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HOTCHKIS AND WILEY FUNDS
SUPPLEMENT TO PROSPECTUS
DATED AUGUST 29, 1997
INVESTMENT OBJECTIVES AND POLICIES -- THE BALANCED INCOME FUND
INVESTMENT OBJECTIVES AND POLICIES -- THE FIXED-INCOME FUNDS -- INVESTMENT
POLICIES OF THE FIXED-INCOME FUNDS
In addition to the types of securities listed on page 18 of the Prospectus,
the Balanced Fund (formerly called the "Balanced Income Fund") may invest in
municipal obligations. In addition to the types of securities listed on pages 19
and 20 of the Prospectus, the Total Return Bond Fund, the Low Duration Fund and
the Short-Term Investment Fund (collectively, the "Fixed-Income Funds") may
invest in municipal obligations.
SECURITIES AND TECHNIQUES USED BY THE FUNDS
MUNICIPAL OBLIGATIONS
The Balanced and Fixed-Income Funds may invest in municipal obligations
issued by or on behalf of the governments of states, territories or possessions
of the United States, the District of Columbia and their agencies and
instrumentalities.
Municipal obligations may be backed by the full taxing power of a
municipality ("general obligations"), backed by the revenues from a specific
project or the credit of a private organization ("revenue obligations") or
issued by or on behalf of public authorities to provide funding for various
privately operated industrial and commercial facilities ("private activity
bonds"). Some municipal obligations are collateralized as to payment of
principal and interest by an escrow of U.S. Government or federal agency
obligations, while others are insured by private insurance companies, while
still others may be supported by letters of credit furnished by domestic or
foreign banks. Others are not backed by escrowed securities, insurance, letters
of credit or other credit enhancements.
The Balanced and Fixed-Income Funds' investments in municipal obligations
may include fixed, variable or floating rate general obligations, revenue
obligations and other obligations, including municipal lease obligations;
resource recovery obligations; certificates of participation; inverse floaters;
instruments with demand features, tender option bonds and standby commitments;
private activity obligations; zero coupon and asset-backed obligations; variable
rate auction and residual interest obligations; tax, revenue or bond
anticipation notes; tax-exempt commercial paper; and purchase obligations that
are subject to restrictions on resale. See the Statement of Additional
Information for a further discussion of these obligations.
The Balanced and Fixed-Income Funds may invest a portion of the value of
their assets in municipal obligations which are related in such a way that an
economic, business or political development or change affecting one such
security would also affect the other securities. Examples of these include
securities the interest on which is paid from revenues of similar types of
projects, or securities whose issuers are located in the same state. As a
result, the Balanced and Fixed-Income Funds may be subject to greater risk
compared to funds that do not follow this practice.
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ORGANIZATION AND MANAGEMENT -- SUBADVISORS
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International ("Mercury") and Merrill Lynch Asset Management U.K.
Limited, affiliated investment advisors that are subsidiaries of Merrill Lynch &
Co., Inc. The subadvisory arrangements are for investment research,
recommendations and other investment related services to be provided to the
International and Global Equity Funds at rates of compensation as may be agreed
by the parties. There is no increase in the aggregate fees paid by these Funds
for such services. David Chambers, whose biography appears under "Portfolio
Managers -- International Fund," has become associated with Mercury and is
located in London.
APPENDIX -- DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE
MUNICIPAL BOND RATINGS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.
STANDARD & POOR'S RATINGS GROUP
MUNICIPAL BOND RATINGS:
S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a very strong or strong capacity to pay principal and interest.
July 29, 1998
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HOTCHKIS AND WILEY FUNDS
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 29, 1997
INVESTMENT OBJECTIVES AND POLICIES
MUNICIPAL OBLIGATIONS
The two principal classifications of municipal bonds, notes and commercial
paper are "general obligation" and "revenue" bonds, notes or commercial paper.
General obligation bonds, notes or commercial paper are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Issuers of general obligation bonds, notes or commercial paper include
states, counties, cities, towns and other governmental units. Revenue bonds,
notes and commercial paper are payable from the revenues derived from a
particular facility or class of facilities or, in come cases, from specific
revenue sources. Revenue bonds, notes or commercial paper are issued for a wide
variety of purposes, included the financing of electric, gas, water and sewer
systems and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.
Included within the revenue bonds category are participations in municipal
lease obligations or installment purchase contracts of municipalities
(collectively, "lease obligations"). State and local governments issue lease
obligations to acquire equipment leases and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may
provide for title to the leased asset to pass eventually to the issuer) have
developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional and statutory
requirements generally applicable for the issuance of debt. Certain lease
obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on an annual or other periodic basis. Consequently, continued
lease payments on those lease obligations containing "non-appropriation" clauses
are dependent on future legislative actions. If such legislative actions do not
occur, the holders of the lease obligation may experience difficulty in
exercising their rights, including disposition of the property.
Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the federal alternative minimum
tax on the portion of a distribution attributable to these obligations. Interest
on private activity obligations will be considered exempt from federal income
taxes; however, shareholders should consult their own tax advisers to determine
whether they may be subject to the federal alternative minimum tax.
Resource recovery obligations are a type of municipal revenue obligation
issued to build facilities such as solid waste incinerators or waste-to-energy
plants. Usually, a private corporation will be involved and the revenue cash
flow will be supported by fees or units paid by municipalities for the use of
the facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.
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Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.
A variable rate obligation is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.
Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.
Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The achievement of the Balanced and Fixed-Income Funds'
investment objectives is dependent in part on the continuing ability of the
issuers of municipal securities in which the Balanced and Fixed-Income Funds
invest to meet their obligations for the payment of principal and interest when
due. Obligations of issuers of municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978, as amended.
Therefore, the possibility exists that, as a result of litigation or other
conditions, the ability of any issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.
July 29, 1998
