfolio's
investment objective will be more dependent on the investment adviser's
analysis than would be the case if that Portfolio were investing in higher
quality bonds. Medium and lower quality bonds may be more susceptible to real
or perceived adverse economic and individual corporate developments than
would investment grade bonds. For example, a projected economic downturn or
the possibility of an increase in interest rates could cause a decline in
high yield bond prices because such an event might lessen the ability of
highly leveraged high yield issuers to meet their principal and interest
payment obligations, meet projected business goals or obtain additional
financing. In addition, the secondary trading market for medium and lower
quality bonds may be less liquid than the market for investment grade bonds.
This potential lack of liquidity may make it more difficult for the
investment adviser to value accurately certain portfolio securities. Further,
as with many corporate bonds (including investment grade issues), there is
the risk that certain high yield bonds containing redemption or call
provisions may be called by the issuers of such bonds in a declining interest
rate market, and the relevant Portfolio would then have to replace such
called bonds with lower yielding bonds, thereby decreasing the net investment
income to the Portfolio. Prepayment of mortgages underlying mortgage-backed
securities, even though these securities will generally be rated in the
higher categories of NRSROs, may reduce their current yield and total return.
However, the Trust's investment adviser intends to invest in these securities
only when the potential benefits to a Portfolio are deemed to outweigh the
risks.
REPURCHASE AGREEMENTS
In repurchase agreements, a Portfolio buys securities from a seller, usually
a bank or brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a future date. During
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the term of the repurchase agreement, the Portfolio's custodian retains the
securities subject to the repurchase agreement as collateral securing the
seller's repurchase obligation, continually monitors on a daily basis the
market value of the securities subject to the agreement and requires the
seller to deposit with the Portfolio's custodian collateral equal to any
amount by which the market value of the securities subject to the repurchase
agreement falls below the resale amount provided under the repurchase
agreement. The creditworthiness of sellers is determined by the investment
adviser, subject to direction of and review by the Board of Trustees. Such
transactions afford an opportunity for the Portfolio to earn a fixed rate of
return on available cash at minimal market risk, although the Portfolio may
be subject to various delays and risks of loss if the seller is unable to
meet its obligation to repurchase. The staff of the SEC currently takes the
position that repurchase agreements maturing in more than seven days are
illiquid securities. No Portfolio will enter into a repurchase agreement if
as a result more than 15% of the Portfolio's net assets would be invested in
"illiquid securities" (except that the limitation is 10% for the Money Market
Portfolio).
LOAN ASSIGNMENTS AND PARTICIPATIONS
The High Yield Portfolio may invest in participations and assignments of
loans to corporate, governmental, or other borrowers originally made by
institutional lenders or lending syndicates. These investments are subject to
the same risks associated with fixed income securities generally. For
example, loans to foreign governments will involve a risk that the
governmental entities responsible for the repayment of the loan may be
unable, or unwilling, to pay interest and repay principal when due. In
addition, loan participations and assignments may have a lower yield because
they are often not rated and may also be less liquid than other debt
interests.
Even if the loans are secured, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the borrower's obligation, or
that the collateral can be liquidated. Also, if a loan is foreclosed, the
Portfolio could become part owner of any collateral, and would bear the costs
and liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the Portfolio could be held liable as a co-lender.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, the Portfolio has direct recourse against the borrower
(usually not the case with loan participations), it may have to rely on the
agent to apply appropriate credit remedies against a borrower. Consequently,
loan participations may also be adversely affected by the insolvency of the
lending bank or other intermediary.
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolios may enter into forward commitments for the purchase or sale of
securities and may purchase and sell securities on a when-issued or delayed
delivery basis. Forward commitments and when- issued or delayed delivery
transactions arise when securities are purchased or sold by a Portfolio with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price or yield to the Portfolio at the time
of entering into the transaction. However, the market value of such
securities may be more or less than the purchase price payable at settlement.
No payment or delivery is made by the Portfolio until it receives delivery or
payment from the other party to the transaction. When a Portfolio engages in
forward commitments or when-issued or delayed delivery transactions, the
Portfolio relies on the other party to consummate the transaction. Failure to
consummate the transaction may result in the Portfolio missing the
opportunity of obtaining a price or yield considered to be advantageous.
Forward commitments and when-issued and delayed delivery transactions are
generally expected to settle within three months from the date the
transactions are entered into, although the Portfolio may close out its
position prior to the settlement date. The Portfolio's custodian will
maintain, in a segregated account of the Portfolio, cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal
to or greater than the Portfolio's purchase commitments; the custodian will
likewise segregate securities sold under a forward commitment or on a delayed
delivery basis. A Portfolio will sell on a forward settlement basis only
securities it owns or has the right to acquire.
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OPTIONS
The Portfolios, other than the Money Market and the Equity Index Portfolios,
may write (sell) covered put and call options and buy put and call options,
including options relating to individual securities and securities indexes.
The Portfolios, other than the Money Market, Government and Equity Index
Portfolios, may also write covered put and call options and buy put and call
options on foreign currencies.
A call option is a contract that gives to the holder the right to buy a
specified amount of the underlying security at a fixed or determinable price
(called the exercise or strike price) upon exercise of the option. A put
option is a contract that gives the holder the right to sell a specified
amount of the underlying security at a fixed or determinable price upon
exercise of the option. In the case of index options, exercises are settled
through the payment of cash rather than the delivery of property. A call
option on a security will be considered covered, for example, if the
Portfolio holds the security upon which the option is written. The Portfolios
may write call options on securities or securities indexes for the purpose of
increasing their return or to provide a partial hedge against a decline in
the value of their portfolio securities or both. The Portfolios may write put
options on securities or securities indexes in order to earn additional
income or (in the case of put options written on individual securities) to
purchase the underlying security at a price below the current market price.
If a Portfolio writes an option which expires unexercised or is closed out by
the Portfolio at a profit, it will retain all or part of the premium received
for the option, which will increase its gross income. If the option is
exercised, the Portfolio will be required to sell or purchase the underlying
security at a disadvantageous price, or, in the case of index options,
deliver an amount of cash, which loss may only be partially offset by the
amount of premium received. Each of the Portfolios noted above may also
purchase put or call options on securities and securities indexes in order to
hedge against changes in interest rates or stock prices which may adversely
affect the prices of securities that the Portfolio wants to purchase at a
later date, to hedge its existing investments against a decline in value, or
to attempt to reduce the risk of missing a market or industry segment
advance. In the event that the expected changes in interest rates or stock
prices occur, the Portfolio may be able to offset the resulting adverse
effect on the Portfolio by exercising or selling the options purchased. The
premium paid for a put or call option plus any transaction costs will reduce
the benefit, if any, realized by the Portfolio upon exercise or liquidation
of the option. Unless the price of the underlying security or level of the
securities index changes by an amount in excess of the premium paid, the
option may expire without value to the Portfolio. See "Risk Factors in
Options and Futures," below.
Options purchased or written by the Portfolios may be traded on the national
securities exchanges or negotiated with a dealer. Options traded in the
over-the-counter market may not be as actively traded as those on an
exchange, so it may be more difficult to value such options. In addition, it
may be difficult to enter into closing transactions with respect to such
options. Such options, and the securities used as "cover" for such options,
may be considered illiquid securities.
In instances in which a Portfolio has entered into agreements with primary
dealers with respect to the over-the-counter options it has written, and such
agreements would enable the Portfolio to have an absolute right to repurchase
at a pre-established formula price the over-the-counter option written by it,
the Portfolio would treat as illiquid securities only the amount equal to the
formula price described above less the amount by which the option is
"in-the-money," i.e., the amount by which the price of the option exceeds the
exercise price.
The Portfolios, except the Money Market, Government and Equity Index
Portfolios, may purchase put and call options and write covered put and call
options on foreign currencies for the purpose of protecting against declines
in the dollar value of portfolio securities and against increases in the
dollar cost of securities to be acquired. Such investment strategies will be
used as a hedge and not for speculation. As in the case of other types of
options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received,
and the Portfolio could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies may be
23
<PAGE>
traded on the national securities exchanges or in the over-the-counter
market. As described above, options traded in the over-the-counter market may
not be as actively traded as those on an exchange, so it may be more
difficult to value such options. In addition, it may be difficult to enter
into closing transactions with respect to options traded over-the-counter.
FUTURES
The High Yield, Global, International, Conservative Investors, Growth
Investors, Government, Balanced and Quality Bond Portfolios may each purchase
and sell futures contracts and related options on debt securities and on
indexes of debt securities to hedge against anticipated changes in interest
rates that might otherwise have an adverse effect on the value of their
assets or assets they intend to acquire. In addition, each Portfolio listed
above (except the Government and Quality Bond Portfolios) as well as the
Growth and Income Portfolio may purchase and sell stock index futures
contracts and related options to hedge the equity portion of its assets or
equity assets it intends to acquire with regard to market risk as
distinguished from stock-specific risk. In the case of the Equity Index
Portfolio, futures contracts and related options on the S&P 500 Index may be
purchased in order to reduce brokerage costs, maintain liquidity to meet
shareholder redemptions or minimize tracking error. As described below under
"Foreign Securities and Currencies," the High Yield, Global, International,
Conservative Investors, Growth Investors, Quality Bond and Growth and Income
Portfolios may each enter into futures contracts and related options on
foreign currencies in order to limit its exchange rate risk. All futures
contracts and related options will be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission (CFTC). All of the
Portfolios, except the Money Market Portfolio, may enter into futures
contracts and buy and sell related options without limitation, except as
noted below. Pursuant to regulations of the CFTC which provide an exemption
from registration as a commodity pool operator, a Portfolio will not purchase
or sell futures contracts or options on futures contracts unless either (i)
the futures contracts or options thereon are for "bona fide hedging" purposes
(as that term is defined under the CFTC regulations) or (ii) if for other
purposes, the sum of amounts of initial margin deposits and premiums required
to establish non-hedging positions would not exceed 5% of the Portfolio's
liquidation value. In addition, the contract value of futures contracts
purchased by the Equity Index Portfolio plus the contract value of futures
contracts underlying call options purchased by the Equity Index Portfolio
will not exceed 20% of the Equity Index Portfolio's total assets. When a
Portfolio purchases or sells a futures contract or writes a put or call
option on a futures contract, the Portfolio will segregate with its custodian
cash or cash equivalents (less any related margin deposits) equal to the cost
of the futures contract it intends to sell or purchase to insure that such
futures positions are not leveraged, or may otherwise cover such positions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
All the Portfolios, except the Money Market, Government and Equity Index
Portfolios, may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time of the contract.
Generally, such forward contracts will be for a period of less than three
months. The Portfolios will enter into forward contracts for hedging purposes
only. These transactions will include forward purchases or sales of foreign
currencies for the purpose of protecting the dollar value of securities
denominated in a foreign currency or protecting the dollar equivalent of
interest or dividends to be paid on such securities. Forward contracts are
traded in the inter-bank market, and not on organized commodities or
securities exchanges.
RISK FACTORS IN OPTIONS AND FUTURES
To the extent a hedging transaction is effective, it will protect the value
of the securities or currencies which are hedged but may reduce or eliminate
the potential for gain. The effectiveness of a hedge depends, among other
things, on the correlation between the price movements of the hedging vehicle
and the hedged items, but these correlations generally are imperfect. A
hedging transaction may produce a loss as a result of such imperfect
correlations or for other reasons. The risks of trading futures contracts
24
<PAGE>
also include the risks of inability to effect closing transactions or to do
so at favorable prices; consequently, losses from investing in futures
contracts are potentially unlimited. The risks of option trading include
possible loss of the entire premium on purchased options and inability to
effect closing transactions at favorable prices. The extent to which a
Portfolio can benefit from investments involving options and futures
contracts may also be limited by various tax rules. Favorable results from
options and futures transactions may depend on the investment adviser's
ability to predict correctly the direction of securities prices, interest
rates and other economic factors.
FOREIGN SECURITIES AND CURRENCIES
All of the Portfolios, except the Government and Equity Index Portfolios, may
invest in foreign securities. Investments in foreign securities may involve a
higher degree of risk because of limited publicly available information,
non-uniform accounting, auditing and financial standards, reduced levels of
government regulation of foreign securities markets, difficulties and delays
in transaction settlements, lower liquidity and greater volatility,
withholding or confiscatory taxes, changes in currency exchange rates,
currency exchange control regulations and restrictions on and the costs
associated with the exchange of currencies and expropriation, nationalization
or other adverse political or economic developments. It may also be more
difficult to obtain and enforce a judgment against a foreign issuer or
enterprise and there may be difficulties in effecting the repatriation of
capital invested abroad. In addition, banking, securities and other business
operations abroad may not be subject to regulation as rigorous as that
applicable to similar activities in the United States. Further, there may be
restrictions on foreign investment in some countries. Special tax
considerations apply to foreign securities, and foreign brokerage commissions
and other fees are generally higher than in the United States.
The Portfolios may buy and sell foreign currencies principally for the
purpose of preserving the value of foreign securities or in anticipation of
purchasing foreign securities.
SECURITIES LENDING
For purposes of realizing additional income, each Portfolio may lend
securities with a value of up to 50% of its total assets to broker-dealers
approved by the Board of Trustees. In addition, the High Yield and Government
Portfolios may each make secured loans of its portfolio securities without
restriction. Any such loan of portfolio securities will be continuously
secured by collateral at least equal to the value of the security loaned.
Such collateral will be in the form of cash, marketable securities issued or
guaranteed by the U.S. Government or its agencies, or a standby letter of
credit issued by qualified banks. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed by the investment
adviser to be of good standing and will not be made unless, in the judgment
of the investment adviser, the consideration to be earned from such loans
would justify the risk.
CERTAIN INVESTMENT RESTRICTIONS
The following restrictions apply to all of the Portfolios, unless otherwise
stated, and are fundamental. Unless permitted by law, they will not be
changed for any Portfolio without a vote of that Portfolio's shareholders.
Additional investment restrictions appear in the SAI.
None of the Portfolios will make loans, except that this restriction shall
not apply to secured loans of portfolio securities by each of the Portfolios.
Each Portfolio, other than the High Yield and Government Portfolios, may make
loans of portfolio securities not exceeding 50% of the value of that
Portfolio's total assets. This restriction does not prevent a Portfolio from
purchasing debt obligations in which a Portfolio may invest consistent with
its investment policies, or from buying government obligations, short-term
commercial paper or publicly traded debt, including bonds, notes, debentures,
certificates of deposit, and equipment trust certificates, nor does this
restriction apply to loans made under insurance policies or through entry
into repurchase agreements to the extent they may be viewed as loans. The
High Yield and Government Portfolios may make secured loans of portfolio
securities or cash without limitation.
25
<PAGE>
Each Portfolio, except as noted below, elects not to "concentrate"
investments in an industry, as that concept is defined under applicable
federal securities laws. In general, this means that no Portfolio will make
an investment in an industry if that investment would make the Portfolio's
holding in that industry exceed 25% of the Portfolio's total assets. However,
this restriction does not apply to investments by the Money Market Portfolio
in certificates of deposit or securities issued and guaranteed by domestic
banks. Furthermore, the United States Government, its agencies and
instrumentalities are not considered members of any industry for purposes of
this restriction.
Each Portfolio intends to be "diversified," as that term is defined under
applicable Federal securities laws. In general, this means that no Portfolio
will make an investment unless, when considering all its other investments,
75% of the value of the Portfolio's assets would consist of cash, cash items,
U.S. Government securities, securities of other investment companies and
other securities. For the purposes of this restriction, "other securities"
are limited for any one issuer to not more than 5% of the value of the
Portfolio's total assets and to not more than 10% of the issuer's outstanding
voting securities.
As a matter of operating policy, except as noted below, the Money Market
Portfolio will invest no more than 5% of the value of its total assets, at
the time of acquisition, in the securities of any one issuer, other than
obligations of the U.S. Government, its agencies and instrumentalities.
However, the Money Market Portfolio may invest up to 25% of the value of its
total assets in First Tier Securities (as defined in Rule 2a-7 under the
Investment Company Act of 1940) of a single issuer for a period of up to
three business days after the purchase of such securities. The Money Market
Portfolio will also not (i) invest more than 5% of the value of its total
assets, at time of acquisition, in Second Tier Securities (as defined in Rule
2a-7 under the Investment Company Act of 1940) or (ii) invest more than the
greater of 1% of the value of the Portfolio's total assets or $1,000,000, at
the time of acquisition, in Second Tier Securities of a single issuer.
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<PAGE>
MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES
The Board of Trustees is responsible for the management of the business and
affairs of the Trust as provided in the laws of the Commonwealth of
Massachusetts and the Trust's Declaration of Trust and By-laws.
THE INVESTMENT ADVISER
Alliance Capital Management L.P. (Alliance), the main office of which is
located at 1345 Avenue of the Americas, New York, New York 10105, serves as
investment adviser to the Trust pursuant to an investment advisory agreement,
relating to each of the Portfolios, between the Trust and Alliance. Alliance,
a publicly traded limited partnership, is indirectly majority-owned by
Equitable.
Alliance is an investment adviser registered under the Investment Advisers
Act of 1940 (Advisers Act). Alliance, a leading international investment
adviser, acts as an investment adviser to various separate accounts and
general accounts of Equitable and other affiliated insurance companies.
Alliance also provides investment advisory and management services to other
investment companies and to endowment funds, insurance companies, foreign
entities, qualified and non-tax qualified corporate funds, public and private
pension and profit-sharing plans, foundations and tax-exempt organizations.
Alliance manages the day-to-day investment operations of the Trust and
exercises responsibility for the investment and reinvestment of the Trust's
assets. Alliance provides, without charge, personnel to the Trust to render
such clerical, accounting, administrative and other services, other than
investor services, as the Trust may request.
The advisory fee payable by the Trust is at the following annual percentages
of the value of each Portfolio's daily average net assets:
<TABLE>
<CAPTION>
DAILY AVERAGE NET ASSETS
---------------------------------------------
FIRST $350 NEXT $400 OVER $750
MILLION MILLION MILLION
-------------- -------------- -------------
<S> <C> <C> <C>
Conservative Investors .550% .525% .500%
Growth Investors ...... .550% .525% .500%
Global ................ .550% .525% .500%
Money Market .......... .400% .375% .350%
Intermediate
Government Securities .500% .475% .450%
High Yield ............ .550% .525% .500%
</TABLE>
<TABLE>
<CAPTION>
FIRST $500 NEXT $500 OVER $1
MILLION MILLION BILLION
-------------- -------------- ------------
<S> <C> <C> <C>
Growth and Income .550% .525% .500%
Quality Bond ...... .550% .525% .500%
</TABLE>
<TABLE>
<CAPTION>
FIRST $750 NEXT $750 OVER $1.5
MILLION MILLION BILLION
-------------- -------------- --------------
<S> <C> <C> <C>
EQUITY INDEX .350% .300% .250%
</TABLE>
<TABLE>
<CAPTION>
FIRST $500 NEXT $1 OVER $1.5
MILLION BILLION BILLION
-------------- ------------ -------------
<S> <C> <C> <C>
International .900% .850% .800%
</TABLE>
27
<PAGE>
THE PORTFOLIO MANAGERS
THE ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS AND GROWTH INVESTORS PORTFOLIOS
Franklin Kennedy III, has been the person principally responsible for the
Conservative Investors and Growth Investors Portfolios' investment program
since their inception. Mr. Kennedy, a Senior Vice President of Alliance, with
which he has been associated since 1993, previously was employed by Equitable
Capital Management Corporation (Equitable Capital) since prior to 1990.
THE EQUITY SERIES
GROWTH AND INCOME PORTFOLIO
Mr. Kennedy and W. Theodore Kuck have been the persons principally
responsible for the Growth and Income Portfolio's investment program since
its inception. Mr. Kuck, a Vice President of Alliance, with which he has been
associated since 1993, previously was employed by Equitable Capital since
prior to 1990.
EQUITY INDEX PORTFOLIO
Judith A. Maglio has been the person principally responsible for the Equity
Index Portfolio's investment program since inception. Ms. Maglio, a Vice
President of Alliance, has been associated with Alliance since prior to 1990.
GLOBAL AND INTERNATIONAL PORTFOLIOS
Ronald Simcoe has been the person principally responsible for the Global
Portfolio's investment program since 1988 and the International Portfolio's
investment program since its inception. Mr. Simcoe, a Vice President of
Alliance, with which he has been associated since 1993, previously was
employed by Equitable Capital since prior to 1990.
THE FIXED INCOME SERIES
MONEY MARKET PORTFOLIO
Raymond J. Papera has been the person principally responsible for the Money
Market Portfolio's investment program since 1990. Mr. Papera, a Vice
President of Alliance, with which he has been associated since 1993,
previously was employed by Equitable Capital since 1990.
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
Patricia J. Young and Paul A. Ullman are the persons principally responsible
for the Intermediate Government Securities Portfolio's investment program as
of May 1, 1995. Ms. Young, Senior Vice President of Alliance, with which she
has been associated since 1992, previously was employed by Hyperion Capital
(beginning in 1991) and Fischer, Francis, Trees & Watts prior thereto. Mr.
Ullman, Vice President of Alliance, with which he has been associated since
1992, previously was employed by Hyperion Capital since 1990.
QUALITY BOND PORTFOLIO
Matthew Bloom is the person principally responsible for the Quality Bond
Portfolio's investment program as of May 1, 1995. Mr. Bloom, a Vice President
of Alliance, has been associated with Alliance since 1989.
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<PAGE>
HIGH YIELD PORTFOLIO
Amy Nussbaum has been the person principally responsible for the High Yield
Portfolio's investment program since 1992. Ms. Nussbaum, a Vice President of
Alliance, with which she has been associated since 1993, previously was
employed by Equitable Capital since prior to 1990.
THE TRUST'S EXPENSES
The Trust's investment adviser pays all of the Trust's operating expenses not
specifically assumed by the Trust. In addition to the investment advisory fee
and brokers' commissions, transfer taxes and other fees relating to
purchases, loans and sales of investments, a number of expenses are paid
directly by the Trust. The Trust pays Trustees' fees and expenses; the fees
and expenses of its independent auditors and of its legal counsel; the costs
of printing and mailing of annual and semi-annual reports to shareholders,
proxy statements, prospectuses, prospectus supplements and SAIs, all to the
extent they are sent to existing Contract owners; the costs of printing of
registration statements; bank transaction charges and custodian's fees; any
proxy solicitors' fees and expenses; SEC filing fees; any federal, state or
local income or other taxes; any interest; any membership fees of the
Investment Company Institute and similar organizations; fidelity bond and
Trustees' liability insurance premiums; and any extraordinary expenses, such
as indemnification payments or damages awarded in litigation or settlements
made. Of these expenses, only .25% of investment advisory fees are reflected
in the Financial Highlights for periods prior to March 22, 1985. The
following table, reflecting the Trust's expenses, is based on information for
the year ended December 31, 1994.
<TABLE>
<CAPTION>
CONSERVATIVE GROWTH GROWTH AND
INVESTORS INVESTORS INCOME EQUITY INDEX
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*
------------------------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Investment Advisory Fees 0.55% 0.54% 0.55% 0.35%
Other Expenses ........... 0.04% 0.05% 0.23% 0.14%
-------------- ----------- ----------- ------------
Total Expenses ........... 0.59% 0.59% 0.78% 0.49%
============== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE
MONEY GOVERNMENT QUALITY
GLOBAL MARKET SECURITIES BOND HIGH YIELD
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.54% 0.40% 0.50% 0.55% 0.55%
Other Expenses ........... 0.15% 0.02% 0.06% 0.04% 0.06%
----------- ----------- -------------- ----------- -----------
Total Expenses ........... 0.69% 0.42% 0.56% 0.59% 0.61%
=========== =========== ============== =========== ===========
</TABLE>
* Annualized.
No information has been provided with respect to the International Portfolio
because such Portfolio has not yet completed a fiscal year.
TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
(DLJ). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation,
is one of the nation's largest investment banking and securities firms.
Another DLJ subsidiary, Autranet, Inc., is a securities broker that markets
independently originated research to institutions. Through the Pershing
Division of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ supplies
security execution and clearance services to financial intermediaries
including broker-dealers and banks. To the extent permitted by law, the Trust
may engage in securities and other transactions with the above entities or
may invest in shares of the investment companies with which those entities
have affiliations. The Investment Company Act generally prohibits the Trust
from engaging in securities transactions with DLJ or its affiliates, as
principal, unless pursuant to an exemptive order from the SEC. The Trust may
apply for such exemptive relief. The Trust has adopted procedures, prescribed
by Section 17(e)(2)(A) of the Investment Company Act and Rule 17e-1
thereunder, which are reasonably designed to provide that any commissions it
pays to DLJ or its affiliates do not exceed the usual and customary broker's
commission. In addition, the Trust will adhere to
29
<PAGE>
Section 11(a) of the Securities Exchange Act of 1934 and any applicable rules
thereunder governing floor trading. The Trust has adopted procedures
permitting it to purchase securities, under certain restrictions prescribed
by an SEC rule, in a public offering in which DLJ or an affiliate is an
underwriter.
DESCRIPTION OF THE TRUST'S SHARES
CHARACTERISTICS
The Board of Trustees has authority to issue an unlimited number of shares of
beneficial interest, without par value. The shares are divided into thirteen
classes, one class for each Portfolio. Each share is entitled to one vote,
and fractional shares are entitled to fractional votes. The Board of Trustees
may establish additional Portfolios and related classes of shares. The Trust
is not required to hold annual shareholder meetings, but special meetings may
be called for purposes such as electing or removing trustees, changing
fundamental policies or approving an investment advisory agreement.
PURCHASE AND REDEMPTION
Equico Securities, Inc. (Equico), a wholly-owned subsidiary of Equitable, is
the principal underwriter of the Trust. Equico's address is 1755 Broadway,
New York, New York 10019. The Trust will offer and sell its shares without a
sales charge, at each Portfolio's net asset value per share. The price at
which a purchase is effected is based on the next calculation of net asset
value after an order is placed by an insurance company investing in the
Trust. Net asset value per share is calculated for purchases and redemption
of shares of each Portfolio by dividing the value of total Portfolio assets,
less liabilities (including Trust expenses, which are accrued daily), by the
total number of shares of that Portfolio outstanding. The net asset value per
share of each Portfolio is determined each business day at 4:00 p.m. Eastern
time. Values are not calculated on national business holidays.
All shares may be redeemed in accordance with the Trust's Declaration of
Trust and By-Laws. Shares will be redeemed at their net asset value. Sales
and redemptions of shares of the same class by the same shareholder on the
same day will be netted. All redemption requests will be processed and
payment with respect thereto will be made within seven days after tenders.
The Trust may also suspend redemption, if permitted by the Investment Company
Act, for any period during which the New York Stock Exchange is closed or
during which trading is restricted by the SEC or the SEC declares that an
emergency exists. Redemption may also be suspended during other periods
permitted by the SEC for the protection of the Trust's shareholders.
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows, as further described in the SAI:
o Stocks and debt securities which mature in more than 60 days are valued
on the basis of market quotations.
o Foreign securities not traded directly, or in American Depositary
Receipt or similar form in the United States, are valued at representative
quoted prices in the currency of the country of origin. Foreign currency
amounts are translated into U.S. dollars at the bid price last quoted by a
composite list of major U.S. banks.
o Short-term debt securities in the Portfolios other than the Money Market
Portfolio which mature in 60 days or less are valued at amortized cost, which
approximates market value. Securities held in the Money Market Portfolio are
valued at prices based on equivalent yields or yield spreads.
o Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good faith
by the Valuation Committee of the Board of Trustees using its best judgment.
30
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio
is entitled, and the Trust intends that each Portfolio shall qualify each
year and elect, to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (Internal
Revenue Code). As a regulated investment company, a Portfolio will not be
subject to federal tax on its net investment income and net realized capital
gains to the extent such income and gains are timely distributed to its
insurance company shareholders. Accordingly, each Portfolio intends to
distribute all of its net investment income and net realized capital gains to
its shareholders. An insurance company which is a shareholder of a Portfolio
will generally not be taxed on distributions from that Portfolio. All
dividend distributions will be reinvested in full and fractional shares of
the Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so
that they will have no federal income or excise tax liability, if any such
liability is nevertheless incurred, the investment performance of the
Portfolio or Portfolios incurring such liability will be adversely affected.
In addition, Portfolios investing in foreign securities and currencies may be
subject to foreign taxes which could reduce the investment performance of
such Portfolio.
In addition to meeting investment diversification rules applicable to
regulated investment companies under Subchapter M of the Internal Revenue
Code, because the Trust funds certain types of Contracts, each Portfolio is
also subject to the investment diversification requirements of Subchapter L
of the Internal Revenue Code. Were any Portfolio to fail to comply with those
requirements, owners of Contracts (other than "pension plan contracts")
funded through the Trust would be taxed immediately on the accumulated
investment earnings under their Contracts and would thereby lose any benefit
of tax deferral. Compliance is therefore carefully monitored by the
investment adviser.
Certain additional tax information appears in the SAI.
For more information regarding the tax implications for owners of Contracts
investing in the Trust, refer to the prospectuses for those products.
INVESTMENT PERFORMANCE
Each Portfolio may illustrate in advertisements or sales materials its
average annual total return, which is the rate of growth of the Portfolio
that would be necessary to achieve the ending value of an investment kept in
the Portfolio for the period specified and is based on the following
assumptions: (1) all dividends and distributions by the Portfolio are
reinvested in shares of the Portfolio at net asset value, and (2) all
recurring fees are included for applicable periods.
Each Portfolio may also illustrate in advertisements or sales materials its
cumulative total return for several time periods throughout the Portfolio's
life based on an assumed initial investment of $1,000. Any such cumulative
total return for each Portfolio will assume the reinvestment of all income
dividends and capital gains distributions for the indicated periods and will
include all recurring fees.
The Money Market Portfolio may illustrate in advertisements or sales
materials its yield and effective yield. The Portfolio's yield refers to
income generated by an investment in the Portfolio over a 7-day period,
expressed as an annual percentage rate. The Money Market Portfolio's
effective yield is calculated similarly but assumes that income earned from
the investment is reinvested. The Portfolio's effective yield will be
slightly higher than its yield because of the compounding effect of this
assumed reinvestment.
The Government, Quality Bond and High Yield Portfolios each may illustrate in
advertisements or sales materials its yield based on a recent 30-day period,
which reflects the income per share earned by that Portfolio's investments.
The yield is calculated by dividing that Portfolio's net investment income
per share during that period by the net asset value on the last day of that
period and annualizing the result.
These performance figures are based on historical earnings and are not
intended to indicate future performance. Nor do they reflect fees and charges
imposed under the Contracts, which fees and charges will reduce such
performance figures; therefore, these figures may be of limited use for
comparative purposes. No Portfolio will use information concerning its
investment performance in advertisements or sales materials unless
appropriate information concerning the relevant separate account is also
included.
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<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
Bonds are considered to be "investment grade" if they are in one of the top
four ratings.
S&P's ratings are as follows:
o Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
o Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
o Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher
rated categories.
o Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than in higher rated categories.
o Debt rated BB, B, CCC, CC or C is 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 obligation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse debt conditions.
o The rating C1 is reserved for income bonds on which no interest is
being paid.
o Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Moody's ratings are as follows:
o Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." 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.
o Bonds which are rated Aa 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.
o Bonds which are rated A 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 some time in the
future.
o Bonds which are rated Baa are considered as medium grade obligations,
i.e., 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.
A-1
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o Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
o 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.
o Bonds which are rated Ca represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
o Bonds which are rated C are the lowest 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 modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its 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 rating category.
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