SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
(A Mutual Fund)
Scudder Variable Life Investment Fund (the "Fund") is an open-end management
investment company which offers shares of beneficial interest of seven
diversified Portfolios:
o Money Market Portfolio seeks stability and current income from a portfolio
of money market instruments. The Money Market Portfolio will maintain a
dollar-weighted average portfolio maturity of 90 days or less in an effort
to maintain a constant net asset value of $1.00 per share.
o Bond Portfolio seeks high income from a high quality portfolio of bonds.
o Balanced Portfolio seeks a balance of growth and income, as well as
long-term preservation of capital, from a diversified portfolio of equity
and fixed-income securities.
o Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income from a portfolio consisting primarily of common
stocks and securities convertible into common stocks.
o Capital Growth Portfolio seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
o Global Discovery Portfolio seeks above-average capital appreciation over
the long term by investing primarily in the equity securities of small
companies located throughout the world.
o International Portfolio seeks long-term growth of capital principally from
a diversified portfolio of foreign equity securities.
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before applying for certain variable annuity
contracts ("VA contracts") and variable life insurance policies ("VLI policies")
offered in the separate accounts of certain insurance companies ("Participating
Insurance Companies"). Please read it carefully and retain it for future
reference. The prospectus should be read in conjunction with the VA contract and
VLI policy prospectus which accompanies it. Shares of the Money Market
Portfolio, and Class A shares of all other Portfolios, are offered herein. If
you require more detailed information, a Statement of Additional Information
dated May 1, 1996, as supplemented from time to time, is available upon request
without charge and may be obtained by calling a Participating Insurance Company
or by writing to broker/dealers offering the above mentioned VA contracts and
VLI policies, or Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103. The Statement of Additional Information, which
is incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUND ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A POOLED
FUNDING VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF VA CONTRACTS
AND VLI POLICIES.
PROSPECTUS
May 1, 1996
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
INVESTMENT CONCEPT OF THE FUND 1
FINANCIAL HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS 8
Money Market Portfolio 8
Bond Portfolio 8
Balanced Portfolio 9
Growth and Income Portfolio 11
Capital Growth Portfolio 11
Global Discovery Portfolio 11
International Portfolio 14
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS 14
Repurchase Agreements 14
Convertible Securities 15
Mortgage and Other Asset-Backed Securities 15
Foreign Securities 15
When-Issued Securities 16
Indexed Securities 16
Loans of Portfolio Securities 16
Zero Coupon Securities 16
Derivatives 17
Options 17
Options on Securities Indexes 17
Futures Contracts 17
Forward Foreign Currency Exchange Contracts, Foreign
Currency Futures Contracts and Foreign Currency Options 18
Strategic Transactions and Derivatives Applicable to
Global Discovery Portfolio 18
Special Situation Securities 18
INVESTMENT RESTRICTIONS 20
INVESTMENT ADVISER 21
Portfolio Management 22
Money Market Portfolio 22
Bond Portfolio 22
Balanced Portfolio 23
Growth and Income Portfolio 23
Capital Growth Portfolio 23
Global Discovery Portfolio 23
International Portfolio 23
DISTRIBUTOR 24
PURCHASES AND REDEMPTIONS 24
NET ASSET VALUE 25
PERFORMANCE INFORMATION 25
Money Market Portfolio 25
Bond Portfolio 25
All Portfolios 25
VALUATION OF PORTFOLIO SECURITIES 26
Money Market Portfolio 26
Other Portfolios 26
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 26
SHAREHOLDER COMMUNICATIONS 27
ADDITIONAL INFORMATION 27
Fund Organization and Shareholder Indemnification 27
Other Information 28
TRUSTEES AND OFFICERS 29
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
INVESTMENT CONCEPT OF THE FUND
- -------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is an open-end, registered
management investment company comprised of the following diversified series: the
Money Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Global Discovery Portfolio, and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the "Portfolios"). Additional Portfolios may be created from
time to time. The Fund is intended to be the funding vehicle for VA contracts
and VLI policies to be offered by the separate accounts of certain Participating
Insurance Companies. The Fund currently does not foresee any disadvantages to
the holders of VA contracts and VLI policies arising from the fact that the
interests of the holders of such contracts and policies may differ.
Nevertheless, the Fund's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. The VA contracts and
the VLI policies are described in the separate prospectuses issued by the
Participating Insurance Companies. The Fund assumes no responsibility for such
prospectuses.
Individual VA contract holders and VLI policyholders are not the "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their separate
accounts are the shareholders or investors (the "Shareholders"), although such
companies may pass through voting rights to their VA contract and VLI
policyholders.
1
<PAGE>
SCUDDER
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FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Money Market Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, DECEMBER OF OPERATIONS)
---------------------------------------------------------------------- 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e) 1986
---------------------------------------------------------------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a) .............. .055 .037 .025 .033 .057 .076 .088 .068 .060 .026 .064
Less distributions from
net investment income ... (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060) (.026) (.064)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ........... 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95 2.59(d) 6.59(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ....... 80 90 49 34 28 32 15 11 8 3 -
Ratio of operating
expenses, net to
average daily net
assets (%) (a) ........... .50 .56 .66 .64 .67 .69 .72 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
daily net assets (%) ..... 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06 5.10(c) 6.75(c)
(a) Portion of expenses
reimbursed
(Note B) ............. $ -- $ -- $ -- $ -- $ -- $ -- $ .001 $ .003 $ .006 $ .022 $ .133
(b) Original capital
(c) Annualized
(d) Not annualized
(e) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</TABLE>
2
<PAGE>
SCUDDER
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FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Bond Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS)
--------------------------------------------------------------------- 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
--------------------------------------------------------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a)............ .44 .43 .48 .49 .52 .53 .54 .54 .49 .23 .45
Net realized and
unrealized gain
(loss) on
investment
transactions.......... .69 (.77) .38 (.02) .61 (.02) .18 (.19) (.40) .08 .44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 1.13 (.34) .86 .47 1.13 .51 .72 .35 .09 .31 .89
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income..... (.45) (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29) (.17) (.33)
Net realized gains
on investment
transactions............ -- (.17) (.15) (.19) (.02) -- -- -- -- (.03) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.45) (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29) (.20) (.33)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period............. $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) 18.17 (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22 4.90(d) 15.11(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)....... 73 142 129 113 74 42 22 3 3 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a)............ .56 .58 .61 .63 .69 .73 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%)............ 6.29 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53 6.88(c) 7.48(c)
Portfolio turnover
rate (%).................. 177.21 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05 23.82(c) 6.27(c)
<FN>
(a) Portion of expenses
reimbursed (Note B)..... $ -- $ -- $ -- $ -- $ -- $ -- $ .01 $ .04 $ .08 $ .21 $ .80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares outstanding
during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</FN>
</TABLE>
3
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Balanced Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS)
--------------------------------------------------------------------- 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
--------------------------------------------------------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period........ $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a)............... .30 .29 .30 .29 .35 .42 .40 .33 .34 .15 .31
Net realized and
unrealized gain (loss)
on investment
transactions............. 2.04 (.48) .42 .36 1.77 (.59) 1.06 .64 (.45) (.11) 1.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................. 2.34 (.19) .72 .65 2.12 (.17) 1.46 .97 (.11) .04 1.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment
income................... (.30) (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23) (.18) (.23)
Net realized gains
on investment
transactions............. (.06) (.77) (.23) (.19) -- (.05) -- -- (.13) (.09) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.......... (.36) (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36) (.27) (.23)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period.............. $10.95 $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) 26.67 (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68) .46(d) 30.60(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)........ 68 46 45 37 25 16 18 11 12 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a)............. .65 .75 .75 .75 .75 .75 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) ............ 3.01 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42 4.20(c) 4.87(c)
Portfolio turnover
rate (%)................... 87.98 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00 28.86(c) 64.12(c)
<FN>
(a) Portion of expenses
reimbursed (Note B) $ -- $ -- $ -- $ -- $ .01 $ -- $ .01 $ .03 $ .03 $ .17 $ .80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares outstanding
during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
*On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income
from a diversified portfolio of equity and fixed income securities. Prior to that date, the Portfolio was known as the
Managed Diversified Portfolio and its investment objective was to realize a high level of long-term total rate of return
consistent with prudent investment risk. The portfolio turnover rate increased due to implementing the present investment
objective. Financial highlights for the nine periods ended December 31, 1993 should not be considered representative of
the present Portfolio.
</FN>
</TABLE>
4
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Growth and Income Portfolio
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 2, 1994
YEAR (COMMENCEMENT
ENDED OF OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
1995 1994
------------ ----------------
<S> <C> <C>
Net asset value, beginning of period......................................... $ 6.26 $ 6.00(b)
------ ------
Income from investment operations:
Net investment income (a) ........................................... .23 .13
Net realized and unrealized gain (loss) on investment transactions... 1.72 .17(f)
------ ------
Total from investment operations............................................. 1.95 .30
------ ------
Less distributions from:
Net investment income................................................ (.19) (.04)
Net realized gains on investment transactions........................ (.04) --
------ ------
Total distributions.......................................................... (.23) (.04)
------ ------
Net asset value, end of period............................................... $ 7.98 $ 6.26
====== ======
TOTAL RETURN (%)............................................................. 31.74 4.91(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)....................................... 52 20
Ratio of operating expenses, net to average net assets (%) (a) .............. .75 .75(c)
Ratio of net investment income to average net assets (%)..................... 3.18 3.63(c)
Portfolio turnover rate (%) ................................................. 24.33 28.41(c)
(a) Portion of expenses waived (Note B) .................................... $ -- $ .03
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts have been calculated using the monthly average shares
outstanding during the period method.
(f) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and purchases
of Portfolio shares in relation to fluctuating market values during the period.
</TABLE>
5
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Capital Growth Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT)
YEAR ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS)
------------------------------------------------------------------------ 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period........ $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67 $ 7.93 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a).. .14 .06 .06 .11 .16 .25 .35 .16 .15 .09 .19
Net realized and unrealized
gain (loss) on investment
transactions............. 3.25 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28) (.07) 1.87
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 3.39 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13) .02 2.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income..... (.11) (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09) (.07) (.13)
Net realized gains on
investment transactions. (.43) (1.31) (.27) (.23) -- (.23) -- -- (.39) (.21) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.54) (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48) (.28) (.13)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................... $15.08 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67 $ 7.93
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)............ 28.65 (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88) .26(d) 34.66(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)....... 338 257 257 167 108 45 45 17 10 1 --
Ratio of operating expenses,
net to average net
assets(%)(a).............. .57 .58 .60 .63 .71 .72 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average net
assets(%)................. 1.06 .47 .46 .95 1.49 2.71 3.51 2.17 1.68 2.21(c) 2.95(c)
Portfolio turnover rate(%).. 119.41 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34 38.78(c) 86.22(c)
(a) Portion of expenses
reimbursed (Note B).... $ -- $ -- $ -- $ -- $ -- $ -- $ .01 $ .01 $ .04 $ .20 $ .81
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares
outstanding during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</TABLE>
6
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
International Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 1, 1987
(COMMENCEMENT
YEARS ENDED DECEMBER 31, OF OPERATIONS)
------------------------------------------------------------------------- TO DECEMBER 31,
1995(e) 1994(e) 1993(e) 1992(e) 1991(e) 1990(e) 1989(e) 1988(e) 1987
------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......... $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a)... .11 .06 .09 .10 .12 .25 .10 .09 --
Net realized and unrealized
gain (loss) on investment
transactions.............. 1.07 (.15) 2.90 (.36) .77 (.89) 2.22(f) .79 (.64)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. 1.18 (.09) 2.99 (.26) .89 (.64) 2.32 .88 (.64)
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income.. (.01) (.07) (.14) (.09) (.20) (.04) -- -- --
In excess of net investment
income.................... -- -- (.12) -- -- -- -- -- --
From net realized gains on
investment transactions... (.04) -- -- -- -- -- -- -- (.10)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.05) (.07) (.26) (.09) (.20) (.04) -- -- (.10)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period...................... $11.82 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%).............. 11.11 (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73 (10.64)(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................ 548 472 238 65 41 35 17 3 2
Ratio of operating expenses,
net to average net
assets(%)(a)................ 1.08 1.08 1.20 1.31 1.39 1.38 1.50 1.50 1.50(c)
Ratio of net investment income
to average net assets(%).... .95 .57 .91 1.23 1.43 2.89 1.30 1.59 .02(c)
Portfolio turnover rate(%).... 45.76 33.52 20.36 34.42 45.01 26.67 57.69 110.42 146.08(c)
(a) Portion of expenses
reimbursed (Note B)...... $ -- $ -- $ -- $ -- $ -- $ -- $ .02 $ .14 $ .07
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares
outstanding during the period method.
(f) Includes provision for federal income tax of $.03 per share.
</TABLE>
7
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
Each Portfolio has a different investment objective which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Portfolios can be expected to affect the degree of market
and financial risk to which each Portfolio is subject and the return of each
Portfolio. The investment objectives and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees of the Fund without a
vote of the Shareholders. There is no assurance that the objectives of any
Portfolio will be achieved.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.
The Money Market Portfolio purchases money market securities such as U.S.
Treasury, agency and instrumentality obligations, finance company and corporate
commercial paper, bankers' acceptances and certificates of deposit of domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion), including
foreign branches of domestic banks, which involve different risks than those
associated with investments in certificates of deposit of domestic banks, and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements. The Money Market Portfolio may also invest in certificates of
deposit issued by banks and savings and loan institutions which had at the time
of their most recent annual financial statements total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are insured by an agency of the U.S. Government, (ii) at no time will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
Investments are limited to those that are dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e., rated in the two highest
categories) by any two nationally-recognized rating services such as Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In addition,
the Adviser seeks through its own credit analysis to limit investments to high
quality instruments presenting minimal credit risks. The portfolio is subject to
certain additional quality and diversification restrictions which are set forth
in the Fund's Statement of Additional Information.
The remaining maturity of each investment in the Money Market Portfolio is 397
calendar days or less. The dollar-weighted average maturity of the Portfolio's
investments varies with money market conditions, but is always 90 days or less.
As a money market fund with a short-term maturity, the Portfolio's income
fluctuates with changes in interest rates, but its price to the public or
"offering price," is expected to remain fixed at $1.00 per share.
BOND PORTFOLIO
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Under normal
circumstances, the Portfolio invests at least 65% of its assets in bonds,
including those of the U.S. Government and its agencies, and those of
corporations and other notes and bonds paying high current income. It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term bond by investing in securities with varying maturities and by
entering into futures contracts on debt securities and related options for
hedging purposes.
The Portfolio is actively managed. The Portfolio may invest in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors. The
Portfolio may also invest in preferred stocks consistent with the Portfolio's
objectives.
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The Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. Government, such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation. In addition, it may purchase obligations of international agencies
such as the International Bank for Reconstruction and Development, and the
Inter-American Development Bank. Other eligible investments include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces) including, without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities, and money market
instruments such as commercial paper, and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Portfolio
may also enter into repurchase agreements and may invest in zero coupon
securities.
The Bond Portfolio is of high quality. No purchase will be made if, as a result
thereof, less than 50% of the Portfolio's net assets would be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any of the nationally-recognized rating
services or (c) if not rated, are judged by the Adviser to be of a quality
comparable to obligations rated as described in (b) above. Not less than 80% of
the debt obligations in which the Portfolio invests will, at the time of
purchase, be rated within the three highest ratings categories of any such
service or, if not rated, will be judged to be of comparable quality by the
Adviser. The Fund may invest up to 20% of its assets in bonds rated below A but
no lower than B by Moody's or S&P, or unrated securities judged by the Adviser
to be of comparable quality. Debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P and
commonly referred to as "junk bonds") and unrated securities of comparable
quality, which usually entail greater risk (including the possibility of default
or bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of loss of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
Except for limitations imposed by the Bond Portfolio's investment restrictions
(see "INVESTMENT RESTRICTIONS"), there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments; however, it
is a policy of the Portfolio that its non-governmental investments will be
spread among a variety of companies and will not be concentrated in any
industry.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of loss. The
net asset value of the Portfolio's shares will fluctuate with changes in the
market price of the Portfolio's investments, which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates. As interest rates fall, the prices of debt securities
tend to rise and vice versa.
BALANCED PORTFOLIO
The Balanced Portfolio seeks a balance of growth and income from a diversified
portfolio of equity and fixed income securities. The Portfolio also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Price Index ("S&P 500"). The Portfolio
will invest primarily in securities issued by medium- to large-sized domestic
companies with annual revenues or market capitalization of at least $600
million, and which, in the opinion of the Adviser, offer above-average potential
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<PAGE>
for price appreciation. The Portfolio seeks to invest in companies that have
relatively consistent and above-average rates of growth; companies that are in a
strong financial position with high credit standings and profitability; firms
with important business franchises, leading products, or dominant marketing and
distribution systems; companies guided by experienced and motivated managements;
and companies selling at attractive market valuations. The Adviser believes that
companies with these characteristics will be rewarded by the market with higher
stock prices over time and provide investment returns, on average, in excess of
the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of issuers
which qualify, at the time of purchase, for one of the three highest equity
earnings and dividends ranking categories (A+, A, or A-) of S&P, or if not
ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are allocated
to bonds and other fixed income securities, including cash reserves. The
Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
restricted securities issued in private placements and zero coupon securities.
For liquidity and defensive purposes, the Portfolio may invest without limit in
cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged by the Adviser to be of a quality comparable to
obligations rated as described in (b) above. Not less than 80% of the debt
obligations in which the Portfolio invests will, at the time of purchase, be
rated within the three highest ratings categories of any such service or, if not
rated, will be judged to be of comparable quality by the Adviser. Up to 20% of
the Portfolio's debt securities may be invested in bonds rated below A but no
lower than B by Moody's or S&P, or unrated securities judged by the Adviser to
be of comparable quality. Debt securities which are rated below investment-grade
(that is, rated below Baa by Moody's or below BBB by S&P and commonly referred
to as "junk bonds") and unrated securities of comparable quality, which usually
entail greater risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid than securities in the
higher rating categories. Securities rated B involve a high degree of
speculation with respect to the payment of principal and interest. Should the
rating of any security held by the Portfolio be downgraded after the time of
purchase, the Adviser will determine whether it is in the best interest of the
Portfolio to retain or dispose of the security.
The Portfolio will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Adviser
weighs the relative values of different asset classes and expectations for
future returns. In doing so, the Adviser analyzes, on a global basis, the level
and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this prospectus. The Portfolio is designed as a
conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Portfolio's foreign holdings will meet the criteria applicable to its domestic
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investments. The international component of the Portfolio's investment program
is intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or forward
delivery basis. The Portfolio may, for hedging purposes, purchase forward
foreign currency exchange contracts and foreign currencies in the form of bank
deposits. The Portfolio may also purchase other foreign money market
instruments, including, but not limited to, bankers' acceptances, certificates
of deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of loss.
The net asset value of the shares of the Portfolio will increase or decrease
with changes in the market price of the Portfolio's investments and, to a lesser
extent, changes in foreign currency exchange rates.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income. In pursuing these three objectives, the Portfolio
invests primarily in common stocks, preferred stocks, and securities convertible
into common stocks of companies which offer the prospect for growth of earnings
while paying higher than average current dividends. Over time, continued growth
of earnings tends to lead to higher dividends and enhancement of capital value.
The Portfolio allocates its investments among different industries and
companies, and changes its portfolio securities for investment considerations
and not for trading purposes.
The Portfolio attempts to achieve its investment objectives by investing
primarily in dividend paying common stocks, preferred stocks and securities
convertible into common stocks. The Portfolio may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Portfolio may also
invest in nonconvertible preferred stocks consistent with the Portfolio's
objectives. From time to time, for temporary defensive purposes, when the
Adviser feels such a position is advisable in light of economic or market
conditions, the Portfolio may invest a portion of its assets in cash and cash
equivalents. The Portfolio may invest in foreign securities and in repurchase
agreements.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will increase or decrease
with changes in the market prices of the Portfolio's investments and, to a
lesser extent, changes in foreign currency exchange rates.
CAPITAL GROWTH PORTFOLIO
The Capital Growth Portfolio seeks to maximize long-term capital growth through
a broad and flexible investment program. The Portfolio invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic conditions periodically warrant, the Portfolio may also
invest up to 25% of its assets in short-term debt instruments.
In its examination of potential investments, the Adviser considers, among other
things, the issuer's financial strength, management reputation, absolute size
and overall industry position.
Equity investments can have diverse financial characteristics, and the Trustees
believe that the opportunity for capital growth may be found in many different
sectors of the market at any particular time. In contrast to the specialized
investment policies of some capital appreciation funds, the Portfolio is
therefore free to invest in a wide range of marketable securities offering the
potential for growth. This enables the Portfolio to pursue investment values in
various sectors of the stock market including:
1. Companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the
business equipment, electronics, specialty merchandising, and health
service industries.
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2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects, but seem undervalued due to factors thought
to be of a temporary nature which may cause their securities to be out of favor
and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net assets in intermediate to longer term debt securities when management
anticipates that the total return on debt securities is likely to equal or
exceed the total return on common stocks over a selected period of time. The
Portfolio may purchase investment-grade debt securities, which are those rated
Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if unrated, of
equivalent quality as determined by the Adviser. Bonds that are rated Baa by
Moody's or BBB by S&P have some speculative characteristics. The Portfolio's
intermediate to longer term debt securities may also include those which are
rated below investment grade, as long as no more than 5% of its net assets are
invested in such securities. As interest rates fall the prices of debt
securities tend to rise and vice versa. Should the rating of any security held
by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Capital Growth Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
GLOBAL DISCOVERY PORTFOLIO
The Global Discovery Portfolio seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world. The Portfolio is designed for investors looking
for above-average appreciation potential (when compared with the overall
domestic stock market as reflected by Standard & Poor's 500 Composite Price
Index) and the benefits of investing globally, but who are willing to accept
above-average stock market risk, the impact of currency fluctuation and little
or no current income.
In pursuit of its objective, the Portfolio generally invests in small, rapidly
growing companies that offer the potential for above-average returns relative to
larger companies, yet are frequently overlooked and thus undervalued by the
market. The Portfolio has the flexibility to invest in any region of the world.
It can invest in companies based in emerging markets, typically in the Far East,
Latin America and lesser developed countries in Europe, as well as in firms
operating in developed economies, such as those of the United States, Japan and
Western Europe. The Portfolio will limit investments in securities of issuers
located in Eastern Europe to 5% of its total assets.
The Adviser invests the Portfolio's assets in companies it believes offer
above-average earnings, cash flow or asset growth potential. It also invests in
companies that may receive greater market recognition over time. The Adviser
believes these factors offer significant opportunity for long-term capital
appreciation. The Adviser evaluates investments for the Portfolio from both a
macroeconomic and microeconomic perspective, using fundamental analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible investments. When evaluating an individual company, the
Adviser takes into consideration numerous factors, including the depth and
quality of management; a company's product line, business strategy and
competitive position; research and development efforts; financial strength,
including degree of leverage; cost structure; revenue and earnings growth
potential; price-earnings ratios and other stock valuation measures.
Secondarily, the Adviser weighs the attractiveness of the country and region in
which a company is located.
Under normal circumstances the Portfolio invests at least 65% of its total
assets in the equity securities of small companies. While the Adviser believes
that smaller, lesser-known companies can offer greater growth potential than
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<PAGE>
larger, more established firms, the former also involve greater risk and price
volatility. To help reduce risk, the Portfolio expects, under usual market
conditions, to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate investments among at least three countries at
all times, including the United States.
The Portfolio may invest up to 35% of its total assets in equity securities of
larger companies throughout the world and in debt securities if the Adviser
determines that the capital appreciation of debt securities is likely to exceed
the capital appreciation of equity securities. The Portfolio may purchase
investment-grade bonds, those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A
or BBB by S&P or, if unrated, of equivalent quality as determined by the
Adviser. The Portfolio may also invest up to 5% of its net assets in debt
securities rated below investment-grade. Securities rated below Baa/BBB are
commonly referred to as "junk bonds." The lower the ratings of such debt
securities, the greater their risks render them like equity securities. The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest.
The Portfolio invests primarily in companies whose individual equity market
capitalizations would place them in the same size range as companies in
approximately the lowest 20% of world market capitalization as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small, medium and large-sized companies based in 22 markets
around the globe. Based on this policy, the companies held by the Portfolio
typically will have individual equity market capitalizations of between
approximately $50 million and $2 billion (although the Portfolio will be free to
invest in smaller capitalization issues that satisfy the Portfolio's size
standard). Furthermore, the median market capitalization of the Portfolio will
not exceed $750 million.
The equity securities in which the Portfolio may invest consist of common
stocks, preferred stocks (either convertible or nonconvertible), rights and
warrants. These securities may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter. For capital appreciation purposes, the
Portfolio may purchase notes, bonds, debentures, government securities and zero
coupon bonds (any of which may be convertible or nonconvertible). The Portfolio
may invest in foreign securities and American Depositary Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities, and engage in strategic transactions. In
addition, the Portfolio may invest in illiquid or restricted securities. For
temporary defensive purposes, the Portfolio may, during periods in which
conditions in securities markets warrant, invest without limit in cash and cash
equivalents.
The Global Discovery Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and
changes in foreign currency exchange rates.
SPECIAL RISK CONSIDERATIONS FOR GLOBAL DISCOVERY PORTFOLIO
The Portfolio is designed for long-term investors who can accept international
investment risk. Since the Portfolio normally will invest in both U.S. and
foreign securities markets, changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets, which enhances the
Portfolio's appeal as a diversification tool. The Portfolio's share price will
reflect the movements of the different stock markets in which it is invested and
the different currencies in which the investments are denominated. The strength
or weakness of the U.S. dollar against foreign currencies is likely to account
for part of the Portfolio's investment performance, although the Adviser
believes that, over the long term, the impact of currency changes on Portfolio
performance will not be as significant as changes in the underlying investments.
As with any long-term investment, the value of shares when sold may be higher or
lower than when purchased.
Global investing involves economic and political considerations not typically
found in U.S. markets. These considerations, which may favorably or unfavorably
affect the Portfolio's performance, include changes in exchange rates and
exchange rate controls (which may include suspension of the ability to transfer
currency from a given country), costs incurred in conversions between
currencies, nonnegotiable brokerage commissions, different accounting standards,
lower trading volume and greater market volatility, the difficulty of enforcing
obligations in other countries, less securities regulation, different tax
provisions (including withholding on interest and dividends paid to the
Portfolio), war, expropriation, political and social instability, and diplomatic
developments.
Further, the settlement period of securities transactions in foreign markets may
be longer than in domestic markets. These considerations generally are more of a
concern in developing countries. For example, the possibility of political
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upheaval and the dependence on foreign economic assistance may be greater in
these countries than in developed countries. The Adviser seeks to mitigate the
risks associated with these considerations through diversification and active
professional management.
There is typically less publicly available information concerning foreign and
smaller companies than for domestic and larger, more established companies. Some
small companies have limited product lines, distribution channels and financial
and managerial resources. Also, because smaller companies normally have fewer
shares outstanding than larger companies and trade less frequently, it may be
more difficult for the Portfolio to buy and sell significant amounts of such
shares without an unfavorable impact on prevailing market prices. Some of the
companies in which the Portfolio may invest may distribute, sell or produce
products which have recently been brought to market and may be dependent on key
personnel with varying degrees of experience.
INTERNATIONAL PORTFOLIO
The International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The Portfolio
invests in companies, wherever organized, which do business primarily outside
the United States. The Portfolio intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries. The Portfolio does not intend to
concentrate investments in any particular industry.
The Portfolio invests primarily in equity securities of established companies,
listed on foreign exchanges, which the Adviser believes have favorable
characteristics. It may also invest in fixed income securities of foreign
governments and companies. However, management intends to maintain a portfolio
consisting primarily of equity securities. Investing in foreign securities may
involve a greater degree of risk than investing in domestic securities due to
the possibility of exchange rate fluctuations and exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war and expropriation (see "POLICIES
AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS--Foreign Securities").
The Portfolio has no present intention of altering its general policy of being
primarily invested under normal conditions in foreign securities. However, in
the event of exceptional conditions abroad, the Portfolio may temporarily invest
all or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the United States.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts, foreign currency options and futures contracts and foreign
currencies in the form of bank deposits. The Portfolio may also purchase other
foreign money market instruments, including, but not limited to, bankers'
acceptances, certificates of deposit, commercial paper, short-term government
and corporate obligations and repurchase agreements.
The International Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and
changes in foreign currency exchange rates.
-------------------------------------------------------------------------------
POLICIES AND TECHNIQUES
APPLICABLE TO THE PORTFOLIOS
- -------------------------------------------------------------------------------
Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
REPURCHASE AGREEMENTS
As a means of earning income for periods as short as overnight, the Fund, on
behalf of a Portfolio, may enter into repurchase agreements with U.S. and
foreign banks, and any broker-dealer which is recognized as a reporting
government securities dealer, if the creditworthiness of the bank or
broker-dealer has been determined by the Adviser to be of a sufficiently high
quality. Under a repurchase agreement, a Portfolio acquires securities, subject
to the seller's agreement to repurchase those securities at a specified time and
price. Securities subject to a repurchase agreement are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the repurchase price on a daily basis. If the seller
under a repurchase agreement becomes insolvent, the Fund's right to dispose of
the securities may be restricted. In the event of the commencement of bankruptcy
or insolvency proceedings of the seller of the securities before repurchase of
the securities under a repurchase agreement, the Fund may encounter delay and
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incur costs, including a decline in value of the securities, before being able
to sell the securities.
CONVERTIBLE SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth and Global Discovery
Portfolios may each invest in convertible securities (bonds, notes, debentures,
preferred stocks and other securities convertible into common stocks) which may
offer higher income than the common stocks into which they are convertible. The
convertible securities in which each Portfolio may invest include fixed income
or zero coupon debt securities, which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
non-convertible securities.
While convertible securities generally offer lower yields than non-convertible
debt securities of similar quality, their prices may reflect changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. Convertible securities entail less credit risk than the
issuer's common stock. The ratings of the convertible securities in which the
Portfolios invest will be comparable to the ratings of the Portfolios' fixed
income securities.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in mortgage-backed
securities, which are securities representing interests in pools of mortgage
loans. These securities provide shareholders with payments consisting of both
interest and principal as the mortgages in the underlying mortgage pools are
paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Portfolio shares. Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs. In addition, either Portfolio may invest in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover, the Portfolios may invest in debt securities which are secured with
collateral consisting of mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), and in other types of mortgage-related
securities.
Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and lessen their growth potential. Either
Portfolio may agree to purchase or sell these securities with payment and
delivery taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to a lower rate of return upon reinvestment. To the extent that such
mortgage-backed securities are held by the Portfolio, the prepayment right of
mortgagors may limit the increase in net asset value of the Portfolio because
the value of the mortgage-backed securities held by the Portfolio may not
appreciate as rapidly as the price of non-callable debt securities.
The Portfolios may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution. Asset-backed
securities are subject to the risk of prepayment and the risk that the
underlying loans will not be repaid.
FOREIGN SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest without limit, except as may be
applicable to debt securities generally, in U.S. dollar-denominated foreign debt
securities (including those issued by the Dominion of Canada and its provinces
and other debt securities which meet the criteria applicable to a Portfolio's
domestic investments), and in certificates of deposit issued by foreign banks
and foreign branches of United States banks, to any extent deemed appropriate by
the Adviser. The Bond Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Balanced Portfolio may invest up
to 20% of its debt securities in non-U.S. dollar-denominated foreign debt
securities, and may invest up to 25% of its equity securities in non-U.S.
dollar-denominated foreign equity securities. The Growth and Income Portfolio
may invest up to 25% of its assets in non-U.S. dollar-denominated securities of
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foreign issuers. The Capital Growth Portfolio may invest up to 25% of its
assets, and the Global Discovery and International Portfolios may each invest
without limit, in non-U.S. dollar-denominated equity securities of foreign
issuers. Global investing involves economic and political considerations not
typically found in U.S. markets. These considerations, which may favorably or
unfavorably affect the Fund's performance, include changes in exchange rates and
exchange rate controls (which may include suspension of the ability to transfer
currency from a given country), costs incurred in conversions between
currencies, nonnegotiable brokerage commissions, different accounting standards,
lower trading volume and greater market volatility, the difficulty of enforcing
obligations in other countries, less securities regulation, different tax
provisions (including withholding on interest and dividends paid to the Fund),
war, expropriation, political and social instability, and diplomatic
developments. Further, the settlement period of securities transactions in
foreign markets may be longer than in domestic markets. These considerations
generally are more of a concern in developing countries. For example, the
possibility of political upheaval and the dependence on foreign economic
assistance may be greater in these countries than in developed countries. The
Adviser seeks to mitigate the risks associated with these considerations through
diversification and active professional management.
WHEN-ISSUED SECURITIES
A Portfolio may from time to time purchase securities on a "when-issued" or
"forward delivery" basis. Debt securities are often issued on this basis. The
price of such securities, which may be expressed in yield terms, is fixed at the
time a commitment to purchase is made, but delivery and payment for such
securities take place at a later date. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income;
however, it is the Fund's intention that each Portfolio will be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued or forward delivery securities may be sold prior to the settlement
date, the Portfolio intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining the net
asset value of a Portfolio. The market value of the when-issued or forward
delivery securities may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward delivery basis. Each Portfolio will establish a segregated account
with its custodian in which it will maintain cash, U.S. Government securities
and other high-grade debt obligations at least equal in value to commitments for
when-issued or forward delivery securities. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date.
INDEXED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
The interest rate or (unlike most fixed-income securities) the principal amount
payable at maturity of an indexed security may be increased or decreased,
depending on changes in the value of the reference instrument. Indexed
securities may be positively or negatively indexed, so that appreciation of the
reference instrument may produce an increase or a decrease in the interest rate
or value at maturity of the security. In addition, the change in the interest
rate or value at maturity of the security may be some multiple of the change in
the value of the reference instrument. Thus, in addition to the credit risk of
the security's issuer, the Fund will bear the market risk of the reference
instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend the portfolio securities of any Portfolio (other than the
Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the value of such securities loaned will
not at any time exceed 10% of the value of the Portfolio's total assets. In
addition, it is anticipated that the Portfolio may share with the borrower some
of the income received on the collateral for the loan or that it will be paid a
premium for the loan. Before a Portfolio enters into a loan, the Adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower.
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ZERO COUPON SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in zero coupon
securities, including U.S. Government securities and privately stripped coupons
on and receipts for U.S. Government securities. These securities pay no cash
income but are issued at substantial discounts from their value at maturity.
When held to maturity, their entire return, which consists of the accretion of
discount, comes from the difference between their issue price and their maturity
value. Because they do not pay interest until maturity, zero coupon securities
tend to be subject to greater interim fluctuation of market value in response to
changes in interest rates than interest-paying securities of similar maturities.
DERIVATIVES
The following descriptions of Options, Options on Securities Indexes, Futures
Contracts, and Forward Foreign Currency Exchange Contracts, Foreign Currency
Futures Contracts and Foreign Currency Options discuss types of derivatives in
which certain of the Portfolios may invest.
OPTIONS
The Fund may write covered call options on securities of any Portfolio (other
than the Money Market Portfolio) in an attempt to earn income. The Balanced,
Growth and Income, Capital Growth and International Portfolios may each also
write put options to a limited extent on their portfolio securities in an
attempt to earn additional income on their portfolios, consistent with their
investment objectives, and they may purchase call and put options for hedging
purposes. Risks associated with writing put options include the possible
inability to effect closing transactions at favorable prices. In addition, the
Fund may engage in over-the-counter options transactions with broker-dealers who
make markets in these options. Over-the-counter options purchased by the Fund
and portfolio securities "covering" the Fund's obligation pursuant to an
over-the-counter option may be deemed to be illiquid and may not be readily
marketable. The Adviser will monitor the creditworthiness of dealers with whom
the Fund enters into such options transactions under the general supervision of
the Fund's Trustees. The Fund may forego the benefit of appreciation in its
Portfolios on securities sold pursuant to call options.
OPTIONS ON SECURITIES INDEXES
The Balanced, Growth and Income, Capital Growth and International Portfolios may
each purchase put and call options on securities indexes to hedge against the
risk of unfavorable price movements adversely affecting the value of a
Portfolio's securities. Options on securities indexes are similar to options on
securities except that settlement is made in cash.
Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the difference between the exercise price of the option and the value of the
underlying stock index on the exercise date, multiplied by (ii) a fixed "index
multiplier." In exchange for undertaking the obligation to make such cash
payment, the writer of the securities index option receives a premium.
Gains or losses on a Portfolio's transactions in securities index options depend
on price movements in the stock market generally (or, for narrow market indexes,
in a particular industry or segment of the market) rather than the price
movements of individual securities held by a Portfolio of the Fund. In this
respect, purchasing a stock index put option is analogous to the purchase of a
put on a securities index futures contract.
A Portfolio may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Portfolio may also allow options to expire unexercised.
FUTURES CONTRACTS
To protect against the effects of adverse changes in interest rates (sometimes
known as "hedging"), the Bond, Balanced, and International Portfolios may each,
to a limited extent, enter into futures contracts on debt securities. Such
futures contracts obligate the Fund, at maturity, to purchase or sell certain
debt securities. The Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios may each enter into securities index futures contracts
to protect against changes in securities market prices. Each of these five
Portfolios may purchase and write put and call options on futures contracts of
the type which such Portfolio is authorized to enter into and may engage in
related closing transactions. This type of option must be traded on a U.S. or
foreign exchange or board of trade.
When interest rates are rising or stock or security prices are falling, futures
contracts can offset a decline in the value of a Portfolio's current portfolio
securities. When rates are falling or stock or security prices are rising, these
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<PAGE>
contracts can secure better rates or prices for a Portfolio than might later be
available in the market when it makes anticipated purchases.
The Fund will engage in transactions in futures contracts and options thereon
only in an effort to protect a Portfolio against a decline in the value of the
Portfolio's securities or an increase in the price of securities that the
Portfolio intends to acquire. Also, the initial margin deposits for futures
contracts and premiums paid for related options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and
high-grade debt obligations, of a Portfolio to cover contracts which would
require it to purchase securities. A Portfolio may lose the expected benefit of
the transactions if interest rates or stock prices move in an unanticipated
manner. Such unanticipated changes in interest rates or stock prices may also
result in poorer overall performance in a Portfolio than if the Fund had not
entered into any futures transactions for that Portfolio. A Portfolio would be
required to make and maintain "margin" deposits in connection with transactions
in futures contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, FOREIGN CURRENCY FUTURES CONTRACTS
AND FOREIGN CURRENCY OPTIONS
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each enter into forward foreign currency exchange contracts
("forward contracts") to the extent of 15% of the value of their respective
total assets, for hedging purposes. A forward contract is a contract
individually negotiated and privately traded by currency traders and their
customers. A forward contract involves an obligation to purchase or sell a
specific currency for an agreed price at a future date, which may be any fixed
number of days from the date of the contract. The agreed price may be fixed or
with a specified range of prices.
The International Portfolio may also enter into foreign currency futures
contracts and foreign currency options to the extent of 15% of the value of its
total assets, for hedging purposes. Foreign currency futures contracts are
standardized contracts traded on commodities exchanges which involve an
obligation to purchase or sell a predetermined amount of currency at a
predetermined date at a specified price. The purpose of entering into these
contracts is to minimize the risk to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. At the same time,
such contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. The Portfolio may
purchase and sell options on foreign currencies for hedging purposes in a manner
similar to that of transactions in forward contracts. Unanticipated changes in
currency prices may result in poorer overall performance for the Portfolio than
if it had not engaged in forward contracts, foreign currency futures contracts
and foreign currency options.
STRATEGIC TRANSACTIONS AND DERIVATIVES APPLICABLE TO GLOBAL DISCOVERY PORTFOLIO
The Global Discovery Portfolio may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates, currency exchange rates, and broad or specific equity
or fixed-income market movements), to manage the effective maturity or duration
of fixed-income securities in the Portfolio or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased by
the Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Portfolio's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
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<PAGE>
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Portfolio to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Portfolio
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Portfolio, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Portfolio can realize on its investments or
cause the Portfolio to hold a security it might otherwise sell. The use of
currency transactions can result in the Portfolio incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the
Portfolio may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.
SPECIAL SITUATION SECURITIES
From time to time, the Global Discovery Portfolio may invest in equity or debt
securities issued by companies that are determined by the Adviser to possess
"special situation" characteristics. In general, a special situation company is
a company whose securities are expected to increase in value solely by reason of
a development particularly or uniquely applicable to the company. Developments
that may create special situations include, among others, a liquidation,
reorganization, recapitalization or merger, material litigation, technological
breakthrough and new management or management policies. The principal risk
associated with investments in special situation companies is that the
anticipated development thought to create the special situation may not occur
and the investments therefore may not appreciate in value or may decline in
value.
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SCUDDER
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INVESTMENT RESTRICTIONS
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Unless specified to the contrary, the following restrictions may not be changed
with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules thereunder and
as used in this prospectus, means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, or (2)
more than 50% of the outstanding shares of that Portfolio). Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Portfolio.
The Fund may not, on behalf of any Portfolio, except the Global Discovery
Portfolio:
(1) with respect to 75% of the value of the total assets of a Portfolio,
invest more than 5% of the value of the Portfolio's total assets in
the securities of any one issuer, except U.S. Government securities
and, with respect to 100% of the value of the total assets of a
Portfolio, the Fund may not invest more than 25% of the value of the
Portfolio's total assets in the securities of any one issuer, except
U.S. Government securities;
(2) pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by the investment restriction (8) below, it may
pledge securities having a market value at the time of pledge not
exceeding 15% of the value of a Portfolio's total assets and except in
connection with the writing of covered call options and the purchase
and sale of futures contracts and options on futures contracts;
(3) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in
accordance with its investment objectives and policies and the entry
into repurchase agreements may be deemed to be loans;
(4) enter into repurchase agreements or purchase any securities if, as a
result thereof, more than 10% of the total assets of a Portfolio
(taken at market value) would be, in the aggregate, subject to
repurchase agreements maturing in more than seven days and invested in
restricted securities or securities which are not readily marketable;
(5) purchase the securities of any issuer if such purchase would cause
more than 10% of the voting securities of such issuer to be held by a
Portfolio;
(6) purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio at
the time of such purchase to be invested in the securities of one or
more issuers having their principal business activities in the same
industry, provided that there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be a separate
industry from gas and electric public utilities, and wholly-owned
finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of the parents).
(7) purchase or sell any put or call options or any combination thereof,
except that the Fund may purchase and sell options on futures
contracts on debt securities, options on securities indexes and
securities index futures contracts and write covered call option
contracts on securities owned by a Portfolio, and may also purchase
call options for the purpose of terminating its outstanding
obligations with respect to securities upon which covered call option
contracts have been written (i.e., "closing purchase transactions"),
and except that the International Portfolio may also purchase and sell
options on foreign currency and on foreign currency futures contracts.
(8) borrow money except from banks as a temporary measure for
extraordinary or emergency purposes (each Portfolio is required to
maintain asset coverage (including borrowings) of 300% for all
borrowings) and no purchases of securities for a Portfolio will be
made while borrowings of that Portfolio exceed 5% of the Portfolio's
assets (the payment of interest on borrowings by a Portfolio will
reduce that Portfolio's income). In addition, the Board of Trustees
has adopted a policy whereby each Portfolio of the Fund may borrow up
to 10% of its total assets; provided, however, that each Portfolio may
borrow up to 25% of its total assets for extraordinary or emergency
purposes, including the facilitation of redemptions.
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In addition, the Fund may not, on behalf of the Global Discovery Portfolio:
(1) borrow money except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase
agreements provided that the Portfolio maintains asset coverage of
300% for all borrowings;
(2) purchase or sell real estate (except that the Portfolio may invest in
(i) securities of companies which deal in real estate or mortgages,
and (ii) securities secured by real estate or interests therein, and
that the Portfolio reserves freedom of action to hold and to sell real
estate acquired as a result of the Portfolio's ownership of
securities); or purchase or sell physical commodities or contracts
relating to physical commodities;
(3) act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio;
(4) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for shares of
the separate classes or series of the Fund; provided that collateral
arrangements with respect to currency-related contracts, futures
contracts, options or other permitted investments, including deposits
of initial and variation margin, are not considered to be the issuance
of senior securities for purposes of this restriction;
(5) purchase any securities which would cause more than 25% of the market
value of its total assets at the time of such purchase to be invested
in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to investments in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
(for the purposes of this restriction, telephone companies are
considered to be in a separate industry from gas and electric public
utilities, wholly-owned finance companies are considered to be in the
same industry of their parents if their activities are primarily
related to financing the activities of their parents and each foreign
government, its agencies or instrumentalities as well as supranational
organizations as a group, are each considered to be a separate
industry);
(6) with respect to 75% of its total assets taken at market value purchase
more than 10% of the voting securities of any one issuer, or invest
more than 5% of the value of its total assets in the securities of any
one issuer, except obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and except securities of
closed end investment companies;
(7) make loans to other persons, except (a) loans of portfolio securities,
provided collateral is maintained at not less than 100% by marking to
market daily, and (b) to the extent the entry into repurchase
agreements and the purchase of debt securities in accordance with its
investment objective and investment policies may be deemed to be
loans;
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Portfolio's net asset value (see "NET ASSET VALUE").
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INVESTMENT ADVISER
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The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a Delaware corporation, Two International Place, Boston, Massachusetts
02110-4103, to manage each Portfolio's daily investment and business affairs
subject to the policies established by the Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law. The
Adviser is one of the most experienced investment counsel firms in the United
States. It was established in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from brokerage, insurance or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. Directly or
through affiliates, the Adviser provides investment advice to over 50 mutual
fund portfolios.
For its advisory services to the Portfolios, the Adviser receives compensation
monthly at the following annual rates for each Portfolio:
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Portfolio Percent of the average
daily net asset values
of each Portfolio
-------------------------------------------------------------------------
Money Market Portfolio .370%
Bond Portfolio .475%
Balanced Portfolio .475%
Growth and Income Portfolio .475%
Capital Growth Portfolio .475%
Global Discovery Portfolio .975%
International Portfolio .875%
-------------------------------------------------------------------------
The investment advisory fees for the Global Discovery and International
Portfolios are higher than those charged many funds which invest primarily in
U.S. securities, but are not necessarily higher than those charged to funds with
investment objectives similar to the investment objectives of these Portfolios.
Under the investment advisory agreements between the Fund, on behalf of each
Portfolio, and the Adviser, the Fund is responsible for all its other expenses,
including clerical salaries; fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the charges of
custodians, transfer agents and other agents; any other expenses, including
clerical expenses, of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and fees for registering or qualifying
securities for sale; the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser; the cost of preparing and distributing reports
and notices to shareholders. The Fund is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Adviser, through Scudder Investor Services, Inc., a subsidiary of
the Adviser, places portfolio transactions on behalf of the Fund's Portfolios.
In so doing, the Adviser seeks to obtain the most favorable net results. Subject
to the foregoing, the Adviser may consider sales of VA contracts and VLI
policies for which the Fund is an investment option, as a factor in the
selection of firms to execute portfolio transactions.
In addition to payments for investment advisory services provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting agreement, have approved payments to the Adviser and Scudder
Fund Accounting Corporation for clerical, accounting and certain other services
they may provide the Fund.
Until April 30, 1998, the Adviser has agreed to waive part or all of its fees
for Global Discovery Portfolio to the extent that the Portfolio's expenses will
be maintained at 1.50% of average net assets.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's management process. Team members work
together to develop investment strategies and select securities for the
Portfolios. They are supported by Scudder's large staff of economists, research
analysts, traders, and other investment specialists who work in Scudder's
offices across the United States and abroad. Scudder believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
MONEY MARKET PORTFOLIO
Lead Portfolio Manager Stephen L. Akers has led Money Market Portfolio's
day-to-day management since 1995. Mr. Akers joined the team in 1995 and has
managed several fixed-income portfolios since joining Scudder in 1984. Nicca
Alcantara, Portfolio Manager, has responsibility for the Portfolio's day-to-day
investments. Ms. Alcantara, who came to Scudder in 1984, has worked as a
portfolio manager since 1989 and joined the team in 1990. Prior to becoming a
portfolio manager, Ms. Alcantara worked as an account assistant in Scudder's
Reserve Asset Management Group. Debra A. Hanson, Portfolio Manager, joined the
team in 1996. Ms. Hanson assists with the development and execution of
investment strategy and has been with Scudder since 1983.
BOND PORTFOLIO
Lead Portfolio Manager William M. Hutchinson has had responsibility for
overseeing the Portfolio's day-to-day operations and has guided the Portfolio's
investment strategy since 1996. Mr. Hutchinson, who has 22 years of investment
22
<PAGE>
experience, came to Scudder in 1986 as a portfolio manager and joined the team
in 1987. Ruth Heisler, Portfolio Manager, helps set the Portfolio's investment
strategy. Ms. Heisler, who has over 40 years of fixed-income investing
experience, joined the team in 1986.
BALANCED PORTFOLIO
Lead Portfolio Manager Valerie F. Malter joined Scudder in 1995 and is
responsible for the Portfolio's investment strategy and daily operation. Ms.
Malter has 10 years of experience as an analyst covering a wide range of
industries, and three years of portfolio management experience focusing on the
stocks of companies with medium- to large-sized market capitalizations. Michael
K. Shields, Portfolio Manager, focuses on the Portfolio's healthcare stocks. Mr.
Shields joined Scudder in 1992 and has 14 years of experience in the financial
industry. William M. Hutchinson, Portfolio Manager, helps set Scudder's overall
fixed-income investment strategy. Mr. Hutchinson, who has 22 years of investment
experience, came to Scudder in 1986 as a portfolio manager. Ruth Heisler,
Portfolio Manager, has had responsibility for the Portfolio's fixed-income
investments since she joined the team in 1986. Ms. Heisler has been involved
with bond research and investing at Scudder since 1953.
GROWTH AND INCOME PORTFOLIO
Lead Portfolio Manager Robert T. Hoffman has responsibility for setting Growth
and Income Portfolio's stock investing strategy and oversees the Portfolio's
day-to-day operations. Mr. Hoffman, who joined Scudder in 1990 as a portfolio
manager, has 12 years of experience in the investment industry, including
several years of pension fund management experience. Kathleen T. Millard,
Portfolio Manager, has worked in the investment industry since 1983 and as a
portfolio manager since 1986. Ms. Millard, who joined Scudder in 1991, also
focuses on stock investing strategy and stock selection. Benjamin W. Thorndike,
Portfolio Manager, is the Portfolio's chief analyst and strategist for
convertible securities. Mr. Thorndike, who has 17 years of investment
experience, joined Scudder in 1983 as a portfolio manager. Lori J. Ensinger,
Portfolio Manager, joined the team in 1996. Ms. Ensinger, who has 13 years of
investment industry experience, joined Scudder in 1993 and focuses on stock
selection and investment strategy.
CAPITAL GROWTH PORTFOLIO
Lead Portfolio Manager William F. Gadsden assumed responsibility for setting
Capital Growth Portfolio's stock investing strategy and overseeing the
Portfolio's day-to-day operations in 1995. Mr. Gadsden joined the team in 1989
and Scudder in 1983 and has 14 years of investment experience. Bruce F. Beaty,
Portfolio Manager, joined the team in 1995. Prior to joining Scudder as a
portfolio manager in 1991, Mr. Beaty spent 11 years in the securities brokerage
business.
GLOBAL DISCOVERY PORTFOLIO
Lead Portfolio Manager Gerald J. Moran sets the Portfolio's investment strategy
and oversees its daily operation. Mr. Moran joined Scudder's equity research and
management area in 1968 as an analyst and has focused on small company stocks
since 1982 and has been a portfolio manager since 1985. Sewall Hodges, Portfolio
Manager, joined Scudder in 1995. Mr. Hodges, who has ten years in global
analysis and portfolio management, focuses on the Portfolio's stock selection
and research.
INTERNATIONAL PORTFOLIO
Lead Portfolio Manager Carol L. Franklin sets International Portfolio's
investment strategy and has responsibility for the Portfolio's daily operation.
Ms. Franklin, who joined the team in 1989, has worked on equity investing at
Scudder as a portfolio manager since 1981. Nicholas Bratt, Portfolio Manager,
has been a member of the Portfolio team since 1987 and has 22 years of
experience in worldwide investing, including 20 years of experience as a
portfolio manager. Mr. Bratt, who has worked at Scudder since 1976, is the head
of Scudder's Global Equity Department. Joan Gregory, Portfolio Manager, focuses
on stock selection, a role she has played since joining Scudder in 1992. Ms.
Gregory has been involved with investment in global and international stocks as
an assistant portfolio manager since 1989.
23
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
DISTRIBUTOR
-------------------------------------------------------------------------------
The Fund has an underwriting agreement with Scudder Investor Services, Inc. (the
"Distributor"), a subsidiary of Scudder, Stevens & Clark, Inc. Located at Two
International Place, Boston, Massachusetts 02110-4103, the Distributor is a
Massachusetts corporation formed in 1947. Under the principal underwriting
agreement between the Fund and the Distributor, the Fund is responsible for the
payment of all fees and expenses in connection with the preparation and filing
of any registration statement and prospectus covering the issue and sale of
shares, and the registration and qualification of shares for sale with the
Securities and Exchange Commission and in the various states, including
registering the Fund as a broker or dealer. The Fund will also pay the fees and
expenses of preparing, printing and mailing prospectuses annually to existing
shareholders and any notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free telephone service for shareholders, wiring funds for share purchases
and redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of the shares, and
preparing, printing and mailing any other literature or advertising in
connection with the offering of the shares to the Participating Insurance
Companies. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under Federal and state
laws, a portion of the toll-free telephone service and of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by the Fund, unless a Plan pursuant to Rule 12b-1 under the 1940 Act, as
amended, is in effect which provides that the Fund shall bear some or all of
such expenses.
As agent, the Distributor currently offers shares of each Portfolio of the Fund
continuously to the separate accounts of Participating Insurance Companies in
all states in which it is registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value, as no sales commission or load is charged. The Distributor
has made no firm commitment to acquire shares of the Fund.
- -------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------------------
Except for Money Market Portfolio, which does not offer separate classes of
shares, the Fund offers two classes of shares on behalf of each Portfolio: Class
A shares are offered at net asset value and are not subject to fees imposed
pursuant to a Distribution Plan. Class B shares are offered at net asset value
and are subject to fees imposed pursuant to a Distribution Plan.
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VA contracts and VLI policies. Orders
received by the Fund or its agent are effected on days on which the New York
Stock Exchange (the "Exchange") is open for trading. For orders received before
the close of regular trading on the Exchange (normally 4 p.m., eastern time),
such purchases and redemptions of the shares of each Portfolio are effected at
the respective net asset values per share determined as of the close of regular
trading on the Exchange on that same day except that, in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after federal funds have been made available to the Fund (see
"NET ASSET VALUE"). Payment for redemptions will be made by State Street Bank
and Trust Company or Brown Brothers Harriman & Co. on behalf of the Fund and the
relevant Portfolios within seven days thereafter. No fee is charged the
shareholders when they redeem Portfolio shares.
The Fund may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed, other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the Securities and Exchange Commission
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security holders of the Fund; or (iv)
at any time when the Fund may, under applicable laws and regulations, suspend
24
<PAGE>
payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Fund,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, determines net
asset value per share as of the close of regular trading on the Exchange,
normally 4 p.m., eastern time, on each day the Exchange is open for trading. Net
asset value per share is calculated for purchases and redemptions for each
Portfolio by dividing the current market value (amortized cost value in the case
of the Money Market Portfolio) of total Portfolio assets, plus other assets,
less all liabilities, by the total number of shares outstanding.
- -------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
From time to time, quotations of the Money Market Portfolio's "yield" and
"effective yield" may be included in advertisements, sales literature or reports
to shareholders or prospective investors. Both yield figures are based on the
historical performance of the Portfolio and show the performance of a
hypothetical investment and are not intended to indicate future performance. The
yield of the Money Market Portfolio refers to the net investment income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated). Included in "net investment income" is the amortization
of market premium or accretion of market and original issue discount. This
income is then "annualized." That is, the amount of income generated by the
Portfolio during that week is assumed to be generated during each week over a
52-week period and is shown as a percentage. The effective yield is expressed
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Yield and effective yield for the Portfolio will vary based on,
among other things, changes in market conditions, the level of interest rates
and the level of the Portfolio's expenses.
BOND PORTFOLIO
From time to time, quotations of the Bond Portfolio's yield may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Yield figures are based on historical performance of the Bond
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The yield of the Bond Portfolio refers
to net investment income generated by the Bond Portfolio over a specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month period and is shown as
a percentage of net asset value.
ALL PORTFOLIOS
From time to time, quotations of a Portfolio's total return may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Total return figures are based on historical performance of the
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The total return of a Portfolio refers
to return assuming an investment has been held in the Portfolio for one year,
five years and ten years or for the life of the Portfolio (the ending date of
which will be stated). The total return quotations may be expressed in terms of
average annual or cumulative rates of return for all periods quoted. Average
annual total return refers to the average annual compound rate of return of an
investment in a Portfolio. Cumulative total return represents the cumulative
change in value of an investment in a Portfolio. Both will assume that all
dividends and capital gains distributions were reinvested.
Yield and total return for a Portfolio will vary based on, among other things,
changes in market conditions and the level of the Portfolio's expenses.
25
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Pursuant to a Rule of the Securities and Exchange Commission, the Money Market
Portfolio will be valued at amortized cost. Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.
By using amortized cost valuation, the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money Market Portfolio, despite minor
shifts in the market value of its portfolio securities. The yield on a
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and were permitted to fluctuate with the market value of the portfolio
securities of the Money Market Portfolio. However, as a result of certain
procedures adopted by the Fund, the Adviser believes any difference will
normally be minimal.
OTHER PORTFOLIOS
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the close of regular trading on the
Exchange on each day the Exchange is open for trading. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such sales, the security is valued at the high or "inside" bid quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method, which the Trustees believe approximates market value. Foreign currency
forward contracts are valued at the value of the underlying currency at the
prevailing currency exchange rate. Securities for which current market
quotations are not readily available are valued at fair value as determined in
good faith by the Trustees, although the actual calculations may be made by
persons acting pursuant to the direction of the Trustees. Please refer to the
section entitled "NET ASSET VALUE" in the Fund's Statement of Additional
Information for more information concerning valuation of portfolio securities.
- -------------------------------------------------------------------------------
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
- -------------------------------------------------------------------------------
The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated investment company under
Subchapter M of the Code.
Each Portfolio of the Fund intends to comply with the diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating Insurance Companies, rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio shares. For further information concerning federal income tax
consequences for the holders of the VA contracts and VLI policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
As a regulated investment company, each Portfolio generally will not be subject
to tax on its ordinary income and net realized capital gains to the extent such
income and gains are distributed in conformity with applicable distribution
requirements under the Code to the separate accounts of the Participating
Insurance Companies which hold its shares. Distributions of income and the
excess of net short-term capital gain over net long-term capital loss will be
treated as ordinary income and distributions of the excess of net long-term
capital gain over net short-term capital loss will be treated as long-term
capital gain by the Participating Insurance Companies. Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are subject to federal income tax if they are retained as part of policy
reserves.
The Money Market Portfolio will declare a dividend of its net investment income
daily and distribute such dividend monthly. Distributions will be made shortly
after the first business day of each month following declaration of the
dividend. The Bond, Balanced, Growth and Income and Capital Growth Portfolios
26
<PAGE>
will declare and distribute dividends from their net investment income, if any,
quarterly, in January, April, July and October. The Global Discovery and
International Portfolios each intend to distribute their net investment income
annually within three months of the Fund's fiscal year-end of December 31,
although an additional distribution may be made if necessary. For all
portfolios, distributions of capital gains, if any, will generally be made
within three months of December 31, although an additional distribution may be
made if ncessary. Dividends declared in October, November or December with a
record date in such a month will be deemed to have been received by shareholders
on December 31 if paid during January of the following year. All distributions
will be reinvested in shares of such Portfolios unless an election is made on
behalf of a separate account to receive distributions in cash. Participating
Insurance Companies will be informed about the amount and character of
distributions from the relevant Portfolio for federal income tax purposes.
For the fiscal year ended December 31, 1995, the average annual portfolio
turnover rates for the Bond and Capital Growth Portfolios were 177.21% and
119.41%, respectively. A higher rate involves greater brokerage and transaction
expenses to the Portfolios and may result in the realization of net capital
gains, which would be taxable to shareholders when distributed.
- -------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
- -------------------------------------------------------------------------------
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more Portfolios are the investment vehicle will receive
from the Participating Insurance Companies unaudited semi-annual financial
statements and audited year-end financial statements certified by the Fund's
independent public accountants. Each report will show the investments owned by
the Fund and the market values thereof as determined by the Trustees and will
provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter, Scudder Investor Services, Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION
The Fund was organized in the Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial interest are
presently divided into seven separate series. Additional series and classes of
shares may be created from time to time. The Fund has adopted a plan pursuant to
Rule 18f-3 under the 1940 Act to permit the Fund to establish a multiple class
distribution system for all of its Portfolios, except Money Market Portfolio.
The plan was approved by the Fund's Board of Trustees at a special meeting on
October 5, 1995.
Under the Fund's multi-class system, shares of each class of a multi-class
Portfolio represent an equal pro rata interest in that Portfolio and, generally,
shall have identical voting, dividend, liquidation, and other rights,
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (1) each class shall have a different designation; (2)
each class of shares shall bear its "class expenses;" (3) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangement; (4) each class shall have separate
voting rights on any matter submitted to shareholders in which the interests of
one class differ from the interests of any other class; (5) each class may have
separate exchange privileges; and (6) each class may have different conversion
features, although a conversion feature is not currently contemplated. Expenses
currently designated as "Class Expenses" by the Fund's Board of Trustees under
the plan pursuant to Rule 18f-3 include, for example, payments to the
Distributor pursuant to the distribution plan for that class, Fund transfer
agent fees attributable to a specific class, and certain securities registration
fees.
Each Portfolio (except Money Market Portfolio) has two classes of shares,
designated as Class A shares and Class B shares, each of which is offered at net
asset value. Class A shares, which are not sold subject to a Rule 12b-1 fee, are
offered pursuant to this prospectus. Class B shares, which are sold subject to a
Rule 12b-1, are offered to certain Participating Insurance Companies pursuant to
a separate prospectus. Participating Insurance Companies with inquiries
27
<PAGE>
regarding Class B shares may call or write to the Fund's underwriter, Scudder
Investor Services, Inc., at the number and address listed above.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability in connection with the Fund property or the acts, obligations or
affairs of the Fund. The Declaration of Trust also provides for indemnification
out of the Fund property of any shareholder held personally liable for the
claims and liabilities to which a shareholder may become subject by reason of
being or having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. The Trustees
believe that, in view of the above, the risk of personal liability of
shareholders is remote.
OTHER INFORMATION
The activities of the Fund are supervised by the Trustees.
Although the Fund does not intend to hold annual meetings, shareholders of the
Fund have certain rights, as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders for the purpose of voting
on the removal of one or more Trustees. Shareholders have one vote for each
share held. Fractional shares have fractional votes.
As of December 31, 1995, Aetna Life Insurance and Annuity Company owned 7.75%,
AUSA Life Insurance Company owned 0.2%, Banner Life Insurance Company owned
2.3%, Charter National Life Insurance Company owned 48.66%, Fortis Benefits Life
Insurance Company owned 0.05%, Intramerica Life Insurance Company owned 4.43%,
Lincoln Benefit Life Insurance Company owned 0.96%, Mutual of America Life
Insurance Company owned 23.73%, Paragon Life Insurance Company owned 0.11%,
Providentmutual Life and Annuity Company of America owned 1.08%, Safeco Life
Insurance Companies owned 2.1%, The Union Central Life Insurance Company owned
8.31%, United of Omaha owned 0.16% and USAA Life Insurance Company owned 0.06%
of the Fund's outstanding shares.
Each Portfolio of the Fund has a December 31 fiscal year end.
Portfolio securities of the Money Market, Bond, Balanced, Growth and Income, and
Capital Growth Portfolios are held separately, pursuant to a custodian
agreement, by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian. Portfolio securities of Global Discovery and
International Portfolios are held separately, pursuant to a custodian agreement,
by Brown Brothers & Harriman, 40 Water Street, Boston, Massachusetts 02109, as
custodian.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, is
the transfer and dividend paying agent for the Fund.
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of each Portfolio.
28
<PAGE>
SCUDDER
- -------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- -------------------------------------------------------------------------------
David B. Watts*
President and Trustee
Daniel Pierce*
Vice President and Trustee
Dr. Kenneth Black, Jr.
Trustee; Regents' Professor Emeritus
of Insurance, Georgia State University
Dr. Rosita P. Chang
Trustee; Professor of Finance,
University of Rhode Island
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business
Administration, Pennsylvania State University
Thomas S. Crain*
Vice President
Jerard K. Hartman*
Vice President
Richard A. Holt*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President
Steven M. Meltzer*
Vice President
Randall K. Zeller*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Kathryn L. Quirk*
Vice President and Assistant Secretary
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
29
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
An open-end management investment company which currently offers shares of
beneficial interest of seven diversified Portfolios which seek, respectively,
(i) stability and current income from a portfolio
of money market instruments, (ii) high income from a high quality
portfolio of bonds, (iii) a balance of growth and income, as well as
long-term preservation of capital,
from a diversified portfolio of equity and fixed income
securities, (iv) long-term growth of capital, current income and
growth of income from a portfolio consisting primarily of common
stocks and securities
convertible into common stocks, (v) long-term capital growth from
a a portfolio consisting primarily of equity securities, (vi)
above-average
capital appreciation over the long term by investing primarily in
the equity securities of small companies located throughout the
world, and
(vii) long-term growth of capital principally from a
diversified portfolio of foreign equity securities
(A Mutual Fund)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Scudder Variable Life Investment
Fund dated May 1, 1996, as may be amended from time to time, a copy of which may
be obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering certain variable annuity contracts and
variable life insurance policies, or Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
Money Market Portfolio.......................................................................................1
Bond Portfolio...............................................................................................2
Balanced Portfolio...........................................................................................3
Growth and Income Portfolio..................................................................................5
Capital Growth Portfolio.....................................................................................6
Global Discovery Portfolio...................................................................................6
Risk Factors Regarding Global Discovery Portfolio............................................................8
International Portfolio.....................................................................................13
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................15
Repurchase Agreements.......................................................................................15
Illiquid Securities.........................................................................................15
Zero Coupon Securities......................................................................................16
Mortgage-Backed Securities and Mortgage Pass-Through Securities.............................................16
Collateralized Mortgage Obligations ("CMOs")................................................................18
FHLMC Collateralized Mortgage Obligations...................................................................18
Other Mortgage-Backed Securities............................................................................18
Other Asset-Backed Securities...............................................................................19
Municipal Obligations.......................................................................................20
Convertible Securities......................................................................................20
Depositary Receipts.........................................................................................21
Foreign Securities..........................................................................................21
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and Income and
International Portfolios..............................................................................22
Indexed Securities..........................................................................................23
When-Issued Securities......................................................................................23
Loans of Portfolio Securities...............................................................................23
Borrowing...................................................................................................24
Options for the Bond, Balanced, Growth and Income and International Portfolios..............................24
Securities Index Options....................................................................................26
Futures Contracts...........................................................................................26
Futures on Debt Securities..................................................................................26
Limitations on the Use of Futures Contracts and Options on Futures..........................................28
Foreign Currency Transactions...............................................................................29
Strategic Transactions and Derivatives Applicable to the Global Discovery Portfolio.........................31
Debt Securities.............................................................................................38
High Yield, High Risk Securities............................................................................38
Combined Transactions.......................................................................................39
Risks of Specialized Investment Techniques Abroad...........................................................39
INVESTMENT RESTRICTIONS..............................................................................................39
PURCHASES AND REDEMPTIONS............................................................................................41
INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................42
Investment Adviser..........................................................................................42
Personal Investments by Employees of the Adviser............................................................45
Distributor.................................................................................................45
MANAGEMENT OF THE FUND...............................................................................................47
Trustees and Officers.......................................................................................47
Remuneration................................................................................................48
NET ASSET VALUE......................................................................................................49
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued)
Page
<S> <C>
TAX STATUS...........................................................................................................51
DIVIDENDS AND DISTRIBUTIONS..........................................................................................54
Money Market Portfolio......................................................................................54
Global Discovery Portfolio and International Portfolio......................................................55
Other Portfolios............................................................................................55
PERFORMANCE INFORMATION..............................................................................................55
Money Market Portfolio......................................................................................55
Bond Portfolio..............................................................................................56
All Portfolios..............................................................................................56
Comparison of Portfolio Performance.........................................................................58
SHAREHOLDER COMMUNICATIONS...........................................................................................61
ORGANIZATION AND CAPITALIZATION......................................................................................62
General.....................................................................................................62
Shareholder and Trustee Liability...........................................................................63
ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................63
PORTFOLIO TURNOVER...................................................................................................65
EXPERTS..............................................................................................................65
COUNSEL..............................................................................................................65
ADDITIONAL INFORMATION...............................................................................................65
FINANCIAL STATEMENTS.................................................................................................66
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
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INVESTMENT OBJECTIVES AND POLICIES
(See "INVESTMENT CONCEPT OF THE FUND" and
"INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
in the Fund's prospectus.)
Scudder Variable Life Investment Fund (the "Fund") is an open-end,
diversified registered management investment company established as a
Massachusetts business trust. The Fund is a series fund consisting of the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Global Discovery Portfolio, and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the "Portfolios"). Additional portfolios may be created from
time to time. The Fund is intended to be the funding vehicle for variable
annuity contracts ("VA contracts") and variable life insurance policies ("VLI
policies") to be offered to the separate accounts of certain life insurance
companies ("Participating Insurance Companies").
Each Portfolio has a different investment objective which it pursues
through separate investment policies, as described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
degree of market and financial risk to which each Portfolio is subject and the
return of each Portfolio. The investment objectives and policies of each
Portfolio may, unless otherwise specifically stated, be changed by the Trustees
of the Fund without a vote of the shareholders. There is no assurance that the
objectives of any Portfolio will be achieved.
Money Market Portfolio
The Money Market Portfolio seeks to maintain the stability of capital
and, consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio will use the amortized cost method of securities valuation.
The Money Market Portfolio purchases U.S. Treasury bills, notes and
bonds; obligations of agencies and instrumentalities of the U.S. Government;
domestic and foreign bank certificates of deposit; bankers' acceptances; finance
company and corporate commercial paper; and repurchase agreements and corporate
obligations. Investments are limited to those that are dollar-denominated and at
the time of purchase are rated, or judged by the Fund's investment adviser,
Scudder, Stevens & Clark, Inc. (the "Adviser"), subject to the supervision of
the Trustees, to be equivalent to those rated high quality (i.e., rated in the
two highest categories) by any two nationally-recognized rating services such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. Securities eligible
for investment by the Money Market Portfolio which are rated in the highest
category by at least two rating services (or by one rating service, if no other
rating service has issued a rating with respect to that security) are known as
"first tier securities." Securities rated in the top two categories which are
not first tier securities are known as "second tier securities." Investments in
commercial paper and finance company paper will be limited to securities which,
at the time of purchase, will be rated A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's or the equivalent by any nationally-recognized rating service or
judged to be equivalent by the Adviser. Obligations which are subject to
repurchase agreements will be limited to those of the type and quality described
above. The Money Market Portfolio may also hold cash. Shares of the Portfolio
are not insured by an agency of the U.S. Government. Securities and instruments
in which the Portfolio may invest may be issued by the U.S. Government, its
agencies and instrumentalities, corporations, trusts, banks, finance companies
and other business entities.
The Money Market Portfolio may invest in certificates of deposit and
bankers' acceptances of large domestic banks (i.e., banks which at the time of
their most recent annual financial statements show total assets in excess of $1
billion) including foreign branches of such domestic banks, which involve
different risks than those associated with investments in certificates of
deposit of domestic banks, and of smaller banks as described below. The
Portfolio will invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign banks if such banks meet the stated
qualifications. Although the Portfolio recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued by foreign banks and foreign branches of domestic banks involves
investment risks that are different in some respects from those associated with
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investments in certificates of deposit and bankers' acceptances issued by
domestic banks. (See "Foreign Securities" in this Statement of Additional
Information for further risks of foreign investment.)
The Money Market Portfolio may also invest in certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
The assets of the Money Market Portfolio consist entirely of cash items
and investments having a remaining maturity date of 397 calendar days or less
from date of purchase. The Portfolio will be managed so that the average
maturity of all instruments in the portfolio (on a dollar-weighted basis) will
be 90 days or less. The average maturity of the Portfolio's investments varies
according to the Adviser's appraisal of money market conditions.
To ensure diversity of the Portfolio's investments, as a matter of
non-fundamental policy the Portfolio will not invest more than 5% of its total
assets in the securities of a single issuer, other than the U.S. Government. The
Portfolio may, however, invest more than 5% of its total assets in the first
tier securities of a single issuer for a period of up to three business days
after purchase, although the Portfolio may not make more than one such
investment at any time. The Portfolio may not invest more than 5% of its total
assets in securities which were second tier securities when acquired by the
Portfolio. Further, the Portfolio may not invest more than the greater of (1) 1%
of its total assets, or (2) one million dollars, in the securities of a single
issuer which were second tier securities when acquired by the Portfolio.
The net investment income of the Portfolio is declared as a dividend to
shareholders daily and distributed monthly in cash or reinvested in additional
shares.
Bond Portfolio
The Bond Portfolio pursues a policy of investing for a high level of
income consistent with a high quality portfolio of debt securities. Under normal
circumstances the Portfolio invests at least 65% of its assets in bonds
including those of the U.S. Government and its agencies and those of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's objectives.
It will attempt to moderate the effect of market price fluctuation relative to
that of a long-term bond by investing in securities with varying maturities and
making use of futures contracts on debt securities and related options for
hedging purposes.
The Bond Portfolio may purchase corporate notes and bonds including
issues convertible into common stock and obligations of municipalities. It may
purchase U.S. Government securities and obligations of federal agencies that are
not backed by the full faith and credit of the U.S. Government, such as
obligations of Federal Home Loan Banks, Farm Credit Banks and the Federal Home
Loan Mortgage Corporation. The Portfolio may also purchase obligations of
international agencies such as the International Bank for Reconstruction and
Development and the Inter-American Development Bank. Other eligible investments
include foreign securities, including non-U.S. dollar-denominated foreign debt
securities and U.S. dollar-denominated foreign debt securities (such as those
issued by the Dominion of Canada and its provinces), including without
limitation, Eurodollar Bonds and Yankee Bonds, mortgage and other asset-backed
securities and money market instruments such as commercial paper and bankers'
acceptances and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements and may
invest in zero coupon securities. The Portfolio invests in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors.
The Bond Portfolio is of high quality. No purchase will be made if as a
result thereof less than 50% of the Portfolio's net assets would be invested in
debt obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any of the nationally-recognized rating
services or (c) if not rated, are judged by the Adviser to be of a quality
comparable to obligations rated as described in (b) above. Not less than 80% of
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the debt obligations in which the Portfolio invests will, at the time of
purchase, be rated within the three highest ratings categories of any such
service or, if not rated, will be judged to be of comparable quality by the
Adviser. The Fund may invest up to 20% of its assets in bonds rated below A but
no lower than B by Moody's or S&P or in unrated securities judged by the Adviser
to be of comparable quality. Debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P) and
unrated securities of comparable quality, which usually entail greater risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of loss of
principal and income, and may be less liquid than securities in the higher
rating categories. Securities rated B involve a high degree of speculation with
respect to the payment of principal and interest. Should the rating of any
security held by the Portfolio be down-graded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security.
See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings organizations and their
respective characteristics.
Except for limitations imposed by the Bond Portfolio's investment
restrictions, there is no limit as to the proportions of the Portfolio which may
be invested in any of the eligible investments; however, it is a policy of the
Portfolio that its non-governmental investments will be spread among a variety
of companies and will not be concentrated in any industry.
The Bond Portfolio may invest in securities of the Government National
Mortgage Agency, a Government corporation within the U.S. Department of Housing
and Urban Development ("GNMAs"). GNMAs are mortgaged-backed securities
representing part ownership of a pool of mortgage loans. These loans, which are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). Once approved by GNMA,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will fluctuate with changes
in the market prices of the Portfolio's investments, which tend to vary
inversely with changes in prevailing interest rates and, to a lesser extent,
changes in foreign currency exchange rates. As interest rates fall, the prices
of debt securities tend to rise and vice versa.
Balanced Portfolio
The Balanced Portfolio seeks a balance of growth and income from a
diversified portfolio of equity and fixed income securities. The Portfolio also
seeks long-term preservation of capital through a quality-oriented investment
approach that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"). The
Portfolio will invest primarily in securities issued by medium-to-large sized
domestic companies with annual revenues or market capitalization of at least
$600 million, and which, in the opinion of the Adviser, offer above-average
potential for price appreciation. The Portfolio seeks to invest in companies
that have relatively consistent and above-average rates of growth; companies
that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A, or A-) of S&P, or if
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not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are
allocated to bonds and other fixed income securities, including cash reserves.
The Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
restricted securities issued in private placements and zero coupon securities.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities that make
current cash distributions of interest.
For liquidity and defensive purposes, the Portfolio may invest without
limit in cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested
in debt obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged at the time of purchase, by the Adviser to be of
a quality comparable to obligations rated as described in (b) above. Not less
than 80% of the debt obligations in which the Portfolio invests will, at the
time of purchase, be rated within the three highest ratings categories of any
such service or, if not rated, will be judged to be of comparable quality by the
Adviser. Up to 20% of the Portfolio's debt securities may be invested in bonds
rated below A but no lower than B by Moody's or S&P, or unrated securities
judged by the Adviser to be of comparable quality. Debt securities which are
rated below investment-grade (that is, rated below Baa by Moody's or below BBB
by S&P and commonly referred to as "junk bonds") and unrated securities of
comparable quality, which usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings organizations and their
respective characteristics.
The Portfolio will, on occasion, adjust its mix of investments among
equity securities, bonds, and cash reserves. In reallocating investments, the
Adviser weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Adviser analyzes, on a global basis, the
level and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this Statement of Additional Information. The
Portfolio is designed as a conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Portfolio's foreign holdings will meet the criteria applicable to
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its domestic investments. The international component of the Portfolio's
investment program is intended to increase diversification, thus reducing risk,
while providing the opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or
forward delivery basis. The Portfolio may, for hedging purposes, purchase
forward foreign currency exchange contracts and foreign currencies in the form
of bank deposits. The Portfolio may also purchase other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of
deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
Growth and Income Portfolio
The Growth and Income Portfolio seeks long-term growth of capital,
current income and growth of income. In pursuing these three objectives, the
Portfolio invests primarily in common stocks, preferred stocks, and securities
convertible into common stocks of companies which offer the prospect for growth
of earnings while paying higher than average current dividends. Over time,
continued growth of earnings tends to lead to higher dividends and enhancement
of capital value. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes. The Adviser believes that a
portfolio investing in these kinds of securities can perform well whether a
growth or value investment style is in favor and that the Portfolio's dividend
strategy can improve its performance in down markets. The Adviser believes these
characteristics can help a shareholder feel comfortable holding onto the
Portfolio for the long run, despite short-term changes in the investment
climate.
The Portfolio attempts to achieve its investment objectives by
investing primarily in dividend paying common stocks, preferred stocks and
securities convertible into common stocks. The Portfolio may also purchase such
securities which do not pay current dividends but which offer prospects for
growth of capital and future income. Convertible securities (which may be
current coupon or zero coupon securities) are bonds, notes, debentures,
preferred stocks and other securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The Portfolio may also invest in nonconvertible preferred stocks consistent with
the Portfolio's objectives. From time to time, for temporary defensive purposes,
when the Adviser feels such a position is advisable in light of economic or
market conditions, the Portfolio may invest a portion of its assets in cash and
cash equivalents. The Portfolio may invest in foreign securities and in
repurchase agreements.
When evaluating a security for purchase or sale, the Adviser may
consider a security's dividend yield relative to the average dividend yield of
the S&P 500.
The Portfolio may, for hedging purposes, purchase forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments,
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate
the risk of loss. The net asset value of the Portfolio's shares will increase or
decrease with changes in the market prices of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
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Capital Growth Portfolio
The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and flexible investment program. The Portfolio invests in
marketable securities, principally common stocks and, consistent with its
objective of long-term capital growth, preferred stocks. However, in order to
reduce risk, as market or economic conditions periodically warrant, the
Portfolio may also invest up to 25% of its assets in short-term debt
instruments.
Important considerations to the Adviser in its examination of potential
investments include certain qualitative considerations such as a company's
financial strength, management reputation, absolute size and overall industry
position.
Equity investments can have diverse financial characteristics, and the
Trustees believe that the opportunity for capital growth may be found in many
different sectors of the market at any particular time. In contrast to the
specialized investment policies of some capital appreciation funds, the
Portfolio is therefore free to invest in a wide range of marketable securities
offering the potential for growth. This enables the Portfolio to pursue
investment values in various sectors of the stock market, including:
1. Companies that generate or apply new technologies, new and
improved distribution techniques, or new services, such as those
in the business equipment, electronics, specialty merchandising,
and health service industries.
2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth
prospects, the Portfolio may also purchase and hold equity securities of
companies that may have only average growth prospects, but seem undervalued due
to factors thought to be of a temporary nature which may cause their securities
to be out of favor and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to
20% of its net assets in intermediate to longer term debt securities when
management anticipates that the total return on debt securities is likely to
equal or exceed the total return on common stocks over a selected period of
time. The Portfolio may purchase investment-grade debt securities, which are
those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if
unrated, of equivalent quality as determined by the Adviser. Bonds that are
rated Baa by Moody's or BBB by S&P have some speculative characteristics. The
Portfolio's intermediate to longer term debt securities may also include those
which are rated below investment grade as long as no more than 5% of its net
assets are invested in such securities. As interest rates fall the prices of
debt securities tend to rise and vice versa. Should the rating of any security
held by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security. (See "High Yield, High Risk Securities.")
The Capital Growth Portfolio cannot guarantee a gain or eliminate the
risk of loss. The net asset value of the shares of the Portfolio will increase
or decrease with changes in the market price of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
Global Discovery Portfolio
The Global Discovery Portfolio seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world. The Portfolio is designed for investors
looking for above-average appreciation potential (when compared with the overall
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domestic stock market as reflected by Standard & Poor's 500 Composite Price
Index) and the benefits of investing globally, but who are willing to accept
above-average stock market risk, the impact of currency fluctuation and little
or no current income.
In pursuit of its objective, the Portfolio generally invests in small,
rapidly growing companies that offer the potential for above-average returns
relative to larger companies, yet are frequently overlooked and thus undervalued
by the market. The Portfolio has the flexibility to invest in any region of the
world. It can invest in companies based in emerging markets, typically in the
Far East, Latin America and lesser developed countries in Europe, as well as in
firms operating in developed economies, such as those of the United States,
Japan and Western Europe.
The Adviser invests the Portfolio's assets in companies it believes
offer above-average earnings, cash flow or asset growth potential. It also
invests in companies that may receive greater market recognition over time. The
Adviser believes these factors offer significant opportunity for long-term
capital appreciation. The Adviser evaluates investments for the Portfolio from
both a macroeconomic and microeconomic perspective, using fundamental analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible investments. When evaluating an individual company, the
Adviser takes into consideration numerous factors, including the depth and
quality of management; a company's product line, business strategy and
competitive position; research and development efforts; financial strength,
including degree of leverage; cost structure; revenue and earnings growth
potential; price-earnings ratios and other stock valuation measures.
Secondarily, the Adviser weighs the attractiveness of the country and region in
which a company is located.
Under normal circumstances the Portfolio invests at least 65% of its
total assets in the equity securities of small issuers. While the Adviser
believes that smaller, lesser-known companies can offer greater growth potential
than larger, more established firms, the former also involve greater risk and
price volatility. To help reduce risk, the Portfolio expects, under usual market
conditions, to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate investments among at least three countries at
all times, including the United States.
The Portfolio may invest up to 35% of its total assets in equity
securities of larger companies throughout the world and in debt securities if
the Adviser determines that the capital appreciation of debt securities is
likely to exceed the capital appreciation of equity securities. The Portfolio
may purchase investment-grade bonds, those rated Aaa, Aa, A or Baa by Moody's or
AAA, AA, A or BBB by S&P or, if unrated, of equivalent quality as determined by
the Adviser. The Portfolio may also invest up to 5% of its net assets in debt
securities rated below investment-grade. Securities rated below Baa/BBB are
commonly referred to as "junk bonds." The lower the ratings of such debt
securities, the greater their risks render them like equity securities. The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest.
The Portfolio selects its portfolio investments primarily from
companies whose individual equity market capitalizations would place them in the
same size range as companies in approximately the lowest 20% of market
capitalization as represented by the Salomon Brothers Broad Market Index, an
index comprised of global equity securities of companies with total available
market capitalization greater than $100 million. Based on this policy, the
companies held by the Portfolio typically will have individual equity market
capitalizations of between approximately $50 million and $2 billion (although
the Portfolio will be free to invest in smaller capitalization issues that
satisfy the Portfolio's size standard). Furthermore, the median market
capitalization of the Portfolio will not exceed $750 million.
Because the Portfolio applies a U.S. size standard on a global basis, a
small company investment outside the U.S. might rank above the lowest 20% by
market capitalization in local markets and, in fact, might in some countries
rank among the largest companies in terms of capitalization.
The equity securities in which the Portfolio may invest consist of
common stocks, preferred stocks (either convertible or nonconvertible), rights
and warrants. These securities may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter. For capital appreciation purposes, the
Portfolio may purchase notes, bonds, debentures, government securities and zero
coupon bonds (any of which may be convertible or nonconvertible). The Portfolio
may invest in foreign securities and American Depositary Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities, and engage in strategic transactions. In
addition, the Portfolio may invest in illiquid or restricted securities. For
temporary defensive purposes, the Portfolio may, during periods in which
conditions in securities markets warrant, invest without limit in cash and cash
equivalents.
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The Global Discovery Portfolio cannot guarantee a gain or eliminate the
risk of loss. The net asset value of the shares of the Portfolio will increase
or decrease with changes in the market price of the Portfolio's investments and
changes in foreign currency exchange rates. The investment objective and
policies of the Portfolio may, unless otherwise specifically stated, be changed
by the Trustees of the Fund without a vote of the Shareholders. There is no
assurance that the objective of the Portfolio will be achieved.
Risk Factors Regarding Global Discovery Portfolio
Small Company Risk. The Adviser believes that small companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of smaller companies may be thinly
traded (and therefore have to be sold at a discount from current market prices
or sold in small lots over an extended period of time). Transaction costs in
smaller company stocks may be higher than those of larger companies.
Foreign Securities. The Portfolio is intended to provide investors with an
opportunity to invest a portion of their assets in a diversified portfolio of
securities of U.S. and foreign companies located worldwide and is designed for
long-term investors who can accept international investment risk. The Portfolio
is designed for investors who can accept currency and other forms of
international investment risk. The Adviser believes that allocation of the
Portfolio's assets on a global basis decreases the degree to which events in any
one country, including the U.S., will affect an investor's entire investment
holdings. In the period since World War II, many leading foreign economies have
grown more rapidly than the U.S. economy and from time to time have had interest
rate levels that had a higher real return than the U.S. bond market.
Consequently, the securities of foreign issuers have provided attractive returns
relative to the returns provided by the securities of U.S. issuers, although
there can be no assurance that this will be true in the future.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
affect the Portfolio's performance favorably or unfavorably. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than that of the New York Stock Exchange, and securities of some
foreign issuers are less liquid and more volatile than securities of domestic
issuers. Similarly, volume and liquidity in most foreign bond markets is less
than that in the U.S. market and at times, volatility of price can be greater
than in the U.S. Further, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolio are
uninvested and no return is earned thereon. The inability of the Portfolio to
make intended security purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolio due to subsequent declines in value of the portfolio security or,
if the Portfolio has entered into a contract to sell the security, could result
in possible liability to the purchaser. Fixed commissions on some foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Adviser will endeavor to achieve the most favorable net
results on the Portfolio's portfolio transactions. Further, the Portfolio may
encounter difficulties or be unable to pursue legal remedies and obtain judgment
in foreign courts. There is generally less government supervision and regulation
of business and industry practices, securities exchanges, brokers and listed
companies than in the U.S. It may be more difficult for the Portfolio's agents
to keep currently informed about corporate actions such as stock dividends or
other matters which may affect the prices of portfolio securities.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. In addition, with
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respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of confiscatory or withholding
taxation, political, social or economic instability, or diplomatic developments
which could affect U.S. investments in those countries. Investments in foreign
securities may also entail certain risks, such as possible currency blockages or
transfer restrictions, and the difficulty of enforcing rights in other
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. The Adviser seeks to mitigate the risks to the
Portfolio associated with the foregoing considerations through investment
variation and continuous professional management.
Limitations on Holdings of Foreign Securities. The Portfolio shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
The Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of the Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of the Portfolio's assets may be invested in securities of issuers located
in the United States.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union. The Portfolio may invest up to 5% of
its total assets in the securities of issuers domiciled in Eastern European
countries.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Fund could lose a substantial portion of any investments it
has made in the affected countries. Further, no accounting standards exist in
East European countries. Finally, even though certain East European currencies
may be convertible into U.S. dollars, the conversion rates may be artificial to
the actual market values and may be adverse to the Portfolio's shareholders.
Foreign Currencies. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, the Portfolio temporarily may hold
funds in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency contracts, foreign currency
futures contracts and options on such contracts. Because of these factors, the
value of the assets of the Portfolio as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Portfolio may incur costs in connection
with conversions between various currencies. Although the Portfolio's custodian
values each Fund's assets daily in terms of U.S. dollars, none of the Funds
intends to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. The Portfolio will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
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basis at the spot rate prevailing in the foreign currency exchange market, or
through entering into forward or futures contracts to purchase or sell foreign
currencies.
Because the Portfolio normally will be invested in both U.S. and
foreign securities markets, changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets. The Portfolio's share price
will reflect the movements of both the different stock and bond markets in which
it is invested and of the currencies in which the investments are denominated;
the strength or weakness of the U.S. dollar against foreign currencies may
account for part of the Portfolio's investment performance. U.S. and foreign
securities markets do not always move in step with each other, and the total
returns from different markets may vary significantly. The Portfolio invests in
many securities markets around the world in an attempt to take advantage of
opportunities wherever they may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the United States.
Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Portfolio is uninvested and no cash is earned thereon. The inability of the
Portfolio to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result either
in losses to the Portfolio due to subsequent declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser. Costs associated with
transactions in foreign securities are generally higher than costs associated
with transactions in U.S. securities. Such transactions also involve additional
costs for the purchase or sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of the Portfolio. Certain
emerging markets require prior governmental approval of investments by foreign
persons, limit the amount of investment by foreign persons in a particular
company, limit the investment by foreign persons only to a specific class of
securities of a company that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Portfolio
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the
Portfolio could lose its entire investment in any such country.
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The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The Portfolio may invest a portion of its assets in securities
denominated in currencies of Latin American countries. Accordingly, changes in
the value of these currencies against the U.S. dollar may result in
corresponding changes in the U.S. dollar value of the Portfolio's assets
denominated in those currencies.
Some Latin American countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Portfolio securities are denominated may have a
detrimental impact on the Portfolio's net asset value.
The economies of individual Latin American countries may differ
favorably or unfavorably from the U.S. economy in such respects as the rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Certain Latin
American countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the
Portfolio at a higher rate than those imposed by other foreign countries. This
may reduce the Portfolio's investment income available for distribution to
shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico
are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region has a large population (roughly 300 million) representing a large
domestic market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in gross domestic product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions, and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect the Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
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region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in
which the Fund may participate, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country or the Portfolio's investment in the debt of that
country.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.
Investing in Europe. Most Eastern European nations, including Hungary, Poland,
Czechoslovakia, and Romania have had centrally planned, socialist economies
since shortly after World War II. A number of their governments, including those
of Hungary, the Czech Republic, and Poland are currently implementing or
considering reforms directed at political and economic liberalization, including
efforts to foster multi-party political systems, decentralize economic planning,
and move toward free market economies. At present, no Eastern European country
has a developed stock market, but Poland, Hungary, and the Czech Republic have
small securities markets in operation. Ethnic and civil conflict currently rage
through the former Yugoslavia. The outcome is uncertain.
Both the European Community (the "EC") and Japan, among others, have
made overtures to establish trading arrangements and assist in the economic
development of the Eastern European nations. A great deal of interest also
surrounds opportunities created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable member of the EC and numerous other international alliances and
organizations. To reduce inflation caused by the unification of East and West
Germany, Germany has adopted a tight monetary policy which has led to weakened
exports and a reduced domestic demand for goods and services. However, in the
long-term, reunification could prove to be an engine for domestic and
international growth.
The conditions that have given rise to these developments are
changeable, and there is no assurance that reforms will continue or that their
goals will be achieved.
Portugal is a genuinely emerging market which has experienced rapid
growth since the mid-1980s, except for a brief period of stagnation over
1990-91. Portugal's government remains committed to privatization of the
financial system away from one dependent upon the banking system to a more
balanced structure appropriate for the requirements of a modern economy.
Inflation continues to be about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in
the 1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
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Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may
be subject to risks due to the inexperience of financial intermediaries, the
lack of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Portfolio's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar, and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, general decline in oil prices has had an adverse impact on many
economies.
Foreign securities such as those purchased by the Portfolio may be
subject to foreign government taxes which could reduce the yield on such
securities, although a shareholder of the Portfolio may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Portfolio. (See "TAX STATUS.")
International Portfolio
The International Portfolio seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments. The
Portfolio invests in companies, wherever organized, which do business primarily
outside the United States. The Fund, on behalf of the Portfolio, intends to
diversify investments among several countries and to have represented in the
program business activities in not less than three different countries. The
management considers it consistent with this policy for the Portfolio to acquire
securities of companies incorporated in the United States and having their
principal activities and interests outside of the United States, and such
investments may be included in the program.
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It is not the policy of the Portfolio to concentrate its investments in
any particular industry, and the Portfolio's management does not intend to make
acquisitions in particular industries which would increase the percentage of the
market value of the Portfolio's assets above 25% for any one industry. The
Portfolio does not invest for the purpose of controlling or managing other
companies.
The major portion of the Portfolio's assets consists of equity
securities of established companies listed on recognized exchanges; the Adviser
expects this condition to continue, although the Portfolio may invest in other
securities. Investments may also be made in fixed income securities of foreign
governments and companies with a view toward total investment return. In
determining the location of the principal activities and interests of a company,
the Adviser takes into account such factors as the location of the company's
assets, personnel, sales and earnings. In selecting securities for the
Portfolio, the Adviser seeks to identify companies whose securities prices do
not adequately reflect their established positions in their fields. In analyzing
companies for investment, the Adviser ordinarily looks for one or more of the
following characteristics: above-average earnings growth per share, high return
on invested capital, healthy balance sheets and overall financial strength,
strong competitive advantages, strength of management and general operating
characteristics which will enable the companies to compete successfully in their
marketplace. Investment decisions are made without regard to arbitrary criteria
such as minimum asset size, debt-equity ratios or dividend history of Portfolio
companies.
The Portfolio may invest in any type of security including, but not
limited to shares, preferred or common, bonds and other evidences of
indebtedness, and other securities of issuers wherever organized, and not
excluding evidences of indebtedness of governments and their political
subdivisions. Although no particular proportion of stocks, bonds or other
securities is required to be maintained, the Fund, on behalf of the Portfolio,
in view of the Portfolio's investment objective, intends under normal conditions
to maintain holdings consisting primarily of a diversified list of equity
securities.
Under exceptional economic or market conditions abroad, the Portfolio
may temporarily, until normal conditions return, invest all or a major portion
of its assets in Canadian or U.S. Government obligations or currencies, or
securities of companies incorporated in and having their principal activities in
Canada or the United States.
Foreign securities such as those purchased by the Portfolio may be
subject to foreign government taxes which could reduce the yield on such
securities, although a shareholder of the Portfolio may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Portfolio. (See "TAXES.")
The Portfolio is intended to provide investors with an opportunity to
invest a portion of their assets in a diversified group of securities of foreign
companies and governments. Management of the Portfolio believes that
diversification of assets on an international basis decreases the degree to
which events in any one country, including the United States, will affect an
investor's entire investment holdings. In the period since World War II, many
leading foreign economies and foreign stock market indexes have grown more
rapidly than the United States economy and leading U.S. stock market indexes,
although there can be no assurance that this will be true in the future. Because
of the Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.
Because the Portfolio normally will be invested in foreign securities
markets, changes in the Portfolio's share price may have a low correlation with
movements in the U.S. markets. The Portfolio's share price will reflect the
movements of both the different stock and bond markets in which it is invested
and of the currencies in which the investments are denominated; the strength or
weakness of the U.S. dollar against foreign currencies may account for part of
the Portfolio's investment performance. U.S. and foreign securities markets do
not always move in step with each other, and the total returns from different
markets may vary significantly. The Portfolio invests in many foreign securities
markets in an attempt to take advantage of opportunities wherever they may
arise.
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POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
in the Fund's prospectus.)
Except as otherwise noted below, the following description of
additional investment policies and techniques is applicable to all of the
Portfolios.
Repurchase Agreements
On behalf of a Portfolio, the Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest categories assigned by Moody's or S&P. A repurchase agreement
with a member bank of the Federal Reserve System, which provides a means for the
Portfolio to earn income on funds for periods as short as overnight, is an
arrangement through which the Portfolio acquires a U.S. Government or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price. A
repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction. The repurchase
price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Portfolio together with the repurchase price on
repurchase. In either case, the income to the Portfolio is unrelated to the
interest rate on the Obligation subject to the repurchase agreement. For
purposes of the Investment Company Act of 1940, as amended (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation subject to the repurchase agreement and is therefore subject to
the Portfolio's investment restriction applicable to loans. It is not clear
whether a court would consider the Obligation purchased by the Portfolio subject
to a repurchase agreement as being owned by the Portfolio or as being collateral
for a loan by the Portfolio to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings of the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Portfolio may
encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Portfolio has not perfected a
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Portfolio would be at the risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Portfolio, the Fund seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including interest), the Portfolio will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Portfolio will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Illiquid Securities
Global Discovery Portfolio may occasionally purchase securities other
than in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the Securities Act of 1933 (the "1933 Act") or the
availability of an exemption from registration (such as Rules 144 or 144A) or
because they are subject to other legal or contractual delays in or restrictions
on resale.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. The Portfolio may be deemed to be an "underwriter"
for purposes of the 1933 Act when selling restricted securities to the public,
and in such event the Portfolio may be liable to purchasers of such securities
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if the registration statement prepared by the issuer, or the prospectus forming
a part of it, is materially inaccurate or misleading.
Zero Coupon Securities
The Bond Portfolio and the Balanced Portfolio may each invest in zero
coupon securities which pay no cash income and are sold at substantial discounts
from their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the issue
price and their value at maturity. Zero coupon securities are subject to greater
market value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Bond Portfolio and the Balanced Portfolio may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks, and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related,
and private organizations as further described below. The Portfolios may also
invest in debt securities which are secured with collateral consisting of
mortgage-backed securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities.
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A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Portfolios to a lower rate of return
upon reinvestment. To the extent that such mortgage-backed securities are held
by the Portfolios, the prepayment right will tend to limit to some degree the
increase in net asset value of the Portfolios because the value of the
mortgage-backed securities held by the Portfolios may not appreciate as rapidly
as the price of non-callable debt securities.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities such as
securities issued by the Government National Mortgage Association ("GNMA") are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional 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.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolios may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
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the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
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from customary long-term fixed rate mortgages. The Bond Portfolio and the
Balanced Portfolio will not purchase mortgage-backed securities or any other
assets which, in the opinion of the Adviser, are illiquid if, as a result, more
than 10% of the value of the Portfolio's total assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment objectives, policies,
and quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
automobile loans, computer leases and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a structure similar to the CMO structure.
Consistent with the Bond Portfolio's and the Balanced Portfolio's investment
objectives and policies, the Portfolios may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated, or failure of the credit support could
adversely affect the return on an investment in such a security.
The Bond Portfolio and the Balanced Portfolio may also invest in
residual interests in asset-backed securities. In the case of asset-backed
securities issued in a pass-through structure, the cash flow generated by the
underlying assets is applied to make required payments on the securities and to
pay related administrative expenses. The residual in an asset-backed security
pass-through structure represents the interest in any excess cash flow remaining
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after making the foregoing payments. The amount of residual cash flow resulting
from a particular issue of asset-backed securities will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Bond Portfolio and the Balanced Portfolio to dispose of any then
existing holdings of such securities.
Municipal Obligations
The Bond Portfolio and the Balanced Portfolio may each invest in
municipal obligations, which are issued by or on behalf of states, territories,
and possessions of the U.S., and their political subdivisions, agencies, and
instrumentalities, and the District of Columbia to obtain funds for various
public purposes. The interest on these obligations is generally exempt from
federal income tax in the hands of most investors. The two principal
classifications of municipal obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations. The
Bond Portfolio and the Balanced Portfolio may each acquire municipal obligations
when, due to disparities in the debt securities markets, the anticipated total
return on such obligations is higher than that on taxable obligations. The Bond
Portfolio and the Balanced Portfolio have no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Portfolio's total assets.
Convertible Securities
The Bond, Balanced, Growth and Income, Capital Growth and Global
Discovery Portfolios may each invest in convertible securities; that is, bonds,
notes, debentures, preferred stocks and other securities which are convertible
into common stock. Investments in convertible securities can provide an
opportunity for capital appreciation and/or income through interest and dividend
payments by virtue of their conversion or exchange features.
The convertible securities in which the Bond, Balanced, Growth and
Income, Capital Growth and Global Discovery Portfolios may invest include
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
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and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Depositary Receipts
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest indirectly in securities of foreign
issuers through sponsored or unsponsored American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"), International Depositary Receipts ("IDRs")
and other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs
are hereinafter referred to as "Depositary Receipts"). Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts. ADRs
are typically issued by a United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by United States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the
United States securities markets and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Balanced, Growth and Income, Capital Growth and International Portfolios'
investment policies, the Portfolios' investments in ADRs, GDRs and other types
of Depositary Receipts will be deemed to be investments in the underlying
securities. Depositary Receipts other than those denominated in U.S. dollars
will be subject to foreign currency exchange rate risk. Certain Depositary
Receipts may not be listed on an exchange and therefore may be illiquid
securities.
Foreign Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios (collectively, the "Non-Money Market Portfolios")
may each invest, without limit, except as applicable to debt securities
generally, in U.S. dollar-denominated foreign debt securities (including those
issued by the Dominion of Canada and its provinces and other debt securities
which meet the criteria applicable to the Portfolio's domestic investments), and
in certificates of deposit issued by foreign banks and foreign branches of
United States banks, to any extent deemed appropriate by the Adviser. The Bond
Portfolio may invest up to 20% of its assets in non-U.S. dollar-denominated
foreign debt securities. The Balanced Portfolio may invest up to 20% of its debt
securities in non-U.S. dollar-denominated foreign debt securities, and may
invest up to 25% of its equity securities in non-U.S. dollar-denominated foreign
equity securities. The Growth and Income Portfolio may invest up to 25% of its
assets in non-U.S. dollar denominated equity securities of foreign issuers. The
Capital Growth Portfolio may invest up to 25% of its assets, and the
International Portfolio may invest without limit, in non-U.S. dollar-denominated
equity securities of foreign issuers.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect the Non-Money Market Portfolios' performance. As
foreign companies are not generally subject to uniform accounting and auditing
and financial reporting standards, practices and requirements comparable to
those applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
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some foreign companies are less liquid and more volatile than securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and liquidity in the U.S. and at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated, or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income and International Portfolios
Each Portfolio that invests in foreign securities shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
Each Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of each Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.
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Indexed Securities
The Bond Portfolio and the Balanced Portfolio may each invest in
indexed securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" or "forward delivery" basis. Debt securities are often issued on
this basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued or forward delivery securities take place at a later date.
During the period between purchase and settlement, no payment is made by the
Portfolio and no interest accrues to the Portfolio. To the extent that assets of
a Portfolio are held in cash pending the settlement of a purchase of securities,
that Portfolio would earn no income; however, it is the Fund's intention that
each Portfolio will be fully invested to the extent practicable and subject to
the policies stated above. While when-issued or forward delivery securities may
be sold prior to the settlement date, the Portfolio intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment on
behalf of a Portfolio to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Fund does not
believe that a Portfolio's net asset value or income will be adversely affected
by the purchase of securities on a when-issued or forward delivery basis. Each
Portfolio will establish a segregated account in which it will maintain cash,
U.S. Government securities and other high-grade debt obligations at least equal
in value to commitments for when-issued or forward delivery securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
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Borrowing
The Board of Trustees has adopted a policy whereby each Portfolio of
the Fund may borrow up to 10% of its total assets; provided, however, that each
Portfolio may borrow up to 25% of its total assets for extraordinary or
emergency purposes, including the facilitation of redemptions. A Portfolio may
only borrow money from banks as a temporary measure for extraordinary or
emergency purposes (each Portfolio is required to maintain asset coverage
(including borrowings) of 300% for all borrowings) and no purchases of
securities for a Portfolio will be made while borrowings of that Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on investment of such funds.
Options for the Bond, Balanced, Growth and Income and International Portfolios
The Fund may, on behalf of each of the Bond, Balanced, Growth and
Income, Capital Growth and International Portfolios, write covered call options
on the portfolio securities of such Portfolio in an attempt to enhance
investment performance. A call option is a contract generally having a duration
of nine months or less which gives the purchaser of the option, in return for a
premium paid, the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time upon the assignment of an
exercise notice prior to the expiration of the option, regardless of the market
price of the security during the option period. A covered call option is an
option written on a security which is owned by the writer throughout the option
period.
The Fund will write, on behalf of a Portfolio, covered call options
both to reduce the risks associated with certain of its investments and to
increase total investment return. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the option, the Portfolio will retain
the risk of loss should the price of the security decline, which loss the
premium is intended to offset in whole or in part. Unlike the situation in which
the Fund owns securities not subject to a call option, the Fund, in writing call
options, must assume that the call may be exercised at any time prior to the
expiration of its obligations as a writer, and that in such circumstances the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. The Fund may forego
the benefit of appreciation in its Portfolios on securities sold pursuant to
call options.
When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period, generally ranging up to nine months. Some of the options
which the Fund writes may be of the European type which means they may be
exercised only at a specified time. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised, a decision over which the Portfolio
has no control, the Portfolio must sell the underlying security to the option
holder at the exercise price. By writing a covered call option, the Portfolio
forgoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each write covered call and put options to a
limited extent on their portfolio securities in an attempt to earn additional
income on their portfolios, consistent with their investment objectives. The
Portfolios may forego the benefits of appreciation on securities sold or
depreciation on securities acquired pursuant to call and put options written by
the Portfolios. Each Portfolio has no current intention of writing options on
more than 5% of its net assets.
When the Fund, on behalf of the Balanced, Growth and Income, Capital
Growth, Global Discovery and International Portfolios, writes a put option, it
gives the purchaser of the option the right to sell the underlying security to
the Portfolio at the specified exercise price at any time during the option
period. Some of the European type options which the Fund writes may be exercised
only at a specified time. If the option expires unexercised, the Portfolio will
realize income in the amount of the premium received for writing the option. If
the put option is exercised, a decision over which the Portfolio has no control,
the Portfolio must purchase the underlying security from the option holder at
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the exercise price. By writing a put option, the Portfolio, in exchange for the
net premium received, accepts the risk of a decline in the market value of the
underlying security below the exercise price. With respect to each put option it
writes, the Portfolio will have deposited in a separate account with its
custodian U.S. Treasury obligations, high-grade debt securities or cash equal in
value to the exercise price of the put option, will have purchased a put option
with a higher exercise price that will expire no earlier than the put option
written or will have used some combination of these two methods. The Fund on
behalf of each Portfolio, will only write put options involving securities for
which a determination is made that it wishes to acquire the securities at the
exercise price at the time the option is written.
A Portfolio may terminate its obligation as a writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction."
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the Portfolio
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call options on any securities in which it
may invest in anticipation of an increase in the market value of such
securities. The purchase of a call option would entitle the Portfolio, in
exchange for the premium paid, to purchase a security at a specified price
during the option period. The Portfolio would ordinarily have a gain if the
value of the securities increased above the exercise price sufficiently to cover
the premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios will normally purchase put options in anticipation of a
decline in the market value of securities in their portfolios ("protective
puts") or securities of the type in which they are permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held by the Portfolio,
at a specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the market value of
the Portfolio's portfolio securities. Put options may also be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. Exchange markets in
securities options are a relatively new and untested concept. It is impossible
to predict the volume of trading that may exist in such options, and there can
be no assurance that viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
thirty broker-dealers make these markets and the Adviser will consider risk
factors such as their creditworthiness when determining a broker-dealer with
which to engage in options transactions. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. Written over-the-counter
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options purchased by the Fund and portfolio securities "covering" the Fund's
obligation pursuant to an over-the-counter option may be deemed to be illiquid
and may not be readily marketable. The Adviser will monitor the creditworthiness
of dealers with whom the Fund enters into such options transactions under the
general supervision of the Fund's Trustees.
Securities Index Options
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each purchase call and put options on securities
indexes for the purpose of hedging against the risk of unfavorable price
movements adversely affecting the value of a Portfolio's securities. Options on
securities indexes are similar to options on stock except that the settlement is
made in cash.
Unlike a securities option, which gives the holder the right to
purchase or sell a specified security at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the underlying securities index on the exercise date,
multiplied by (ii) a fixed "index multiplier." In exchange for undertaking the
obligation to make such cash payment, the writer of the securities index option
receives a premium.
A securities index fluctuates with changes in the market values of the
securities so included. Some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indices are also based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange, Philadelphia Exchange, New York
Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities holdings of a Portfolio will not exactly match the composition of the
securities indexes on which options are written. In addition, the purchase of
securities index options involves essentially the same risks as the purchase of
options on futures contracts. The principal risk is that the premium and
transactions costs paid by a Portfolio in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
securities index on which the option is written. Options on securities indexes
also entail the risk that a liquid secondary market to close out the option will
not exist, although a Portfolio will generally only purchase or write such an
option if the Adviser believes the option can be closed out.
Futures Contracts
The Fund may, on behalf of the Bond, Balanced and International
Portfolios, purchase and sell futures contracts on debt securities to hedge
against anticipated changes in interest rates that might otherwise have an
adverse effect upon the value of the Portfolio's debt securities. In addition,
the Fund may, on behalf of the Non-Money Market Portfolios, purchase and sell
securities index futures to hedge the equity securities of a Portfolio with
regard to market (systematic) risk as distinguished from stock-specific risk.
Each of these five Portfolios may also purchase and write put and call options
on futures contracts of the type which such Portfolio is authorized to enter
into and may engage in related closing transactions. All of such futures on debt
securities, stock index futures and related options will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC") or on appropriate foreign exchanges, to the extent permitted by law.
Even though at the present time no contracts based on global indices which meet
the International Portfolio's investment criteria are available, there are U.S.
stock indices which may be used to hedge U.S. securities held in that Portfolio.
Futures on Debt Securities
A futures contract on a debt security is a binding contractual
commitment which, if held to maturity, will result in an obligation to make or
accept delivery, during a particular future month, of securities having a
standardized face value and rate of return. By purchasing futures on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself to accept the future delivery of the underlying security
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and pay the agreed price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
Positions taken in the futures markets are normally not held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures positions taken by the Fund on
behalf of a Portfolio will usually be liquidated in this manner, the Fund may
instead make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes responsibility
for closing-out and guarantees that the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the securities should
occur (with its concomitant reduction in yield), the increased cost to the
Portfolio of purchasing the securities will be offset, at least to some extent,
by the rise in the value of the futures position taken in anticipation of the
subsequent securities purchase.
Stock Index Futures. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the future is based. That
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity securities of each
of the Balanced, Growth and Income, Capital Growth or International Portfolios
with regard to market (systematic) risk (involving the market's assessment of
over-all economic prospects), as distinguished from stock-specific risk
(involving the market's evaluation of the merits of the issuer of a particular
security). By establishing an appropriate "short" position in stock index
futures, the Fund may seek to protect the value of the equity of a Portfolio's
securities against an overall decline in the market for equity securities.
Alternatively, in anticipation of a generally rising market, the Fund can seek
on behalf of a Portfolio to avoid losing the benefit of apparently low current
prices by establishing a "long" position in stock index futures and later
liquidating that position as particular equity securities are in fact acquired.
To the extent that these hedging strategies are successful, the Portfolio will
be affected to a lesser degree by adverse overall market price movements,
unrelated to the merits of specific portfolio equity securities, than would
otherwise be the case.
Options on Futures. For bona fide hedging purposes, the Fund may also purchase
and write, on behalf of each of the Bond, Balanced, Growth and Income, Capital
Growth and International Portfolios, call and put options on futures contracts,
which are traded on exchanges that are licensed and regulated by the CFTC or on
any foreign exchange for the purpose of options trading, to the extent permitted
by law. A "call" option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
"put" option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price, at any time before the option expires.
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Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When a person exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the holder of an option will usually realize a gain or loss by buying
or selling an offsetting option at a market price that will reflect an increase
or a decrease from the premium originally paid.
Options on futures can be used by a Portfolio to hedge substantially
the same risks as might be addressed by the direct purchase or sale of the
underlying futures contracts. If the Portfolio purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself. But in contrast to a futures transaction, in which
only transaction costs are involved, benefits received in an option transaction
will be reduced by the amount of the premium paid as well as by transaction
costs. In the event of an adverse market movement, however, the Portfolio will
not be subject to a risk of loss on the option transaction beyond the price of
the premium it paid plus its transaction costs, and may consequently benefit
from a favorable movement in the value of its portfolio securities that would
have been more completely offset if the hedge had been effected through the use
of futures.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will gain the amount of
the premium, which may partially offset unfavorable changes in the value of
securities held in or to be acquired for the Portfolio. If the option is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the maintenance of a
liquid market. A Portfolio will not purchase or write options on futures
contracts unless, in the Adviser's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
Limitations on the Use of Futures Contracts and Options on Futures
All of the futures contracts and options on futures transactions into
which the Fund will enter will be for bona fide hedging or other appropriate
risk management purposes as permitted by CFTC regulations and to the extent
consistent with requirements of the Securities and Exchange Commission (the
"SEC").
To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC regulations, subject to the requirements of the SEC. The Fund will
further seek to assure that fluctuations in the price of the futures contracts
and options on futures that it uses for hedging purposes will be substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase, though there can be no assurance that this result
will be achieved. The Fund will sell futures contracts or acquire puts to
protect against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures contracts or calls on futures contracts to protect a
Portfolio against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.
As evidence of this hedging intent, the Fund expects that on 75% or
more of the occasions on which it purchases a long futures contract or call
option on futures for a Portfolio the Fund will effect the purchase of
securities in the cash market or take delivery as it closes out a Portfolio's
futures position. In particular cases, however, when it is economically
advantageous to the Portfolio, a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.
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As an alternative to literal compliance with the bona fide hedging
definition, a CFTC definition now permits the Fund to elect to comply with a
different test, under which its long futures positions will not exceed the sum
of (a) cash or cash equivalents segregated for this purpose, (b) cash proceeds
on existing investments due within thirty days and (c) accrued profits on the
particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.
Futures on debt securities and stock index futures are at present
actively traded on exchanges that are licensed and registered by the CFTC, or
consistent with the CFTC regulations on foreign exchanges. Portfolios will incur
brokerage fees in connection with their futures and options transactions, and
will be required to deposit and maintain funds with brokers as margin to
guarantee performance of futures obligations. In addition, while futures
contracts and options on futures will be purchased and sold to reduce certain
risks, those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the Portfolio than if it had not entered into any
futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
Each Portfolio, in dealing in futures contracts and options on futures,
is subject to the 300% asset coverage requirement for borrowings set forth under
"Investment Restrictions" in the Fund's prospectus. The Trustees have also
adopted a policy (which is not fundamental and may be modified by the Trustees
without a shareholder vote) that, immediately after the purchase or sale of a
futures contract or option thereon, the value of the aggregate initial margin
with respect to all futures contracts and premiums on options on futures
contracts entered into by a Portfolio will not exceed 5% of the fair market
value of the Portfolio's total assets. Additionally, the value of the aggregate
premiums paid for all put and call options held by the Portfolio will not exceed
2% of its net assets. A futures contract for the receipt of a debt security and
long index futures will be offset by assets of the Portfolio held in a
segregated account in an amount equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.
Foreign Currency Transactions
The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes. These Portfolios
may also, for hedging purposes, purchase foreign currencies in the form of bank
deposits as well as other foreign money market instruments, including but not
limited to, bankers' acceptances, certificates of deposit, commercial paper,
short-term government and corporate obligations and repurchase agreements. The
International Portfolio may also enter into foreign currency futures contracts
and foreign currency options.
Because investments in foreign companies usually will involve
currencies of foreign countries, and because the Non-Money Market Portfolios
temporarily may hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of their assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and they may incur costs in
connection with conversions between various currencies. Although the Non-Money
Market Portfolios value their assets daily in terms of U.S. dollars, they do not
intend to convert their holdings of foreign currencies into U.S. dollars on a
daily basis. They will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market Portfolios at one rate, while offering a lesser rate of exchange should
the Non-Money Market Portfolios desire to resell that currency to the dealer.
The Non-Money Market Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or, in
the case of the International Portfolio, futures contracts to purchase or sell
foreign currencies.
A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
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directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. The agreed price may be fixed or within
a specified range of prices. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the CFTC,
such as the Chicago Mercantile Exchange. Futures contracts involve brokerage
costs, which may vary from less than 1% to 2.5% of the contract price, and
require parties to the contract to make "margin" deposits to secure performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign currencies.
The International Portfolio would enter into futures contracts solely for
hedging or other appropriate risk management purposes as defined in CFTC
regulations.
Forward contracts differ from foreign currency futures contracts in
certain respects. For example, the maturity date of a forward contract may be
any fixed number of days from the date of the contract agreed upon by the
parties, rather than a predetermined date in a given month, and they may be in
any amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
Upon the maturity of a forward or foreign currency futures contract a
Portfolio may either accept or make delivery of the currency specified in the
contract or, at or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. Closing
purchase transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
A Portfolio may enter into forward contracts and foreign currency
futures contracts under certain circumstances. When a Portfolio enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when a Portfolio anticipates the receipt in a foreign currency of
dividends or interest payments on such a security which it holds, the Portfolio
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward or futures contract for the purchase or sale, for a fixed amount
of dollars, of the amount of foreign currency involved in the underlying
transactions, the Portfolio will attempt to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward or futures contract to sell, for a
fixed amount of dollars, the amount of foreign currency approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. The precise matching of the forward or futures contract amounts and
the value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of a portion of
the Portfolio's foreign assets.
The Non-Money Market Portfolios do not intend to enter into such
forward or futures contracts to protect the value of their portfolio securities
on a regular continuous basis, and will not do so if, as a result, a Portfolio
will have more than 15% of the value of its total assets committed to the
consummation of such contracts. A Portfolio also will not enter into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Portfolio
to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Non-Money Market Portfolios
believe that it is important to have the flexibility to enter into such forward
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or foreign currency futures contracts when each determines that the best
interests of the Portfolio will be served.
Except when a Portfolio enters into a forward contract for the purpose
of the purchase or sale of a security denominated in a foreign currency, State
Street Bank and Trust Company (the "Custodian"), will place cash or liquid
securities into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts (or the Portfolio's forward contracts will be otherwise covered
consistent with applicable regulatory policies) and foreign currency futures
contracts that require the Portfolio to purchase foreign currencies. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
The Non-Money Market Portfolios generally will not enter into a forward
or foreign currency futures contract with a term of greater than one year. It
also should be realized that this method of protecting the value of a
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Portfolio can achieve at some future
point in time.
While the Non-Money Market Portfolios will enter into forward and, in
the case of the International Portfolio, foreign currency futures contracts and
foreign currency options to reduce currency exchange rate risks, transactions in
such contracts involve certain other risks. Thus, while a Portfolio may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall performance for the Portfolio than if it had not engaged in any
such transaction. Moreover, there may be imperfect correlation between the value
of the Portfolio's holdings of securities denominated in a particular currency
and forward or futures contracts entered into by the Portfolio. Such imperfect
correlation may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.
The International Portfolio may purchase options on foreign currencies
for hedging purposes in a manner similar to that of transactions in forward
contracts. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such decreases in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency declines, the Portfolio will have the right to sell such currency
for a fixed amount of dollars which exceeds the market value of such currency.
This would result in a gain that may offset, in whole or in part, the negative
effect of currency depreciation on the value of the Portfolio's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency is projected
for those securities to be acquired, thereby increasing the cost of such
securities, the International Portfolio may purchase call options on such
currency. If the value of such currency increased, the purchase of such call
options would enable the Portfolio to purchase currency for a fixed amount of
dollars which is less than the market value of such currency. Such a purchase
would result in a gain that may offset, at least partially, the effect of any
currency related increase in the price of securities the Portfolio intends to
acquire. As in the case of other types of options transactions, however, the
benefit the Portfolio derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The International Portfolio may close out its position in a currency
option by either selling the option it has purchased or entering into an
offsetting option.
Strategic Transactions and Derivatives Applicable to the Global Discovery
Portfolio
The Global Discovery Portfolio may, but is not required to, utilize
various other investment strategies as described below to hedge various market
risks (such as interest rates, currency exchange rates, and broad or specific
equity or fixed-income market movements), to manage the effective maturity or
duration of fixed-income securities in the Portfolio's portfolio, or to enhance
potential gain. These strategies may be executed through the use of derivative
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contracts. Such strategies are generally accepted as a part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Portfolio
may purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities in the Portfolio, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of
fixed-income securities in the Portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Portfolio's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Portfolio
to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Portfolio can realize on its
investments or cause the Portfolio to hold a security it might otherwise sell.
The use of currency transactions can result in the Portfolio incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of
the Portfolio creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Portfolio assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Portfolio's purchase of a put option on a security might be
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designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Portfolio is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Portfolio's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolio expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Portfolio will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
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rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency transactions, are determined to be of equivalent credit
quality by the Adviser. The staff of the SEC currently takes the position that
OTC options purchased by the Portfolio, and portfolio securities "covering" the
amount of the Portfolio's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Portfolio's limitation on investing no more than 10% of its
assets in illiquid securities.
If the Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income.
The sale of put options can also provide income.
The Portfolio may purchase and sell call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All calls sold by the Portfolio must be
"covered" (i.e., the Portfolio must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help protect it against loss, a call sold by the Portfolio
exposes the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument which it might otherwise have sold.
The Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Portfolio will not sell put options if, as a result, more
than 50% of the Portfolio's assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. The Portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Portfolio, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Portfolio's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the
Portfolio to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
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The Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Portfolio's total assets (taken at current
value); however, in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Portfolio may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Portfolio may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or are determined
to be of equivalent credit quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Portfolio will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Portfolio may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Portfolio has or in
which the Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Portfolio may also engage
in proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency whose changes in value are generally considered to be correlated to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, in exchange for U.S. dollars.
The amount of the commitment or option would not exceed the value of the
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
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deutschemark (the "D-mark"), the Portfolio holds securities denominated in
schillings and the Adviser believes that the value of schillings will decline
against the U.S. dollar, the Adviser may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Portfolio if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Portfolio is engaging in proxy hedging. If the Portfolio enters into a
currency hedging transaction, the Portfolio will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolio if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are subject
to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. The Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the 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 with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
36
<PAGE>
purposes, the Adviser and the Portfolio believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. The Portfolio will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from an NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Portfolio segregate liquid high
grade assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolio to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid high grade
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Portfolio will require the Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Portfolio on an index will require the Portfolio to own portfolio
securities which correlate with the index or to segregate liquid high grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by the Portfolio requires the Portfolio to
segregate liquid, high grade assets equal to the exercise price.
Except when the Portfolio enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Portfolio to
buy or sell currency will generally require the Portfolio to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate liquid high grade assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by the Portfolio, including those on
securities, currency, financial instruments or indices and OCC issued and
exchange listed index options, will generally provide for cash settlement. As a
result, when the Portfolio sells these instruments it will only segregate an
amount of assets equal to its accrued net obligations, as there is no
requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the
Portfolio, or the in-the-money amount plus any sell-back formula amount in the
case of a cash-settled put or call. In addition, when the Portfolio sells a call
option on an index at a time when the in-the-money amount exceeds the exercise
price, the Portfolio will segregate, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess. OCC issued and exchange
37
<PAGE>
listed options sold by the Portfolio other than those above generally settle
with physical delivery, or with an election of either physical delivery or cash
settlement and the Portfolio will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Portfolio
must deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Portfolio's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Portfolio may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Portfolio could purchase a put option
if the strike price of that option is the same or higher than the strike price
of a put option sold by the Portfolio. Moreover, instead of segregating assets
if the Portfolio held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
The Portfolio's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAX STATUS.")
Debt Securities
If the Adviser determines that the capital appreciation of debt
securities is likely to exceed that of common stocks, the Global Discovery
Portfolio may invest in debt securities of foreign and U.S. issuers. Global
Discovery Portfolio debt investments will be selected on the basis of capital
appreciation potential, by evaluating, among other things, potential yield, if
any, credit quality, and the fundamental outlooks for currency and interest rate
trends in different parts of the world, taking into account the ability to hedge
a degree of currency or local bond price risk. The Global Discovery Portfolio
may purchase "investment-grade" bonds, which are those rated Aaa, Aa, A or Baa
by Moody's or AAA, AA, A or BBB by S&P or, if unrated, judged to be of
equivalent quality as determined by the Adviser. Bonds rated Baa or BBB may have
speculative elements as well as investment-grade characteristics. The Global
Discovery Portfolio may also invest up to 5% of its net assets in debt
securities which are rated below investment-grade, that is, rated below Baa by
Moody's or below BBB by S&P and in unrated securities of equivalent quality.
High Yield, High Risk Securities
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may
each invest in below investment grade securities (rated Ba and lower by Moody's
and BB and lower by S&P) or unrated securities. Such securities carry a high
degree of risk (including the possibility of default or bankruptcy of these
issuers of such securities) generally involve greater volatility of price and
risk of principal and income, and may be less liquid than securities in the
higher ratings categories and are considered speculative. The Global Discovery
Portfolio may invest up to 5% of its net assets in such securities. The lower
the ratings of such debt securities, the greater their risks render them like
equity securities. See the Appendix to this Statement of Additional Information
for a more complete description of the ratings assigned by ratings organizations
and their respective characteristics.
As economic downturn may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by a
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<PAGE>
Portfolio. Prices and yields of high yield securities will fluctuate over time
and may affect a Portfolio's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolios' investment objectives may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.
Prices for below investment grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions gradually to reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
Combined Transactions
Each Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward contracts) and any combination of futures,
options and foreign currency transactions ("component" transactions), instead of
a single transaction, as part of a single hedging strategy when, in the opinion
of the Adviser, it is in the best interest of a Portfolio to do so. A combined
transaction, while part of a single hedging strategy, may not offset fully the
risks of each component transaction and, therefore, may contain elements of risk
that are present in each of its component transactions. (See above for the risk
characteristics of certain transactions.)
Risks of Specialized Investment Techniques Abroad
The above described specialized investment techniques when conducted
abroad may not be regulated as effectively as in the United States; may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by: (i)
other complex foreign political, legal and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during on-business hours in the United States; (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States; and (v) lesser trading volume.
INVESTMENT RESTRICTIONS
(See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)
Unless specified to the contrary, the following restrictions may not be
changed with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the 1940 Act and
the rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% of the shares of that Portfolio present at a meeting
if the holders of more than 50% of the outstanding shares of that Portfolio are
present in person or by proxy, or (2) more than 50% of the outstanding shares of
that Portfolio). Any investment restrictions which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
39
<PAGE>
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Portfolio.
In addition to the investment restrictions set forth in the Fund's
prospectus, the Fund may not on behalf of any Portfolio:
(1) purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except (a) debt securities futures
contracts and securities index futures contracts and options
thereon, and (b) in the case of the International Portfolio,
foreign currency futures contracts;
(2) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts managed by
Scudder, Stevens & Clark or its affiliates in the purchase or
sale of portfolio securities;
(3) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Fund or a member, officer, director
or trustee of the investment adviser of the Fund if one or
more of such individuals owns beneficially more than one-half
of one percent (1/2 of 1%) of the shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2 of 1%) of such
shares or securities together own beneficially more than 5% of
such shares or securities or both;
(4) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(5) issue senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur pursuant
to the Investment Restrictions set forth in the Fund's
prospectus and except for shares of various additional series
which may be established by the Trustees; or
(6) act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting.
In addition to the investment restrictions set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Global Discovery and International Portfolios:
(1) hedge by purchasing put and call options, futures contracts,
or other derivative instruments on securities in an aggregate
amount equivalent to more than 10% of the Portfolio's total
assets;
(2) make securities loans if the value of such securities loaned
exceeds 10% of the value of the Portfolio's total assets at
the time any loan is made.
In addition to the investment restrictions set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Global Discovery Portfolio:
(1) purchase or retain securities of any open-end investment
company, or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event the Portfolio may not
purchase more than 3% of the outstanding voting securities of
another investment company, may not invest more than 5% of its
total assets in another investment company, and may not invest
more than 10% of its total assets in other investment
companies;
40
<PAGE>
(2) invest more than 10% of its net assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days, and the Portfolio will not invest
more than 5% of its total assets in restricted securities;
(3) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the
Portfolio at any time do not exceed 20% of its net assets; or
sell put options on securities if, as a result, the aggregate
value of the obligations underlying such put options would
exceed 50% of the Portfolio's net assets;
(4) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Portfolio and the premiums paid
for options on futures contracts does not exceed 5% of the
Portfolio's total assets provided that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(5) borrow other than from banks, or borrow money (including
reverse repurchase agreements) in excess of 10% of its total
assets (taken at market value) except that for temporary or
emergency purposes the Portfolio may borrow up to 25% of its
total assets;
(6) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold at no added cost and, if the right is
conditional, the sale is made upon the same conditions, except
in connection with arbitrage transactions and except that the
Fund may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities;
(7) purchase warrants if as a result warrants taken at the lower
of cost or market value would represent more than 10% of the
value of the Portfolio's net assets or more than 2% of its net
assets in warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable
listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value).
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Portfolio's assets
will not be considered a violation of the restriction.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Portfolio's net asset value. (See "NET ASSET
VALUE.")
PURCHASES AND REDEMPTIONS
(See "PURCHASES AND REDEMPTIONS" in the Fund's prospectus.)
The separate accounts of the Participating Insurance Companies purchase
and redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies but only on days on which the Exchange is open for trading.
Such purchases and redemptions of the shares of each Portfolio are effected at
their respective net asset values per share determined as of the close of
regular trading on the Exchange (normally 4 p.m. eastern time) on that same day
except that, in the case of the Money Market Portfolio, purchases will not be
effected until the next determination of net asset value after federal funds
have been made available to the Fund. (See "NET ASSET VALUE.") Payment for
redemptions will be made by State Street Bank and Trust Company on behalf of the
Fund and the applicable Portfolios within seven days thereafter. No fee is
charged the separate accounts of the Participating Insurance Companies when they
redeem Fund shares.
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<PAGE>
The Fund may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the SEC determines that a state of emergency
exists which may make payment or transfer not reasonably practicable, (iii) as
the SEC may by order permit for the protection of the security holders of the
Fund or (iv) at any other time when the Fund may, under applicable laws and
regulations, suspend payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise
which would require that a substantial amount of net assets be withdrawn from
the Fund, orderly portfolio management could be disrupted to the potential
detriment of such contract and policy holders.
INVESTMENT ADVISER AND DISTRIBUTOR
(See "INVESTMENT ADVISER" and "DISTRIBUTOR" in the Fund's prospectus.)
Investment Adviser
The Fund has four investment advisory agreements, one for the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio and Capital Growth
Portfolio, one for the International Portfolio, one for the Growth and Income
Portfolio and one for the Global Discovery Portfolio (the "Agreements"). These
Agreements are with the investment counsel firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, doing business under the name Scudder, Stevens &
Clark. This organization is one of the most experienced investment counsel firms
in the United States. It currently manages in excess of $100 billion in assets
for its clients, including: more than $50 billion in U.S. and foreign bonds, and
over $10 billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international investment company
clients exceed $6 billion. Scudder, Stevens & Clark, Inc. was established in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928, it introduced the first no-load mutual fund to
the public. The Adviser has been a leader in international investment management
and trading for over 40 years.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Securities Trust, Scudder State Tax Free
Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S.
Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income
Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The
First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The
Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts
have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $12 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
Certain investments may be appropriate for the Fund and for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
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<PAGE>
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of the most favorable net
results to the Fund.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Under the Agreements, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the investment objectives and policies of
each Portfolio, and determines, for each Portfolio, what securities shall be
purchased, what securities shall be held or sold, and what portion of a
Portfolio's assets shall be held uninvested, subject always to the provisions of
the Fund's Declaration of Trust and By-Laws, and of the 1940 Act and to a
Portfolio's investment objectives, policies and restrictions, and subject
further to such policies and instructions as the Trustees may from time to time
establish. The Adviser also advises and assists the officers of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Fund and makes available, without
expense to the Fund, the services of such affiliated persons as may duly be
elected Trustees of the Fund, subject to their individual consent to serve and
to any limitations imposed by law, and pays the Fund's office rent and provides
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work. For its advisory
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
<TABLE>
<CAPTION>
% of the average
daily net asset
values of each Dollar Amount
Portfolio Portfolio 1993 1994 1995
<S> <C> <C> <C> <C>
Money Market Portfolio .370% $130,455 $269,963 $306,996
Bond Portfolio .475% 550,565 650,361 657,112
Balanced Portfolio .475% 198,056 218,621 269,230
Growth and Income Portfolio .475% -- 0 169,852
Capital Growth Portfolio .475% 955,017 1,199,585 1,383,919
Global Discovery Portfolio .975% -- -- --
International Portfolio .875% 1,049,464 3,363,597 4,357,541
</TABLE>
Under the Agreements, the Fund is responsible for all its other
expenses, including clerical salaries; fees and expenses incurred in connection
with membership in investment company organizations; brokers' commissions;
legal, auditing and accounting expenses; taxes and governmental fees; the
charges of custodians, transfer agents and other agents; any other expenses,
including clerical expenses, of issue, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and fees for registering or
qualifying securities for sale; the fees and expenses of the Trustees of the
Fund who are not affiliated with the Adviser; and the cost of preparing and
distributing reports and notices to shareholders. The Fund may arrange to have
third parties assume all or part of the expense of sale, underwriting and
distribution of its shares. (See "Distributor" for expenses paid by Scudder
Investor Services, Inc.) The Fund is also responsible for its expenses incurred
in connection with litigation, proceedings and claims and the legal obligation
it may have to indemnify its officers and Trustees with respect thereto.
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<PAGE>
In addition to payments for investment advisory services provided by
the Adviser, the Trustees, consistent with the Fund's investment advisory
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder Investor Services, Inc. for clerical, accounting and certain other
services they may provide the Fund. Effective October 1, 1994, the Trustees
authorized the elimination of these administrative expenses. Under a new
agreement, effective October 1, 1994, the Trustees authorized the Fund, on
behalf of each Portfolio, to pay Scudder Fund Accounting Corporation, a
subsidiary of the Adviser, for determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Fund.
For the year ended December 31, 1994, such compensation amounted to
$40,297 for the Money Market Portfolio, $40,238 for the Bond Portfolio, $38,204
for the Balanced Portfolio, $25,179 for the Growth and Income Portfolio, $45,253
for the Capital Growth Portfolio, $45,272 for the International Portfolio;
administrative expenses not imposed aggregated $7,119 for the Balanced
Portfolio.
For the year ended December 31, 1995, such compensation amounted to
$30,000 for the Money Market Portfolio, $43,187 for the Bond Portfolio, $37,353
for the Balanced Portfolio, $38,256 for the Growth and Income Portfolio, $73,583
for the Capital Growth Portfolio and $277,867 for the International Portfolio.
The Agreements dated November 14, 1986 (for the Money Market Portfolio,
Bond Portfolio, Balanced Portfolio and Capital Growth Portfolio), April 30, 1987
(for the International Portfolio), May 1, 1994 (for the Growth and Income
Portfolio) will remain in effect until September 30, 1996. The Agreement dated
May 1, 1996 (for the Global Discovery Portfolio) will remain in effect until
September 30, 1997. The Agreements will continue in effect from year to year
thereafter only if their continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreements or "interested
persons" of the Adviser or the Fund cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding securities of such Portfolio. The
Agreement for the Money Market Portfolio, Bond Portfolio, Balanced Portfolio and
Capital Growth Portfolio and the Agreement for the International Portfolio were
last approved by such Trustees (including a majority of the Trustees who are not
such "interested persons") on August 11, 1995. The Agreement for the Growth and
Income Portfolio was last approved by such Trustees (including a majority of the
Trustees who are not such "interested persons") on February 11, 1994. The
Agreement for the Global Discovery Portfolio was last approved by such Trustees
(including a majority of the Trustees who are not such "interested persons") on
October 5, 1995. Each Agreement may be terminated at any time without payment of
penalty by either party on sixty days' written notice, and automatically
terminates in the event of its assignment.
Each Agreement also provides that the Fund may use any name derived
from the name "Scudder, Stevens & Clark" only as long as such Agreement remains
in effect.
In reviewing the terms of the Agreements and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Fund are represented by independent counsel at the Fund's expense.
The Agreements provide that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
Each Participating Insurance Company has agreed with the Adviser to
reimburse the Adviser for a period of five years to the extent that the
aggregate annual advisory fee paid on behalf of all Portfolios with respect to
the average daily net asset value of the shares of all Portfolios held in that
Participating Insurance Company's general or separate account (or those of
affiliates) is less than $25,000 in any year. It is expected that insurance
companies which become Participating Insurance Companies in the future will be
required to enter into similar arrangements.
Until April 30, 1998, the Adviser has agreed to waive part or all of
both the management and administrative fees for the Global Discovery Portfolio
to the extent that the Portfolio's expenses will be maintained at 1.50%.
44
<PAGE>
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolios. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
Distributor
The Fund has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a subsidiary of the Adviser, Two International Place,
Boston, Massachusetts 02110-4103. The Fund's underwriting agreement dated July
12, 1985, will remain in effect until September 30, 1996, and from year to year
thereafter only if its continuance is approved annually by a majority of the
Trustees who are not parties to such agreement or "interested persons" of any
such party and either by vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund.
Under the principal underwriting agreement between the Fund and the
Distributor, the Fund is responsible for the payment of all fees and expenses in
connection with the preparation and filing of any registration statement and
prospectus covering the issue and sale of shares, and the registration and
qualification of shares for sale with the SEC in the various states, including
registering the Fund as a broker or dealer. The Fund will also pay the fees and
expenses of preparing, printing and mailing prospectuses annually to existing
shareholders and any notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free telephone service for shareholders, wiring funds for share purchases
and redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares to the public. The
Distributor will pay all fees and expenses in connection with its qualification
and registration as a broker or dealer under Federal and state laws, a portion
of the toll-free telephone service and of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Fund, unless a 12b-l Plan is in effect which provides that the Fund shall
bear some or all of such expenses. The Distributor has entered into agreements
with broker-dealers authorized to offer and sell VA contracts and VLI policies
on behalf of the Participating Insurance Companies under which agreements the
broker-dealers have agreed to be responsible for the fees and expenses of any
prospectus, statement of additional information and printed information
supplemental thereto of the Fund distributed in connection with their offer of
VA contracts and VLI policies.
As agent, the Distributor currently offers shares of each Portfolio on
a continuous basis to the separate accounts of Participating Insurance Companies
in all states in which the Portfolio or the Fund may from time to time be
registered or where permitted by applicable law. The underwriting agreement
45
<PAGE>
provides that the Distributor accepts orders for shares at net asset value
without sales commission or load being charged. The Distributor has made no firm
commitment to acquire shares of any Portfolio.
A description of the Rule 12b-1 plan for Class B shares of the
Portfolio (the "Plan") and related services and fees thereunder is provided in
the prospectus. On October 5, 1995, the Board of Trustees of the Fund
unanimously approved the Plan. In connection with its consideration of the Plan,
the Board of Trustees was furnished with drafts of the Plan and related
materials, including information related to the advantages and disadvantages of
Rule 12b-1 plans currently being used in the mutual fund industry. Legal counsel
for the Fund provided additional information, summarized the provisions of the
proposed Plan and discussed the legal and regulatory considerations in adopting
such Plan.
The Board considered various factors in connection with its decision as
to whether to approve the Plan, including (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI policies; (f) the merits of possible alternative plans or pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.
Based upon its review of the foregoing factors and the materials
presented to it, and in light of its fiduciary duties under relevant state law
and the 1940 Act, the Board determined, in the exercise of its business
judgment, that the Fund's Plan is reasonably likely to benefit the Fund and the
VA contract and VLI policy owners in at least one of several ways. Specifically,
the Board concluded that the Participating Insurance Companies would have less
incentive to educate VA contract and VLI policy owners and sales people
concerning the Fund if expenses associated with such services were not paid for
by the Fund. In addition, the Board determined that the payment of distribution
fees to insurers should motivate them to maintain and enhance the level of
services relating to the Fund provided to VA contract and VLI policy owners,
which would, of course, benefit such VA contract and VLI policy owners. Further,
the adoption of the Plan would likely help to maintain and may lead to an
increase in net assets under management given the distribution financing
alternatives available through the multi-class structure. The Board also took
into account expense structures of other competing products and administrative
compensation arrangements between other funds, their advisers and insurance
companies that currently are in use in the variable products industry. Further,
it is anticipated that Plan fees may be used to educate potential and existing
owners of VA contracts and VLI policies concerning the Fund, the securities
markets and related risks. A better educated investor, in the Distributor's
view, is less likely to surrender his or her VA contract or VLI policy early,
thereby avoiding the costs associated with such an event. Accordingly, the Plan
may help the Fund and Participating Insurance Companies meet investor education
needs.
The Board realizes that there is no assurance that the expenditure of
Fund assets to finance distribution of Fund shares will have the anticipated
results. However, the Board believes there is a reasonable likelihood that one
or more of such benefits will result, and since the Board will be in a position
to monitor the distribution expenses of the Fund, it will be able to evaluate
the benefit of such expenditures in deciding whether to continue the Plan.
The Plan and any Rule 12b-1-related agreement that is entered into by
the Fund or the Distributor in connection with the Plan will continue in effect
for a period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Fund's Board of
Trustees, and of a majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Fund or a Portfolio ("Independent Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable. In addition, the Plan and any Rule
12b-1 related agreement, may be terminated as to Class B shares of a Portfolio
at any time, without penalty, by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the Independent Trustees.
The Plan also provides that it may not be amended to increase materially the
amount that may be spent for distribution of Class B shares of a Portfolio
without the approval of Class B shareholders of that Portfolio.
46
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT OF THE FUND
Trustees and Officers
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- ----------------
<S> <C> <C> <C>
David B. Watts*@+ (61) President and Trustee Managing Director of Scudder, Assistant Treasurer
Stevens & Clark, Inc.
Daniel Pierce*@+ (62) Vice President and Chairman of the Board and Vice President,
Trustee Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer
Dr. Kenneth Black, Jr. (71) Trustee Regents' Professor Emeritus of ----
Educational Foundation, Inc. Insurance, Georgia State
35 Broad Street University
11th Floor, Room 1144
Atlanta, GA 30303
Dr. Rosita P. Chang (41) Trustee Professor of Finance, _____
PACAP Research Center University of Rhode Island
College of Business
Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802
Peter B. Freeman@ (63) Trustee Corporate Director and Trustee ----
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond (62) Trustee Dean, Smeal College of Business ----
801 Business Administration, Pennsylvania
Administration Bldg. State University
Pennsylvania State University
University Park, PA 16802
Thomas S. Crain++ (55) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Jerard K. Hartman# (63) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Richard A. Holt*** (54) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Thomas W. Joseph+ (57) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer
and Assistant Clerk
David S. Lee+ (62) Vice President Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and
Director
47
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- ----------------
Steven M. Meltzer+ (37) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Randall K. Zeller# (41) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Thomas F. McDonough+ (49) Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath+ (42) Vice President and Managing Director of Scudder, ----
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# (50) Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Kathryn L. Quirk# (43) Vice President and Managing Director of Scudder, Vice President
Assistant Secretary Stevens & Clark, Inc.
Coleen Downs Dinneen+ (35) Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
<FN>
* Messrs. Watts and Pierce are considered by the Fund and its counsel to be Trustees who are
"interested persons" of the Adviser or of the Fund (within the meaning of the 1940 Act).
** Unless otherwise stated, all the officers and Trustees have
been associated with their respective companies for more
than five years, but not necessarily in the same capacity.
@ Peter B. Freeman, Daniel Pierce and David B. Watts are members of the Executive Committee, which
has the power to declare dividends from ordinary income and distributions of realized capital
gains to the same extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts 02110-4103
# Address: 345 Park Avenue, New York, New York 10154
++ Address: 600 Vine Street - Suite 2000, Cincinnati, Ohio 45202
*** Address: 111 E. Wacker Drive - Suite 2200, Chicago, Illinois 60601
</FN>
</TABLE>
Certain of the Trustees and officers of the Fund also serve in similar
capacities with other Scudder Funds.
Remuneration
Several of the officers and Trustees of the Fund may also be officers
of the Adviser, the Distributor, Scudder Service Corporation, Scudder Trust
Company or Scudder Fund Accounting Corporation which receive fees paid by the
Fund. The Fund pays no direct remuneration to any officer of the Fund. However,
each of the Trustees who is not affiliated with the Adviser will be paid by the
Fund. Of these unaffiliated Trustees, Drs. Black and Hammond each receive an
annual Trustee's fee of $2,000 per Portfolio and a fee of $200 per Portfolio for
each Trustees' meeting attended or for each meeting held for the purpose of
considering arrangements between the Fund and the Adviser, while Mr. Freeman
receives fees of $1,250 per Portfolio and $125 per Portfolio, respectively. Drs.
Black and Hammond also receive $100 per Portfolio per committee meeting attended
(other than audit committee, for which each receives a fee of $200 per
Portfolio), while Mr. Freeman receives fees of $75 per Portfolio and $125 per
Portfolio, respectively. A total of $106,524 was paid for Trustees' fees and
expenses, including legal counsel to the Trustees, in the year ended December
31, 1995.
48
<PAGE>
The following Compensation Table, provides in tabular form, the
following data.
Column (1) All Trustees who receive compensation from the Fund.
Column (2) Aggregate compensation received by a Trustee from all series of the
Fund, which is comprised of Money Market Portfolio, Bond Portfolio, Balanced
Portfolio, Growth and Income Portfolio, Capital Growth Portfolio and
International Portfolio.
Columns (3) and (4) Pension or retirement benefits accrued or proposed to be
paid by the Fund. The Fund does not pay its Trustees such benefits.
Column (5) Total compensation received by a Trustee from Money Market Portfolio,
Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio and International Portfolio, plus
compensation received from all funds managed by the Adviser for which a Trustee
serves. The total number of funds from which a Trustee receives such
compensation is also provided in column (5).
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995
=========================== ============================= =================== ================= ====================
(1) (2) (3) (4) (5)
Pension or Total
Retirement Compensation
Benefits Estimated From the Fund
Aggregate Compensation Accrued As Part Annual and Fund
Name of Person, from the Scudder Variable of Fund Benefits Upon Complex Paid to
Position Life Investment Fund* Expenses Retirement Trustee
=========================== ============================= =================== ================= ====================
<S> <C> <C> <C> <C>
Dr. Kenneth Black, Jr., $ 26,000 N/A N/A $ 26,000
Trustee (6 funds)
Dr. Rosita P. Chang, $ 3,092 N/A N/A $ 3,092
Trustee (6 funds)
Peter B. Freeman, Trustee $ 16,400 N/A N/A $ 126,750
(31 funds)
Dr. J.D. Hammond, $ 26,000 N/A N/A $ 26,000
Trustee (6 funds)
<FN>
* Scudder Variable Life Investment Fund consists of seven Portfolios: Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital
Growth Portfolio, Global Discovery Portfolio and International Portfolio.
</FN>
</TABLE>
NET ASSET VALUE
(See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
in the Fund's prospectus)
The net asset value of shares of each Portfolio of the Fund is computed
as of the close of regular trading on the Exchange on each day the Exchange is
open for trading (the "Value Time"). The Exchange is scheduled to be closed on
the following holidays: New Year's Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value
per share is determined by dividing the value of the total assets of a Fund,
less all liabilities, by the total number of shares outstanding.
The valuation of the Money Market Portfolio securities is based upon
their amortized cost, which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
49
<PAGE>
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
50
<PAGE>
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h)
of the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
invested in U.S. Treasury securities which qualify for the "Special Rule for
Investments in United States Obligations" specified in Section 817(h)(3) of the
Code.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under the Code.
Investment company taxable income of a Portfolio generally is made up
of dividends, interest, certain currency gains and losses and net-short-term
capital gains in excess of net long-term capital losses, less expenses. Net
realized capital gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
At December 31, 1994 the Bond Portfolio had a net tax basis capital
loss carryforward of approximately $4,153,327 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until December 31, 2002, whichever occurs first. In addition, from November
1, 1994 through December 31, 1994, the Balanced Portfolio incurred $275,417 of
net realized capital losses which the Fund intends to defer and treat as arising
in the fiscal year ended December 31, 1995.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, such
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability, and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference between its pro rata
share of such gains and its tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the relevant Portfolio have been
held by such shareholders. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
51
<PAGE>
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except the Money Market Portfolio) result
in a reduction in the net asset value of the Portfolio's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International Portfolios invest in stock of certain foreign investment
companies, the Portfolios may be subject to U.S. federal income taxation on a
portion of any "excess distribution" with respect to, or gain from the
disposition of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of a Portfolio's holding period for the
stock. The distribution or gain so allocated to any taxable year of a Portfolio,
other than the taxable year of the excess distribution or disposition, would be
taxed to a Portfolio at the highest ordinary income rate in effect for such
year, and the tax would be further increased by an interest charge to reflect
the value of the tax deferral deemed to have resulted from the ownership of the
foreign company's stock. Any amount of distribution or gain allocated to the
taxable year of the distribution or disposition would be included in a
Portfolio's investment company taxable income and, accordingly, would not be
taxable to a Portfolio to the extent distributed by a Portfolio as a dividend to
its shareholders.
Proposed regulations have been issued which may allow the Balanced,
Growth and Income, Capital Growth and International Portfolios to make an
election to mark to market their shares of these foreign investment companies in
lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Balanced, Capital Growth,
International and Growth and Income Portfolios would report as ordinary income
the amount by which the fair market value of the foreign company's stock exceeds
the Balanced, Capital Growth, International and Growth and Income Portfolios'
adjusted basis in these shares. No mark to market losses would be recognized.
The effect of the election would be to treat excess distributions and gain on
dispositions as ordinary income which is not subject to a fund level tax when
distributed to shareholders as a dividend. Alternatively, the Portfolios may
elect to include as income and gain their share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Portfolio will be subject to tax under Section 1234 of the Code.
In general, no loss is recognized by a Portfolio upon payment of a premium in
connection with the purchase of a put or call option. The character of any gain
or loss recognized (i.e., long-term or short-term) will generally depend in the
case of a lapse or sale of the option on the Portfolio's holding period for the
option and in the case of an exercise of a put option on the Portfolio's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
of the Portfolio. If the Portfolio writes a put or call option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as a short-term capital gain or loss. If a call
option written by a Portfolio is exercised, the character of the gain or loss
depends on the holding period of the underlying security. The exercise of a put
option written by a Portfolio is not a taxable transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts
entered into by a Portfolio and all listed nonequity options written or
purchased by the Portfolio (including options on debt securities, options on
futures contracts, options on securities indexes and options on broad-based
stock indexes) will be governed by Section 1256 of the Code. Absent a tax
election to the contrary, gain or loss attributable to the lapse, exercise or
closing out of any such position generally will be treated as 60% long-term and
40% short-term capital gain or loss, and on the last trading day of the fiscal
year, all outstanding Section 1256 positions will be marked to market (i.e.
treated as if such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
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<PAGE>
acquired by a Portfolio will be treated as ordinary income. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security owned by
the Portfolio.
Subchapter M of the Code requires that each Portfolio realize less than
30% of its annual gross income from the sale or other disposition of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward activities of a Portfolio may
increase the amount of gains realized by a Portfolio that are subject to the 30%
limitation. Accordingly, the amount of such transactions that a Portfolio may
undertake may be limited.
Positions of a Portfolio which consist of at least one stock and at
least one stock option or other position with respect to a related security
which substantially diminishes the Portfolio's risk of loss with respect to such
stock could be treated as a "straddle" which is governed by Section 1092 of the
Code, the operation of which may cause deferral of losses, adjustments in the
holding periods of stock or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these straddle rules
exists for any "qualified covered call options" on stock written by a Portfolio.
Positions of a Portfolio which consist of at least one position not
governed by Section 1256 and at least one futures contract, foreign currency
forward contract or nonequity option governed by Section 1256 which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed straddle." Although mixed straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or eliminate the operation of these rules. Each
Portfolio will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon securities and the face value ("original issue discount") will be
treated as income to the Portfolio each year, even though the Portfolio will not
receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the investment company taxable
income of the Portfolio which must be distributed to shareholders in order to
maintain the qualification of the Portfolio as a regulated investment company
and to avoid federal income tax at the Portfolio level. Shareholders will be
subject to income tax on such original issue discount, whether or not they elect
to receive their distributions in cash. If a Portfolio acquires a debt
instrument at a market discount, a portion of the gain recognized, if any, on
disposition of such instrument may be treated as ordinary income.
Dividend and interest income received by the Portfolios from sources
outside the U.S. may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the U.S.
may reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains respecting investments by foreign
investors.
Each Portfolio will be required to report to the Internal Revenue
Service all distributions of investment company taxable income and capital gains
as well as gross proceeds from the redemption or exchange of shares, except in
the case of certain exempt shareholders, which include most corporations. Under
the backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
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<PAGE>
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes
on distributions received from such Portfolios and on redemptions of their
shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither
the Fund nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons. Each shareholder which is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Portfolio, including the possibility that such a shareholder
may be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for
the holders of the VA contracts and VLI policies, shareholders should consult
the prospectus used in connection with the issuance of their particular
contracts or policies. Shareholders should consult their tax advisers about the
application of the provisions of tax law described in this statement of
additional information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Money Market Portfolio
The net investment income of the Money Market Portfolio is determined
as of the close of regular trading on the Exchange (normally 4 p.m. eastern
time) on each day on which the Exchange is open for business. All of the net
income so determined normally will be declared as a dividend to shareholders of
record as of the close of regular trading on such Exchange after the purchase
and redemption of shares. Unless the business day before a weekend or holiday is
the last day of an accounting period, the dividend declared on that day will
include an amount in respect of the Portfolio's income for the subsequent
non-business day or days. No daily dividend will include any amount of net
income in respect of a subsequent semi-annual accounting period. Dividends
commence on the next business day after the date of purchase. Dividends will be
invested in additional shares of the Portfolio at the net asset value per share,
normally $1.00, determined as of the first business day of each month unless
payment of the dividend in cash has been requested.
Net investment income of the Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Accreted market discount is included in interest
income. The Portfolio does not anticipate that it will normally realize any
long-term capital gains with respect to its portfolio.
Normally the Money Market Portfolio will have a positive net income at
the time of each determination thereof. Net income may be negative if an
unexpected liability must be accrued or a loss realized. If the net income of
the Portfolio determined at any time is a negative amount, the net asset value
per share will be reduced below $1.00 unless one or more of the following steps
are taken: the Trustees have the authority (1) to reduce the number of shares in
each shareholder's account, (2) to offset each shareholder's pro rata portion of
negative net income from the shareholder's accrued dividend account or from
future dividends, or (3) to combine these methods in order to seek to maintain
the net asset value per share at $1.00. The Fund may endeavor to restore the
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<PAGE>
Portfolio's net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share will increase to the extent of positive net income which
is not declared as a dividend.
Should the Money Market Portfolio incur or anticipate, with respect to
its portfolio, any unusual or unexpected significant expense or loss which would
affect disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend policy
described above or to revise it in light of the then prevailing circumstances in
order to ameliorate to the extent possible the disproportionate effect of such
expense or loss on then existing shareholders. Such expenses or losses may
nevertheless result in a shareholder's receiving no dividends for the period
during which the shares are held and in receiving upon redemption a price per
share lower than that which was paid. Similarly, should the Money Market
Portfolio incur or anticipate any unusual or unexpected significant income,
appreciation or gain which would affect disproportionately the fund's income for
a particular period, the Trustees or the Executive Committee of the Trustees may
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing shareholders. Such actions may reduce the
amount of the daily dividend received by existing shareholders.
Global Discovery Portfolio and International Portfolio
The Global Discovery Portfolio and International Portfolio will each
follow the practice of distributing substantially all of its investment company
taxable income. The Portfolios intend to distribute the excess of net realized
long-term capital gains over net realized short-term capital losses.
Distributions of investment company taxable income and any net capital
gain will be made within three months of the end of the Fund's fiscal taxable
year. Both distributions will be reinvested in additional shares of each
Portfolio unless a shareholder has elected to receive cash.
Other Portfolios
Each of the Bond, Capital Growth, Balanced and Growth and Income
Portfolios has followed the practice of declaring and distributing a dividend of
investment company taxable income, if any, quarterly, in January, April, July
and October. Each Portfolio has distributed its net capital gain within three
months of the end of each fiscal year. Both dividends and capital gain
distributions will be reinvested in additional shares of such a Portfolio unless
an election is made on behalf of a separate account to receive dividends and
capital gain distributions in cash.
PERFORMANCE INFORMATION
(See "Performance Information" in the Fund's prospectus)
From time to time, quotations of a Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Money Market Portfolio
A. Yield is the net annualized yield based on a specified seven
calendar days calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period
subtracting a hypothetical charge reflecting deductions from
shareholder accounts and dividing the difference by the value of
the account at the beginning of the base period to obtain the
base period return. The yield is annualized by multiplying the
base period return by 365/7. The yield figure is stated to the
nearest hundredth of one percent. The yield of the Money Market
Portfolio for the seven-day period ended December 31, 1995, was
5.28%.
B. Effective yield is the net annualized yield for a specified seven
calendar days assuming a reinvestment of the income or
compounding. Effective yield is calculated by the same method as
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<PAGE>
yield except the yield figure is compounded by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting one
from the result, according to the following formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The effective yield of the Portfolio for the seven-day period
ended December 31, 1995, was 5.42%.
As described above, yield and effective yield are based on historical
earnings and show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield and effective yield will vary
based on changes in market conditions and the level of expenses.
In connection with communicating its yield or effective yield to
current or prospective shareholders, the Money Market Portfolio also may compare
these figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
From time to time, in marketing pieces and other fund literature, the
Fund's yield and performance over time may be compared to the performance of
broad groups of comparable mutual funds, bank money market deposit accounts and
fixed-rate insured certificates of deposit (CDs), or unmanaged indexes of
securities that are comparable to money market funds in their terms and intent,
such as Treasury bills, bankers' acceptances, negotiable order of withdrawal
accounts, and money market certificates. Most bank CDs differ from money market
funds in several ways: the interest rate is fixed for the term of the CD, there
are interest penalties for early withdrawal of the deposit, and the deposit
principal is insured by the FDIC.
Bond Portfolio
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Yield for the 30-day period ended December 31, 1995
Bond Portfolio 5.71%
All Portfolios
A. Average Annual Total Return is the average annual compound
rate of return for the periods of one year and five years (or
such shorter periods as may be applicable dating from the
commencement of the Portfolio's operations) all ended on the
date of a recent calendar quarter.
Average annual total return quotations reflect changes in the
price of a Portfolio's shares and assume that all dividends
and capital gains distributions during the respective periods
were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound
rates of return of a hypothetical investment over such
periods, according to the following formula (average annual
total return is then expressed as a percentage):
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<PAGE>
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Average Annual Total Return for periods ended December 31, 1995
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio 5.65% 4.20% 5.65%^(1) -- %
Bond Portfolio 18.17 9.74 8.69^(1) --
Balanced Portfolio* 26.67 12.60 10.77^(1) --
Growth and Income Portfolio 31.74 -- -- 21.44^(3)
Capital Growth Portfolio 28.65 15.84 13.25^(1) --
Global Discovery Portfolio -- -- -- --
International Portfolio 11.11 10.40 -- 9.39^(2)
<FN>
^(1) For the period beginning July 16, 1985 (commencement of operations)
^(2) For the period beginning May 1, 1987 (commencement of operations)
^(3) For the period beginning May 2, 1994 (commencement of operations)
</FN>
</TABLE>
B. Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period.
Cumulative total return quotations reflect changes in the price
of a Fund's shares and assume that all dividends and capital
gains distributions during the period were reinvested in Fund
shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such
periods, according to the following formula (cumulative total
return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
___________________________
* On May 1, 1993, the Portfolio adopted its present name and investment
objective which is a balance of growth and income from a diversified
portfolio of equity and fixed income securities. Prior to that date, the
Portfolio was known as the Managed Diversified Portfolio and its investment
objective was to realize a high level of long-term total rate of return
consistent with prudent investment risk. Performance information for the
five years and life of Fund periods should not be considered representative
of the present Portfolio.
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<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return for periods ended December 31, 1995
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio 5.65% 22.85% 73.27%^(1) -- %
Bond Portfolio 18.17 59.13 130.08^(1) --
Balanced Portfolio* 26.67 81.00 178.03^(1) --
Growth and Income Portfolio 31.74 -- -- 38.20^(3)
Capital Growth Portfolio 28.65 108.63 247.09^(1) --
Global Discovery Portfolio -- -- -- --
International Portfolio 11.11 64.03 -- 117.73^(2)
<FN>
^(1) For the period beginning July 16, 1985 (commencement of operations)
^(2) For the period beginning May 1, 1987 (commencement of operations)
^(3) For the period beginning May 2, 1994 (commencement of operations)
</FN>
</TABLE>
As described above, average annual total return, cumulative total
return and yield are based on historical earnings and are not intended to
indicate future performance. Average annual total return, cumulative total
return and yield for a Portfolio will vary based on changes in market conditions
and the level of the Portfolio's expenses.
In connection with communicating its total return or yield to current
or prospective shareholders, the Fund also may compare these figures for a
Portfolio to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
Quoted yields on shares of the Fund's Portfolios will be of limited
usefulness to policy and contract holders for comparable purposes because such
quoted yields will be more than yields on participating contracts and policies
due to charges imposed at the separate account level.
Comparison of Portfolio Performance
From time to time, in marketing and other fund literature, the
performance of the Fund's Portfolios may be compared to the performance of broad
groups of mutual funds which are used in conjunction with variable annuities and
have with similar investment goals, as tracked by independent organizations.
Among these organizations, Lipper Analytical Services, Inc., Morningstar, Inc.
and the Variable Annuity Research and Data Service (V.A.R.D.S.^R) may be cited.
When independent tracking results are used, a Portfolio will be compared to
Lipper's appropriate fund category, that is, by investment objective and
portfolio holdings. For instance, growth portfolios will be compared to funds
within Lipper's growth fund category; income portfolios will be compared to
funds within Lipper's income fund category; and so on. Rankings may be listed
among one or more of the asset-size classes as determined by Lipper.
Lipper, Morningstar and V.A.R.D.S.^R track and rank the performance of
variable annuities in each of the major investment categories. Performance
comparisons and rankings by Lipper, Morningstar and V.A.R.D.S.R are based on
total return and assume reinvestment of income and capital gains, but do not
take into account sales charges, redemption fees or certain other expenses
charged at the separate account level.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of the Portfolios with performance quoted with respect to other
investment companies or types of investments.
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<PAGE>
From time to time, in marketing and other Fund literature, each
Portfolio's performance may be compared to the performance of broad groups of
comparable mutual funds or unmanaged indexes of comparable securities.
Evaluations of performance made by independent sources may also be used in
advertisements concerning each Portfolio, including reprints of, or selections
from, editorials or articles about these Portfolios.
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may invest in foreign securities. The following
graph illustrates the historical risks and returns of selected indices which
track the performance of various combinations of United States and international
securities for the ten year period ended December 31, 1995; results for other
periods may vary. The graph uses ten year annualized international returns
represented by the Morgan Stanley Capital International Europe, Australia and
Far East (EAFE) Index and ten year annualized United States returns represented
by the S&P 500 Index. Risk is measured by the standard deviation in overall
portfolio performance within each index. Performance of an index is historical,
and does not represent the performance of a Fund, and is not a guarantee of
future results.
X-Y SCATTER CHART OMITTED
CHART TITLE:
------------------------------------------------
EFFICIENT FRONTIER
MSCI EAFE vs. S&P 500 (12/31/85-12/31/95)
------------------------------------------------
Total Return Standard Deviation
(Reward) (Portfolio Volatility-Risk)
-------- ---------------------------
13.63 19.37 100% Int'l MSCI EAFE
13.92 18.14 10 US/90 Int'l
14.18 17.02 20/80
14.40 16.04 30 U.S./70 Int'l
14.58 15.23 40/60
14.73 14.61 50 U.S./50Int'l
14.83 14.20 60/40
14.90 14.03 70 U.S./30 Int'l
14.92 14.10 80/20
14.91 14.41 90 U.S./10 Int'l
14.86 14.95 100% U.S. S&P 500
Source: Lipper Analytical Services, Inc. (Data as of 12/31/95)
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund may include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
59
<PAGE>
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Morningstar, Inc., a company that, among other activities, analyzes, ranks, and
rates mutual funds and variable annuities.
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<PAGE>
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
Mutual Funds, a monthly magazine devoted to mutual fund investing.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national business weekly that periodically reports
mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Your Money, a bimonthly magazine featuring articles about personal investing and
money management.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance
Companies for which shares of one or more Portfolios are the investment vehicle
will receive from the Participating Insurance Companies unaudited semi-annual
financial statements and audited year-end financial statements certified by the
Fund's independent public accountants. Each report will show the investments
owned by the Fund and the market values thereof as determined by the Trustees
and will provide other information about the Fund and its operations.
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<PAGE>
Participating Insurance Companies with inquiries regarding the Fund may
call the Fund's underwriter, Scudder Investor Services, Inc., at 617-295-1000 or
write Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder
Indemnification" in the Fund's prospectus.)
General
The Fund is an open-end investment company established under the laws
of The Commonwealth of Massachusetts by Declaration of Trust dated March 15,
1985.
As of December 31, 1995, AEtna Life Insurance and Annuity Company (151
Farmington Avenue PPH3, Hartford, CT 06156), owned of record and beneficially
46.5% of the International Portfolio; they owned of record and beneficially
7.75% of the Fund's total outstanding shares; and AUSA Life Insurance Company (4
Manhattanville Road, Purchase, NY 10577) owned of record and beneficially 1.2%
of the International Portfolio; they owned of record and beneficially 0.2% of
the Fund's total outstanding shares; and Banner Life Insurance Company of
Rockville, MD (1701 Research Blvd., Rockville, MD 20850) owned of record and
beneficially 0.7% of the Money Market Portfolio, 1.3% of the Bond Portfolio,
7.3% of the Balanced Portfolio, 0.6% of the International Portfolio, 2.2% of the
Growth and Income Portfolio and 1.7% of the Capital Growth Portfolio; they owned
of record and beneficially 2.3% of the Fund's total outstanding shares; and
Charter National Life Insurance Company (8301 Maryland Avenue, St. Louis, MO
63105, a Missouri corporation) and its subsidiary, Intramerica Life Insurance
Company (1 Blue Hills Plaza, Pearl River, NY 10965), owned of record and
beneficially 61.2% of the Money Market Portfolio, 35.5% of the Bond Portfolio,
78.7% of the Balanced Portfolio, 29.9% of the Capital Growth Portfolio, 96.6% of
the Growth and Income Portfolio and 16.7% of the International Portfolio; they
owned of record and beneficially 53.1% of the Fund's total outstanding shares.
In 1991, Charter National Life Insurance Company purchased the Colonial Penn
Group, Inc., which indirectly owns Intramerica, a New York domestic life
insurer. On November 1, 1992, First Charter Life Insurance Company ("First
Charter"), a subsidiary of Charter National Life Insurance Company, was merged
with and into Intramerica. As the company surviving the merger, Intramerica
acquired legal ownership of all of First Charter's assets, including the
Variable Account, and became responsible for all of First Charter's liabilities
and obligations. As a result of the merger, all Contracts issued by First
Charter before the merger became Contracts issued by Intramerica after the
merger. Fortis Benefits Insurance Company (Norwest Bank, Sixth and
Marquette-MS0063, Minneapolis, MN 55479) owned of record and beneficially 0.3%
of the International Portfolio; they owned of record and beneficially 0.05% of
the Fund's total outstanding shares; and Lincoln Benefit Life Insurance Company
(134 South 13th Street, Lincoln, NE 68508) owned of record and beneficially 2.2%
of the Bond Portfolio and 3.6% of the Balanced Portfolio; they owned of record
and beneficially 0.96% of the Fund's total outstanding shares; and Mutual of
America Life Insurance Company of New York (666 5th Avenue, New York, NY 10103,
a New York corporation) and its subsidiary, American Life Insurance Company (666
5th Avenue, New York, NY 10103), owned of record and beneficially 55.1% of the
Bond Portfolio, 62.9% of the Capital Growth Portfolio and 24.4% of the
International Portfolio; they owned of record and beneficially 23.73% of the
Fund's total outstanding shares; and Paragon Life Insurance Company (100 South
Brentwood, St. Louis, MO 63105) owned of record and beneficially 0.1% of the
Bond Portfolio, 0.1% of the Capital Growth Portfolio, 0.4% of the Balanced
Portfolio, and 0.1% of the International Portfolio; they owned of record and
beneficially 0.11% of the Fund's total outstanding shares; and Providentmutual
Life and Annuity Company of America, (300 Continental Drive, Newark, DE 19713)
owned of record and beneficially 5.2% of the Bond Portfolio, 1.2% of the Growth
and Income Portfolio, and 0.1% of the International Portfolio; they owned of
record and beneficially 1.08% of the Fund's total outstanding shares; and Safeco
Life Insurance Companies (15411 N.E. 51st Street, Redmond, WA 98052), owned of
record and beneficially 10.0% of the Balanced Portfolio and 2.6% of the
International Portfolio; they owned of record and beneficially 2.1% of the
Fund's total outstanding shares; and The Union Central Life Insurance Company
(1876 Waycross Road, Cincinnati, OH 45240) owned of record and beneficially
37.7% of the Money Market Portfolio, 5.0% of the Capital Growth Portfolio and
7.2% of the International Portfolio; they owned of record and beneficially 8.31%
of the Fund's total outstanding shares; and United of Omaha Life Insurance
Company (Mutual of Omaha Plaza, Law Division, 3301 Dodge Street, Omaha, NE
68131) owned of record and beneficially 0.3% of the Money Market Portfolio, 0.5%
of the Bond Portfolio, and 0.2% of the International Portfolio; they owned of
record and beneficially 0.16% of the Fund's total outstanding shares.
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Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Portfolio on matters affecting an individual
Portfolio. For example, a change in investment policy for the Money Market
Portfolio would be voted upon only by shareholders of the Money Market
Portfolio. Additionally, approval of the investment advisory agreement covering
a Portfolio is a matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that Portfolio. Shares
have noncumulative voting rights, which means that holders of more than 50% of
the shares voting for the election of Trustees can elect all Trustees and, in
such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons as Trustees. Shares
have no preemptive or subscription rights, and are transferable.
Shareholders have certain rights, as set forth in the Declaration of
Trust of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. Such removal can be
effected upon the action of two-thirds of the outstanding shares of beneficial
interest of the Fund.
Shareholder and Trustee Liability
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. Notice
of such disclaimer will normally be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The Declaration
of Trust provides for indemnification out of the Fund property of any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
ALLOCATION OF PORTFOLIO BROKERAGE
To the maximum extent feasible, the Adviser places orders for portfolio
transactions through its affiliate, the Distributor, which in turn places orders
on behalf of the Fund with the issuer, underwriters or other brokers and
dealers. The Distributor will receive no commissions, fees or other remuneration
for this service. Allocation of brokerage is supervised by the Adviser.
The Fund's purchases and sales of portfolio securities of the Money
Market Portfolio and the Bond Portfolio and of debt securities acquired for the
other Portfolios, are generally placed by the Adviser with primary market makers
for these securities on a net basis, without any brokerage commission being paid
by the Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter. Transactions in equity securities
generally involve the payment of a brokerage commission.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for any Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock exchange transactions but which is generally fixed in the
case of foreign exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option as a
factor in the selection of firms to execute portfolio transactions. The Adviser
seeks to evaluate the overall reasonableness of brokerage commissions paid
through the familiarity of the Distributor with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
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<PAGE>
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to the custodian of the Fund
for valuation purposes, or who supply research, market and statistical
information to the Adviser. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
investing in, purchasing or selling securities; and the availability of
securities or purchasers or sellers of securities; and furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The Adviser is not
authorized when placing portfolio transactions for the Fund to pay a brokerage
commission (to the extent applicable) in excess of that which another broker
might have charged for effecting the same transaction solely on account of the
receipt of research, market or statistical information. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option, as a
factor in the selection of firms to execute portfolio transactions. Except for
implementing the policy stated above, there is no intention to place portfolio
transactions with any particular brokers or dealers or groups thereof. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market-makers for the securities being traded unless, in the
opinion of the Adviser, after exercising care, it appears that more favorable
results are available otherwise.
Subject also to obtaining the most favorable net results, the Adviser
may place brokerage transactions with Bear, Stearns & Co. A credit against the
custodian fee due to State Street Bank and Trust Company equal to one-half of
the commission on any such transaction will be given with respect to the
applicable Portfolio on any such transaction. During the fiscal year ended
December 31, 1995, no such credit was applied against the custodian fee.
Although certain research, market and statistical information from
brokers and dealers is useful to the Fund and the Adviser, it is the opinion of
the Adviser that such information is only supplementary to the Adviser's own
research effort, since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Fund and not all such
information is used by the Adviser in connection with the Fund. Conversely, such
information provided to the Adviser by brokers and dealers through whom other
clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Fund.
In the years ended December 31, 1993, 1994 and 1995, the Fund paid
brokerage commissions of $1,084,463, $2,006,264, and $2,669,610, respectively.
In the years ended December 31, 1993, 1994, and 1995, the International
Portfolio paid brokerage commissions of $524,970, $1,471,275, and $1,813,248,
respectively, the Capital Growth Portfolio paid brokerage commissions of
$467,826, $420,391, and $788,596, respectively and the Balanced Portfolio paid
brokerage commissions of $91,667, $79,629, and $67,758, respectively. In the
years ended December 31, 1994 and 1995, the Growth and Income Portfolio paid
brokerage commissions of $34,967 and $54,235, respectively. In the year ended
December 31, 1995, $1,686,320 (93%) of the total brokerage commissions paid by
the International Portfolio, $410,070 (52%) of the total brokerage commissions
paid by the Capital Growth Portfolio, $43,930 (81%) of the total brokerage
commissions paid by the Growth and Income Portfolio and $33,201 (49%) of the
total brokerage commissions paid by the Balanced Portfolio resulted from orders
placed, consistent with the policy of obtaining the most favorable net results,
with brokers and dealers who provided supplementary research information to the
Portfolios or the Adviser. The amount of such transactions aggregated
$93,846,661 for the International Portfolio (96% of all brokerage transactions),
$51,809,416 for the Capital Growth Portfolio (89% of all brokerage
transactions), $9,483,088 for the Growth and Income Portfolio (70% of all
brokerage transactions) and $11,399,717 (92% of all brokerage transactions) for
the Balanced Portfolio. The balance of such brokerage was not allocated to any
particular broker or dealer with regard to the above-mentioned or other special
factors.
The Trustees will periodically review whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
No recapture arrangements are currently in effect.
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PORTFOLIO TURNOVER
The average annual portfolio turnover rate for each Portfolio, i.e. the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less), for the years
ended December 31, 1994 and 1995, respectively, was:
December 31,
1994 1995
---- ----
Bond Portfolio 96.55% 177.21%
Balanced Portfolio 101.64 87.98
Growth and Income Portfolio 28.41 24.33
Capital Growth Portfolio 66.44 119.41
Global Discovery Portfolio -- --
International Portfolio 33.52 45.76
In the case of the Bond and Capital Growth Portfolios, the higher rates
involve greater brokerage and transaction expenses to the Portfolios and may
result in the realization of net capital gains, which would be taxable to
shareholders when distributed. Under the above definition, the Money Market
Portfolio will have no portfolio turnover. Purchases and sales, for these
Portfolios, are made for the Portfolio whenever necessary, in management's
opinion, to meet the Portfolio's objective. Under normal investment conditions,
it is anticipated that the portfolio turnover rate for the Global Discovery
Portfolio will not exceed 75% for the initial fiscal year.
EXPERTS
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., One Post Office
Square, Boston, Massachusetts 02109, independent accountants, and have been so
included or incorporated by reference in reliance upon the accompanying report
of said firm, which report is given upon their authority as experts in
accounting and auditing.
COUNSEL
The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.
ADDITIONAL INFORMATION
The activities of the Fund are supervised by its Trustees, who are
elected by shareholders. Shareholders have one vote for each share held.
Fractional shares have fractional votes.
Portfolio securities of the Money Market, Bond, Balanced, Growth and
Income, and Capital Growth Portfolios are held separately, pursuant to a
custodian agreement, by State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, as custodian. Portfolio securities of
Global Discovery and International Portfolios are held separately, pursuant to a
custodian agreement, by Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, as custodian.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Portfolios. Money Market Portfolio pays SFAC an annual fee
equal to 0.020% of the first $150 million of average daily net assets, 0.0060%
of such assets in excess of $150 million and 0.0035% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio and Capital Growth
Portfolio each pay SFAC an annual fee equal to 0.025% of the first $150 million
of average daily net assets, 0.0075% of such assets in excess of $150 million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
65
<PAGE>
charges for this service. Global Discovery and International Portfolios pay SFAC
an annual fee equal to 0.065% of the first $150 million of average daily net
assets, 0.040% of such assets in excess of $150 million and 0.020% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. SFAC computes net asset value for the Fund. The Fund pays SFAC an
annual fee equal to 0.065% of the first $150 million of average daily net
assets, 0.040% of such assets in excess of $150 million and 0.020% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts,
02107-2291, is the transfer and dividend paying agent for the Fund.
The Fund has a December 31 fiscal year end.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended from time to time, and all persons dealing with the Fund must
look solely to the property of the Fund for the enforcement of any claims
against the Fund as neither the Trustees, officers, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Fund. Upon the initial purchase of shares, the shareholder agrees to be bound by
the Fund's Declaration of Trust, as amended from time to time. The Declaration
of Trust is on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement, and its amendments, for further information with
respect to the Fund and the securities offered hereby. The Registration
Statement, and its amendments, are available for inspection by the public at the
SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of Scudder Variable Life Investment Fund are
comprised of the following:
Money Market Portfolio
Balanced Portfolio
Bond Portfolio
Growth and Income Portfolio
Capital Growth Portfolio
International Portfolio
The financial statements, including the investment portfolios of
Scudder Variable Life Investment Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference and attached hereto, in the Annual Report to the
Shareholders of the Fund dated December 31, 1995, and are hereby deemed to be
part of this Statement of Additional Information.
The Statements of Assets and Liabilities as of April 30, 1996 and the
Report of Independent Accountants for Global Discovery Portfolio is incorporated
by reference and attached hereto.
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APPENDIX
Description of Bond Ratings
Moody's Investors Service, Inc.
Aaa: Bonds that 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.
Aa: Bonds that 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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds that 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.
Baa: Bonds that 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.
Ba: Bonds that 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.
B: Bonds that are rated B generally lack haracteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms ofthe contract over any long period of time may be
small.
Standard & Poor's
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations.
Capacity to payprincipal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: 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
debt in this category than in higher rated categories.
Bonds rated BB and B are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation. While such debt will likely have some
<PAGE>
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB: Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B: Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
Description of Commercial Paper Ratings
Moody's Investors Service, Inc.
P-1: Moody's Commercial Paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations which
have an original maturity not exceeding one year. The
designation "Prime-1" or "P-1" indicates the highest quality
repayment capacity of the rated issue.
Standard & Poor's
A-1: Standard & Poor's Commercial Paper ratings are current
assessments of the likelihood of timely payment of debt
considered short-term in the relevant market. The A-1
designation indicates the degree of safety regarding timely
payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a
plus (+) sign designation.
<PAGE>
Scudder Variable Life
Investment Fund
Annual Report
December 31, 1995
An open-end management investment company that offers shares
of beneficial interest in six types of diversified portfolios.
<PAGE>
Scudder Variable Life Investment Fund
Contents
Letter from the Fund's President 2
Money Market Portfolio Management Discussion 3
Bond Portfolio Management Discussion 4
Bond Portfolio Summary 5
Balanced Portfolio Management Discussion 6
Balanced Portfolio Summary 7
Growth and Income Portfolio Management Discussion 8
Growth and Income Portfolio Summary 9
Capital Growth Portfolio Management Discussion 10
Capital Growth Portfolio Summary 11
International Portfolio Management Discussion 12
International Portfolio Summary 13
Investment Portfolios, Financial Statements, and Financial Highlights
Money Market Portfolio 14
Bond Portfolio 20
Balanced Portfolio 27
Growth and Income Portfolio 37
Capital Growth Portfolio 46
International Portfolio 54
Notes to Financial Statements 64
Report of Independent Accountants 68
Tax Information 69
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Global stock and bond markets generally were strong in 1995, as slow
growth, moderate inflation, and falling interest rates provided a positive
economic backdrop. The biggest investment story of the year was the stunning
advance in the domestic stock market, as the average U.S. equity mutual fund
tracked by Lipper Analytical Services rose 31.07%. The U.S. bond markets rallied
as well, as evidenced by the average return of 17.30% for funds in Lipper's
income category--the product of sharply declining interest rates.
Internationally, while several European bourses provided solid returns in 1995,
interest rate declines in that region were not as compelling to investors as
those in the U.S., and market returns were correspondingly lower. Japan's stock
market was essentially flat, although the investment climate in that country
appeared to be improving as the year drew to a close.
Despite its impressive performance in 1995, the U.S. stock market appears
to be reasonably valued based on 1996 earnings forecasts. In addition, the
long-term outlook for U.S. financial assets is positive, as the economy is
expected to grow without inflation. A repeat of 1995's exceptional performance
is unlikely, however, especially if the economy slows in the coming year, as
anticipated. Many international markets are attractively valued by comparison,
and economies such as those in Europe are just beginning to realize the full
impact of falling interest rates and corporate restructuring--underscoring the
value of a global approach to investing.
We see a number of trends underway that support the outlook for investment
in the U.S. and around the world. Technology is bringing efficiencies to every
stage of the product cycle, from design to distribution. Globalization has
widened the competitive universe, making inflationary price increases less
likely. Deregulation is subjecting major industries to market discipline,
increasing capacity and reducing supply bottlenecks. While investing will always
involve uncertainties and market fluctuation, the net result of these forces may
well be an era of disinflationary growth that benefits investors and raises
living standards worldwide. We look forward to the challenges and opportunities
afforded by the evolving economic landscape, and thank you for your continued
investment in Scudder Variable Life Investment Funds.
Sincerely,
/s/David B. Watts
David B. Watts
President,
Scudder Variable Life Investment Fund
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<PAGE>
MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Money market funds generally provided attractive returns in 1995, despite
falling interest rates that resulted in lower yields. Many investors found the
combination of principal stability and solid real (inflation-adjusted) returns
provided by money funds attractive, and money funds consistently attracted
assets, ending the year with approximately $775 billion in total assets, up from
approximately $619 billion at the end of 1994 (source: Money Fund Report, IBC
Financial Publishing).
As of December 31, Money Market Portfolio posted a competitive 5.28% 7-day
net annualized yield. The Fund provided investors with $0.055 per share in
income distributions, contributing to a 5.65% total return for the annual
period.
Because longer-term instruments allow investors to lock in higher current
rates during periods of falling interest rates, we extended the Fund's average
maturity during the fiscal year. Money Market Portfolio's average maturity was
57 days at the close of the fiscal period. By comparison, the Fund's average
maturity was 35 days as of December 31, 1994. With the economy continuing to
slow, we believe that the Federal Reserve may lower interest rates further, and
we expect that in the coming months Money Market Portfolio's average maturity
will remain relatively long in order to capture higher yields.
Corporate commercial paper offered the most attractive yields available
during the period and remained a significant portion of the Fund. These
securities allow high-quality companies to raise short-term funds at a lower
rate than loans offered by banks. Commercial paper made up approximately 74% of
the Fund's portfolio at the end of the period.
With the economy moving at its current slow pace and inflation under
control, Money Market Portfolio will continue to lean toward longer-term
high-quality money market securities. As always, maintaining a stable one dollar
share price is a top priority, although this share price cannot be guaranteed.
Given these characteristics, and the potential for attractive real returns in
view of low inflation, which now stands at about 2%, we believe Money Market
Portfolio remains an appropriate place for your short-term investment needs and
can play an important role in your investment plan.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Neff /s/Stephen L. Akers
Robert T. Neff Stephen L. Akers
Lead Portfolio Manager
/s/Nicca B. Alcantara
Nicca B. Alcantara
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BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Slowing economic growth and low inflation prompted the Federal Reserve
Board to reverse course mid-year and cut short-term rates on two occasions in
1995, while rates on long-term bonds ended the year nearly two percentage points
lower, falling from 7.87% to 5.95% as measured by the 30-year U.S. Treasury. The
U.S. fixed-income markets benefited from 1995's declining interest rate
environment as evidenced by the 18.47% return of the unmanaged Lehman Brothers
Aggregate Bond Index for the year. Bond Portfolio provided a total return of
18.17% for the 12 months ended December 31, in keeping with both the Lehman
Index and the average A-rated Corporate Bond fund tracked by Lipper Analytical
Services, which returned 18.45%.
Throughout the period, we managed the portfolio actively, seeking to
capitalize upon shifts in relative valuation among the U.S. Treasury, mortgage
and corporate sectors, as well as changes in the yield curve. Going into 1995,
we extended duration--and therefore the portfolio's sensitivity to interest rate
changes--to benefit more fully from the rally in bond prices while capturing
higher yields. In addition, we began early in the year to trim our weighting in
mortgage-backed securities, particularly high-coupon issues trading at a
premium, in favor of Treasuries; mortgage-backeds tend to underperform in
periods of falling interest rates, as investors become wary of prepayments and
seek to maintain durations in order to benefit from bond market strength.
Throughout the year, we implemented a more "bulleted" portfolio configuration
focused on intermediate maturities where we saw the most potential for rate
declines and price appreciation. Finally, we maintained significant exposure to
the corporate sector, seeking bonds with favorable yield characteristics and
business outlooks versus comparable issues.
Going forward, it is unlikely that 1996 will see fixed-income prices rally
to the extent they did in 1995. However, economic growth is expected to continue
to slow, meaning that inflation should remain benign and that the Fed should
have room for further easing, especially if progress towards fiscal restraint in
Washington remains on course. Our generally positive outlook for interest rates
is reflected in the portfolio's modestly above-neutral duration. Average quality
of portfolio holdings remains a high "AAA." Bond Portfolio remains focused both
on identifying areas of the fixed-income market that represent strong relative
value and on providing competitive yields.
Sincerely,
Your Portfolio Management Team
/s/Ruth Heisler /s/Renee L. Ross
Ruth Heisler Renee L. Ross
Lead Portfolio Manager
/s/William M. Hutchinson
William M. Hutchinson
4
<PAGE>
BOND PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
BOND PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,817 18.17% 18.17%
5 Year $15,913 59.13% 9.74%
10 Year $23,008 130.08% 8.69%
LB AGGREGATE BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,847 18.47% 18.47%
5 Year $15,727 57.27% 9.47%
10 Year $25,079 150.79% 9.62%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Bond Portfolio
Year Amount
- ----------------------
85 $10,000
86 $11,227
87 $11,364
88 $11,984
89 $13,380
90 $14,459
91 $17,004
92 $18,196
93 $20,449
94 $19,470
95 $23,008
LB Aggregate Bond Index
Year Amount
- ----------------------
85 $10,000
86 $11,526
87 $11,844
88 $12,778
89 $14,635
90 $15,946
91 $18,498
92 $19,867
93 $21,804
94 $21,168
95 $25,079
The Lehman Brothers (LB) Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage securities. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Bond Portfolio.
- -------------------------------------------------------------------
ASSET QUALITY
- -------------------------------------------------------------------
By Quality
- -------------------
AAA 81%
AA 1% The average quality of the
A 12% portfolio remains a high
BBB 6% "AAA".
----
100%
====
- -------------------
Average Quality: AAA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
EFFECTIVE MATURITY
- -------------------------------------------------------------------
- ---------------------------
Less than 1 year 17%
1 - 3 years 11%
3 - 7 years 37%
7 - 12 years 11%
12 years or greater 24%
----
100%
====
- ---------------------------
Weighted average effective maturity: 9 years
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
- -----------------------------------
U.S. Treasury Obligations 56%
Corporate Bonds 14%
Commercial Paper 13%
Foreign Bonds 7%
Asset-Backed Securities 5%
U.S. Government Agency
Pass-Thrus 3%
U.S. Government Guaranteed
Mortgages 2%
----
100%
====
- -----------------------------------
5
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Slow economic growth, low inflation, and falling interest rates boosted
both the U.S. equity and bond markets in 1995. Stocks rose a stunning 37.58% as
measured by the unmanaged S&P 500 Index, while the bond market returned 18.47%
as gauged by the unmanaged Lehman Brothers Aggregate Bond Index. Balanced
Portfolio provided a total return of 26.67% for the 12 months ended December 31,
exceeding the 25.16% return of the average balanced fund tracked by Lipper
Analytical Services.
With respect to the equity portion of the Portfolio, we continue to focus
on U.S. companies with strong balance sheets, leading market positions, and
solid prospects for above-average growth. Individual market sectors that
performed particularly well over the year included technology, consumer staples,
healthcare, and financial services. While the technology group was slightly
underweighted, these sectors were generally well-represented in the equity
portion of the portfolio. Going forward, we expect that an environment of slower
economic growth and low inflation will be positive for those companies capable
of delivering consistently above-average earnings growth rates. Moreover, we
believe that growth stock prices overall are well within a reasonable range.
Thus we have retained substantial weightings in healthcare, media, and services,
as well as selected finance issues. With respect to the volatile technology
sector, we have built positions in companies that operate in less
commodity-oriented segments and are market leaders in growing niches, including
LSI Logic, Atmel, and Informix. Our portfolio is underweight in manufacturing
and retail/consumer discretionary, both of which are more economically sensitive
than other sectors.
On the fixed-income side, throughout the period, we sought to capitalize
upon shifts in relative valuation among the Treasury, mortgage, and corporate
sectors. Going into 1995, we extended duration--and therefore the portfolio's
sensitivity to interest rate changes--to benefit more fully from the rally in
bond prices. In addition, we began early in the year to trim our weighting in
mortgage-backed securities in favor of Treasuries; mortgage-backeds tend to
underperform in periods of falling interest rates, as investors become wary of
prepayments and seek to maintain durations in order to benefit from bond market
strength. Throughout the year, we implemented a more "bulleted" portfolio
configuration focused on intermediate maturities where we saw the most potential
for rate declines and price appreciation. Going forward, we believe the outlook
for interest rates is generally positive, and this is reflected in the
fixed-income portion of the portfolio's modestly above-neutral duration.
Sincerely,
Your Portfolio Management Team
/s/Bruce F. Beaty /s/Ruth Heisler
Bruce F. Beaty Ruth Heisler
Lead Portfolio Manager
/s/Renee L. Ross /s/William F. Gadsden
Renee L. Ross William F. Gadsden
6
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
BALANCED PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $12,667 26.67% 26.67%
5 Year $18,100 81.00% 12.60%
10 Year $27,803 178.03% 10.77%
S&P 500 INDEX (60%)
AND LBAB INDEX (40%)
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $13,134 31.34% 31.34%
5 Year $19,428 94.28% 14.20%
10 Year $34,053 240.53% 13.03%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Balanced Portfolio
Year Amount
- ----------------------
85 $10,000
86 $11,671
87 $11,475
88 $13,105
89 $15,660
90 $15,361
91 $19,497
92 $20,855
93 $22,410
94 $21,950
95 $27,803
S&P 500 Index
Year Amount
- ----------------------
85 $10,000
86 $11,866
87 $12,490
88 $14,564
89 $19,178
90 $18,583
91 $24,244
92 $26,092
93 $28,721
94 $29,101
95 $40,036
LBAB Index
Year Amount
- ----------------------
85 $10,000
86 $11,526
87 $11,844
88 $12,778
89 $14,635
90 $15,946
91 $18,498
92 $19,867
93 $21,804
94 $12,168
95 $25,079
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market and
The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond
issues and mortgage securities. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Balanced Portfolio. The Balanced Portfolio, with its
current name and investment objective, commenced operations on May 1, 1993.
Performance figures include the performance of its predecessor, the Managed
Diversified Portfolio. Since adopting its current objectives, the cumulative
and average annual returns are 32.95% and 11.25%, respectively.
- -------------------------------------------------------------------
EQUITY HOLDINGS
- -------------------------------------------------------------------
Sector breakdown of the Five Largest Equity Holdings
Portfolio's equity holdings ----------------------------
- --------------------------- 1. PHILIP MORRIS COMPANIES INC.
Consumer Staples 18% Tobacco, food products and brewing
Health 17%
Technology 14% 2. MERCK & CO. INC.
Financial 9% Leading ethical drug manufacturer
Consumer Discretionary 9%
Service Industries 8% 3. AMERICAN INTERNATIONAL GROUP, INC.
Manufacturing 7% Major international insurance
Media 7% holding company
Durables 5%
Other 6% 4. PROCTER & GAMBLE CO.
---- Diversified manufacturer of consumer
100% products
====
- --------------------------- 5. PEPSICO. INC.
Soft drinks, snack foods and food
services
- -------------------------------------------------------------------
FIXED INCOME HOLDINGS
- -------------------------------------------------------------------
By Asset Type By Quality
- ----------------------------------- -----------------
U.S. Treasury Obligations 48% AAA 79%
Corporate Bonds 18% AA 2%
Cash Equivalents 11% A 8%
U.S. Government Agency BBB 11%
Pass-Thrus 7% ----
Foreign Bonds 5% 100%
Asset-Backed Securities 5% ====
U.S. Government Guaranteed -----------------
Mortgages 5%
Collateralized Mortgage
Obligations 1%
----
100%
====
- -----------------------------------
7
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Falling interest rates, low inflation, and strong corporate earnings
combined to make 1995 a spectacular year for the U.S. stock market, which
returned 37.58% as measured by the unmanaged S&P 500 Index. Growth and Income
Portfolio's net asset value rose $1.72 per share over the year, to $7.98 on
December 31. In addition, the Portfolio distributed $0.19 per share in income
and $0.04 per share in capital gains to shareholders. The Portfolio's total
return of 31.74% for the year modestly exceeded that of the average growth and
income fund tracked by Lipper Analytical Services, which returned 30.82%. The
Portfolio's underperformance relative to the S&P 500 is consistent with its
conservative, yield-oriented philosophy, which is designed to provide
competitive performance in strong markets and above-average performance in weak
markets.
For much of the first half of the year, leadership among stock market
sectors vacillated with investor speculation regarding the impact on cyclical
industries of Federal Reserve policy. In July, the Fed reversed course and began
to ease short-term interest rates as signs of an economic slowdown emerged,
setting off another wave of market realignment. The Portfolio adhered to its
income-based discipline in the face of these market gyrations, purchasing only
those stocks with dividend yields at least 20% higher than the market average,
many of which were temporarily out of favor and represented a high degree of
value.
Throughout 1995, the Portfolio maintained overweight positions in the
year's top two performing sectors: financial services and healthcare. Many
financial companies have been the beneficiaries of declining interest rates, and
one significant addition to the Portfolio, the Student Loan Marketing
Association, turned in exceptional performance, more than doubling in value
after purchase. Health stocks surged on the strength of an improved regulatory
outlook and a merger wave fed in particular by undervaluation in the
pharmaceutical group. The Portfolio did not have meaningful exposure to the
technology sector, a natural consequence of our emphasis on high dividends and
strong fundamentals, which meant that we missed both the upsurge and year-end
correction experienced by that group.
Economic growth should continue to slow in 1996, and the Portfolio should
benefit from its significant weightings in sectors with historically resilient
earnings, including healthcare and consumer staples, as well as from its
exposure to the financial group, which should continue to thrive in the
prevailing low-interest-rate environment. Undervalued sectors such as
manufacturing and energy are also well-represented in the Portfolio. We believe
Growth and Income Portfolio, with its disciplined approach, remains an excellent
"core" investment for those seeking both participation in the equity markets and
more consistent performance than the average equity vehicle.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Hoffman /s/Kathleen T. Millard
Robert T. Hoffman Kathleen T. Millard
Lead Portfolio Manager
/s/Benjamin W. Thorndike
Benjamin W. Thorndike
8
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $13,174 31.74% 31.74%
Life of
Fund* $13,820 38.20% 21.44%
S&P 500 INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $13,758 37.58% 37.58%
Life of
Fund* $14,305 43.05% 23.98%
*The Fund commenced operations on May 2, 1994.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Growth and Income Portfolio
Year Amount
- ----------------------
5/2/94* $10,000
6/94 $ 9,854
9/94 $10,488
12/94 $10,235
3/95 $10,903
6/95 $11,817
9/95 $12,688
12/95 $13,483
S&P 500 Index
Year Amount
- ----------------------
5/2/94* $10,000
6/94 $ 9,915
9/94 $10,400
12/94 $10,398
3/95 $11,411
6/95 $12,500
9/95 $13,493
12/95 $14,305
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns were higher
due to maintenance of the Fund's expenses. See Financial
Highlights for the Growth and Income Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
- --------------------------- Sector breakdown of the
Equity Securities 94% Portfolio's equity holdings
Cash Equivalents 6% ---------------------------
---- Financial 18%
100% Health 14%
==== Manufacturing 14%
- --------------------------- Consumer Staples 12%
Energy 9%
A graph in the form of a pie chart Durables 6%
appears here, illustrating the Communications 6%
exact data points in the table Utilities 4%
to the right. Consumer Discretionary 4%
Other 7%
----
100%
====
The portfolio's focus is on sectors with earnings that
should be resilient as the economy slows, such as financial
and healthcare.
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- -------------------------------------------------------------------
1. UNITED TECHNOLOGIES CORP.
Manufacturer of aerospace, climate control systems, and elevators
2. STUDENT LOAN MARKETING ASSOCIATION
Student loan financing programs
3. ELI LILLY & CO.
Leading pharmaceutical company
4. XEROX CORP.
Leading manufacturer of copiers and duplicators
5. TRW INC.
Defense electronics, automotive parts and systems
6. LOCKHEED MARTIN CORP.
Manufacturer of aircraft, missiles and space equipment
7. KIMBERLY-CLARK CORP.
Consumer paper products and newsprint
8. PHILIP MORRIS COMPANIES INC.
Tobacco, food products and brewing
9. H&R BLOCK INC.
Tax consulting and preparation
10. BAXTER INTERNATIONAL INC.
Manufacturing and distributor of hospital and laboratory products
and services
9
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
A combination of slow growth, declining interest rates, and low inflation
helped propel U.S. equities to unanticipated peaks in 1995. Capital Growth
Portfolio's total return of 28.65% for the 12 months ended December 31, in part
reflects this strong market environment. The Portfolio's net asset value rose
$2.85 per share to $15.08 over the period. In addition, the Portfolio
distributed to shareholders $0.11 per share in income and $0.43 in capital gains
in 1995. While the Portfolio's performance for the year lagged that of the
unmanaged S&P 500 Index, which returned 37.58%, it was roughly in keeping with
the 30.79% total return of the average growth fund tracked by Lipper Analytical
Services.
Over the first half of 1995, Portfolio performance was aided by significant
weightings in the financial and technology sectors, including positions in the
Federal National Mortgage Association (mortgages) and Intel (semiconductors). As
the year progressed, the Portfolio de-emphasized sectors that have historically
experienced above-average volatility, such as media and communications, in favor
of sectors with earnings growth that should be sustainable even as the economy
slows, such as financial services and healthcare. Many financial stocks stand to
benefit from the current low-interest-rate environment, including such holdings
as FNMA and American International Group (insurance). Companies in the health
sector, such as Columbia/HCA Healthcare (hospital management) and Merck
(pharmaceuticals), should be more resistant to earnings disappointments than
companies with products and services of a less essential nature.
Despite their downturn in the latter part of 1995, technology stocks as a
group continue to display the potential for above-average long-term earnings
growth. Our focus with respect to this sector is on achieving broad exposure to
market leaders, and to avoid overexposure to the erratic semiconductor group and
individual issues trading at very high multiples. Accordingly, we have trimmed
our positions in Intel and Microsoft (software) and have added to holdings such
as Hewlett-Packard and Applied Materials, which display better value and have
diversified sources of revenue. Finally, we have increased our energy sector
holdings in view of the relative value presented by that group.
Going forward, the prospect of fiscal restraint on the part of the U.S.
government and continued low interest rates should provide a favorable backdrop
for equity investing. Despite a slowing economy and less compelling valuations,
earnings in selected groups should continue to be attractive and be rewarded by
the market. We are confident that Capital Growth Portfolio is positioned to
benefit investors seeking capital appreciation over time.
Sincerely,
Your Portfolio Management Team
/s/William F. Gadsden /s/Bruce F. Beaty
William F. Gadsden Bruce F. Beaty
Lead Portfolio Manager
10
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
CAPITAL GROWTH PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $12,865 28.65% 28.65%
5 Year $20,863 108.63% 15.84%
10 Year $34,709 247.09% 13.25%
S&P 500 INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $13,758 37.58% 37.58%
5 Year $21,544 115.44% 16.58%
10 Year $40,036 300.36% 14.87%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Capital Growth Portfolio
Year Amount
- ----------------------
85 $10,000
86 $12,230
87 $11,998
88 $14,646
89 $17,977
90 $16,637
91 $23,218
92 $24,709
93 $29,868
94 $26,980
95 $34,709
S&P 500 Index
Year Amount
- ----------------------
85 $10,000
86 $11,866
87 $12,490
88 $14,564
89 $19,178
90 $18,583
91 $24,244
92 $26,092
93 $28,721
94 $29,101
95 $40,036
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See
Financial Highlights for the Capital Growth Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
- --------------------------- Sector breakdown of the
Equity Securities 94% Portfolio's equity holdings
Cash Equivalents 6% ---------------------------
---- Health 16%
100% Technology 15%
==== Financial 14%
- --------------------------- Energy 8%
Media 7%
A graph in the form of a pie chart Manufacturing 6%
appears here, illustrating the Consumer Staples 6%
exact data points in the table Consumer Discretionary 5%
to the right. Service Industries 5%
Other 12%
----
94%
====
Sectors such as financial services should maintain
earnings growth as the economy slows.
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- -------------------------------------------------------------------
1. CAPITAL CITIES/ABC INC.
TV and radio broadcasting, cable programming and publishing
2. FEDERAL NATIONAL MORTGAGE ASSOCIATION
Insurer and holder of mortgage loans
3. COLUMBIA/HCA HEALTHCARE CORP.
Leading Hospital management company
4. HEWLETT-PACKARD CO.
Measurement and test instruments, computer systems
5. APPLIED MATERIALS, INC..
Producer of reactors used to manufacture thin film
6. AMERICAN INTERNATIONAL GROUP, INC.
Major international insurance holding company
7. INTEL CORP.
Semiconductor memory circuits
8. MCDONALD'S CORP.
Worldwide fast food restaurant franchiser
9. ROYAL DUTCH PETROLEUM CO.
International energy company
10. JOHNSON & JOHNSON
Healthcare products
11
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The international equity investment climate was generally positive in 1995,
as slow growth, low interest rates, and low inflation prevailed in most major
economies. The International Portfolio's return of 11.11% for the 12 months
ended December 31, is in line with the 11.46% return of the unmanaged Morgan
Stanley Capital International Europe, Australia, and Far East plus Canada Index,
and compares favorably with the 9.41% average return of international funds
tracked by Lipper Analytical Services.
Throughout the year, Portfolio weightings favored Europe at the expense of
Japan. This strategy proved effective, as European stock markets in aggregate
produced solid returns. Among the major European bourses, Switzerland and Great
Britain turned in especially strong performances, with returns of 25.9% and
17.2%, respectively. After a shaky start to the year, the Japanese market
essentially finished flat, staging a recovery over the last quarter based on
lower interest rates and signs of a more determined effort on the part of the
government to address the underlying problems in the economy.
Going forward, while we have trimmed our European holdings, we remain
modestly overweight in the region, which we consider attractively valued. With
growth falling and unemployment rising, a key issue is whether France and other
European governments laboring under large budget deficits will be able to meet
the criteria established in Maastricht for European Monetary Union. We believe
that some degree of monetary stimulus is likely and that rates will fall
further, and have therefore added to or initiated positions in interest rate
sensitive stocks, such as French insurer AXA and Spanish motorway operator
Acesa.
Outside of Europe, we have increased our Japanese weighting. The yen has
given back some of its gains versus the dollar--a positive for Japan's
export-driven economy. Firms continue to restructure and interest rates are low.
Moreover, Japan is one of the few markets poised to benefit from the early
stages of economic recovery and upward revisions in corporate earnings.
Accordingly, we have added to Japanese stocks that are sensitive to economic
growth, such as retail conglomerate Ito-Yokado and specialized component
manufacturer THK.
In the year ahead, we will continue to focus on finding companies with the
ability to thrive in an increasingly globalized economy characterized by slow
growth and low inflation. The International Portfolio continues to provide a
vehicle for important exposure to economies and stock markets outside of the
United States.
Sincerely,
Your Portfolio Management Team
/s/Carol L. Franklin /s/Nicholas Bratt
Carol L. Franklin Nicholas Bratt
Lead Portfolio Manager
/s/Joan R. Gregory
Joan R. Gregory
12
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
INTERNATIONAL PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,111 11.11% 11.11%
5 Year $16,403 64.03% 10.40%
Life of
Fund* $21,773 117.73% 9.39%
LB Aggregate Bond Index
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,146 11.46% 11.46%
5 Year $15,540 55.40% 9.21%
Life of
Fund* $15,509 55.09% 5.24%
*The Fund commenced operations on May 1, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Bond Portfolio
Year Amount
- ----------------------
5/31/87* $10,000
87 $ 8,997
88 $10,502
89 $14,470
90 $13,363
91 $14,893
92 $14,433
93 $19,896
94 $19,727
95 $21,919
MSCI EAFE & Canada Index
Year Amount
- ----------------------
5/31/87* $10,000
87 $ 9,138
88 $11,682
89 $12,968
90 $ 9,980
91 $11,186
92 $ 9,824
93 $12,961
94 $13,915
95 $15,509
The Morgan Stanley Capital International (MSCI) Europe, Australia, the Far
East (EAFE) & Canada Index is an unmanaged capitalization-weighted measure
of stock markets in Europe, Australia, the Far East and Canada. Index returns
assume dividends reinvested net of witholding tax and, unlike Fund returns,
do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the International Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
By Region By Sector
(Excluding Cash Equivalents) (Equity Holdings)
- ---------------------------- ---------------------------
Europe 53% Manufacturing 21%
Japan 27% Financial 12%
Pacific Basin 13% Metals & Minerals 9%
Latin America 4% Technology 8%
Canada 3% Durables 7%
---- Energy 7%
100% Service Industries 6%
==== Health 5%
Consumer Staples 5%
Other 20%
----
100%
====
Graphs in the form of pie charts appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- -------------------------------------------------------------------
1. SAP AG
German computer software manufacturer
2. CANON NC.
Leading producer of visual image and information equipment in Japan
3. MATSUSHITA ELECTRICAL INDUSTRIAL CO., LTD.
Consumer electronic products manufacturer in Japan
4. SMC CORP.
Leading maker of pneumatic equipment in Japan
5. FUJITSU LTD.
Leading manufacturing of computers in Japan
6. KYOCERA CORP.
Leading ceramic package manufacturer in Japan
7. TELECOM ITALIA MOBILE SPA
Cellular telecommunication services in Italy
8. SKANDIA FOERSAEKRINGS AB
Swedish financial conglomerate
9. HUTCHISON WHAMPOA, LTD.
Container terminal and real estate company in Hong Kong
10. HEINEKEN HOLDINGS N.V.
Brewery in the Netherlands
13
<PAGE>
MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1995
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------
11.8% REPURCHASE AGREEMENT
----------------------------------------------------------------
9,374,000 Repurchase Agreement with
Donaldson, Lufkin &
Jenrette dated 12/29/95
at 5.85%, to be repurchased
at $9,380,093 on 1/2/96,
collateralized by a $9,902,000
U.S. Treasury Bill, 11/14/96
(Cost $9,374,000) ................................. 9,374,000
----------
----------------------------------------------------------------
73.8% COMMERCIAL PAPER
----------------------------------------------------------------
CONSUMER STAPLES 3.1%
Package Goods/
Cosmetics 2,500,000 Procter & Gamble Co., 5.52%, 2/20/96 ................ 2,480,833
----------
HEALTH 7.5%
Pharmaceuticals 3,000,000 Abbott Laboratories, 5.58%, 1/23/96 ................. 2,989,770
3,000,000 Eli Lilly & Co., 5.62%, 3/5/96 ...................... 2,970,027
----------
5,959,797
----------
FINANCIAL 48.1%
Banks 8.7% 3,000,000 Deutsche Bank Financial Inc., 5.52%, 3/25/96 ........ 2,961,360
1,000,000 J.P. Morgan & Co., Inc., 5.61%, 1/31/96 ............. 995,325
3,000,000 Prudential Funding Corp., 5.68%, 1/24/96 ............ 2,989,113
----------
6,945,798
----------
Business
Finance 7.5% 3,000,000 New Center Asset Trust, 5.34%, 4/23/96 .............. 2,949,715
3,000,000 Norwest Corp., 5.67%, 2/5/96 ........................ 2,983,463
----------
5,933,178
----------
Consumer
Finance 16.9% 3,000,000 American Express Credit Corp., 5.69%, 1/23/96 ....... 2,989,568
3,000,000 AT&T Capital Corp., 5.58%, 1/5/96 ................... 2,998,140
1,500,000 Ford Credit Receivables Funding Inc.,5.67%,2/7/96 ... 1,491,259
3,000,000 General Electric Capital Corp., 5.44%, 5/10/96 ...... 2,941,067
3,000,000 Household Finance Corp., 5.68%, 2/9/96 .............. 2,981,540
----------
13,401,574
----------
Other Financial
Companies 15.0% 3,000,000 American General Finance Corp., 5.38%, 3/26/96 ...... 2,961,892
3,000,000 Ciesco L.P., 5.63%, 2/22/96 ......................... 2,975,603
3,000,000 Corporate Asset Funding Corp., 5.7%, 1/22/96 ........ 2,990,025
3,000,000 Matterhorn Capital Corp., 5.74%, 1/12/96 ............ 2,994,738
----------
11,922,258
----------
MANUFACTURING 7.5%
Chemicals 3.7% 3,000,000 E.I. du Pont de Nemours & Co., 5.57%, 2/8/96 ........ 2,982,362
----------
Machinery/
Components/
Controls 3.8% 3,000,000 Pitney Bowes Credit Corp., 5.67%, 1/18/96 ........... 2,991,967
----------
TECHNOLOGY 3.8%
Diverse
Electronic
Products 3,000,000 Motorola Inc., 5.6%, 1/26/96 ........................ 2,988,333
----------
ENERGY 3.8%
Oil Companies 3,000,000 Chevron Oil Finance Co., 5.55%, 1/11/96 ............. 2,995,375
----------
TOTAL COMMERCIAL PAPER (Cost $58,601,475) ........... 58,601,475
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------
10.6% U.S. TREASURY OBLIGATIONS
----------------------------------------------------------------
3,000,000 U.S. Treasury Bill, 5.31%, 3/7/96 2,970,795
3,000,000 U.S. Treasury Bill, 5.21%, 6/13/96 2,928,865
2,500,000 U.S. Treasury Note, 6%, 6/30/96 2,502,688
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $8,402,348) 8,402,348
----------
----------------------------------------------------------------
3.8% SHORT-TERM NOTES
----------------------------------------------------------------
1,000,000 FCC National Bank Notes, 5.8%, 10/10/96 1,000,000
2,000,000 Morgan Bank Delaware, 6.5%, 5/6/96 2,003,033
----------
TOTAL SHORT-TERM NOTES (Cost $3,003,033) 3,003,033
----------
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $79,380,856) (a) 79,380,856
==========
- -------------------------------------------------------------------------------------------------------------
<FN>
(a) Cost for federal income tax purposes is $79,380,856.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments, at value (including repurchase agreements
of $9,374,000) (amortized cost $79,380,856) (Note A) ................... 79,380,856
Cash ........................................................................... 88
Receivables:
Portfolio shares sold .................................................. 426,045
Interest ............................................................... 113,354
----------
Total assets ................................................... 79,920,343
LIABILITIES
Payables:
Portfolio shares redeemed .............................. $ 129,977
Accrued management fee (Note B) ........................ 24,463
Other accrued expenses (Note B) ........................ 18,012
-----------
Total liabilities .............................. 172,452
-----------
Net assets, at value ........................................... $79,747,891
===========
NET ASSETS
Net assets consist of:
Paid-in capital ........................................ 79,747,891
-----------
Net assets, at value ........................................... $79,747,891
===========
NET ASSET VALUE, offering and redemption price per share
($79,747,891/79,747,891 outstanding shares of beneficial
interest, no par value, unlimited number of shares
authorized) .................................................. $1.00
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Interest ............................................. $4,982,809
Expenses (Note A):
Management fee (Note B) ........................... $306,996
Accounting fees (Note B) .......................... 30,000
Trustees' fees (Note B) ........................... 15,730
Custodian fees .................................... 16,922
Legal ............................................. 15,115
Auditing .......................................... 12,773
Other ............................................. 13,669 411,205
----------------------
Net investment income ................................ 4,571,604
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,571,604
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1994 1995
- --------------------------------------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment income and net increase in net assets
resulting from operations .............................................. $ 4,571,604 $ 2,768,491
------------- -------------
Distributions to shareholders from net investment income
($.055 and $.037 per share, respectively) .............................. (4,571,604) (2,768,491)
------------- -------------
Portfolio share transactions at net asset value of $1.00 per share:
Proceeds from shares sold .............................................. 148,542,887 186,827,297
Net asset value of shares issued to shareholders in
reinvestment of distributions from net investment in ........... 4,571,604 2,768,491
Cost of shares redeemed ................................................ (163,864,512) (147,877,533)
------------- -------------
Net increase (decrease) in net assets from Portfolio share transactions. (10,750,021) 41,718,255
------------- -------------
INCREASE (DECREASE) IN NET ASSETS ......................................... (10,750,021) 41,718,255
Net assets at beginning of period ......................................... 90,497,912 48,779,657
------------- -------------
NET ASSETS AT END OF PERIOD ............................................... $ 79,747,891 $ 90,497,912
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, DECEMBER OF OPERATIONS)
---------------------------------------------------------------------- 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e) 1986
---------------------------------------------------------------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a) .............. .055 .037 .025 .033 .057 .076 .088 .068 .060 .026 .064
Less distributions from
net investment income ... (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060) (.026) (.064)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ........... 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95 2.59(d) 6.59(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ....... 80 90 49 34 28 32 15 11 8 3 -
Ratio of operating
expenses, net to
average daily net
assets (%) (a) ........... .50 .56 .66 .64 .67 .69 .72 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
daily net assets (%) ..... 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06 5.10(c) 6.75(c)
(a) Portion of expenses
reimbursed
(Note B) ............. $ -- $ -- $ -- $ -- $ -- $ -- $ .001 $ .003 $ .006 $ .022 $ .133
(b) Original capital
(c) Annualized
(d) Not annualized
(e) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</TABLE>
19
<PAGE>
<TABLE>
BOND PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1995
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------
13.4% COMMERCIAL PAPER
----------------------------------------------------------------
13,972,000 American Express Credit Corp., 5.003%, 1/2/96
(Cost $13,972,000) .................................. 13,972,000
----------
----------------------------------------------------------------
55.7% U.S. TREASURY OBLIGATIONS
----------------------------------------------------------------
2,145,000 U.S. Treasury 7.25%, 5/15/16 ........................ 2,449,311
10,405,000 U.S. Treasury 6.25%, 8/15/23 ........................ 10,705,809
3,025,000 U.S. Treasury Note, 4.625%, 2/29/96 ................. 3,022,641
5,940,000 U.S. Treasury Note, 4.75%, 2/15/97 .................. 5,904,716
2,300,000 U.S. Treasury Note, 6.75%, 5/31/99 .................. 2,402,419
1,125,000 U.S. Treasury Note, 6%, 10/15/99 .. ................. 1,153,125
24,250,000 U.S. Treasury Note 5,625%, 11/30/00 ................. 24,469,705
5,030,000 U.S. Treasury Note, 6.375%, 8/15/02 ................. 5,274,408
970,000 U.S. Treasury Note, 5.875%, 2/15/04 ................. 990,457
4,125,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 11/15/10 (6.05**) ....... 1,700,449
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $56,836,899) .. 58,073,040
----------
----------------------------------------------------------------
2.0% U.S. GOV'T GUARANTEED MORTGAGES
----------------------------------------------------------------
1,940,521 Government National Mortgage Association, 10%,
8/15/20* (Cost $2,088,486) ........................ 2,135,777
----------
----------------------------------------------------------------
3.3% U.S. GOVERNMENT AGENCY PASS-THRUS
----------------------------------------------------------------
1,990,199 Federal National Mortgage Association, 7%, 8/1/25* .. 2,006,359
1,468,056 Federal National Mortgage Association, 6.5%, 10/1/25* 1,450,615
----------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost $3,398,741) ................................. 3,456,974
----------
----------------------------------------------------------------
0.1% COLLATERALIZED MORTGAGE OBLIGATIONS
----------------------------------------------------------------
151,335 Federal National Mortgage Association, REMIC,
8.5%, 4/25/18 (Cost $143,673) ....................... 153,320
----------
----------------------------------------------------------------
3.3% FOREIGN BONDS - U.S. $ DENOMINATED
----------------------------------------------------------------
1,000,000 J. Seagram & Sons Inc., 9%, 8/15/21 ................. 1,243,880
1,000,000 Korea Development Bank, 9.6%, 12/1/00 ............... 1,151,520
1,000,000 Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98 ... 1,092,140
----------
TOTAL FOREIGN BONDS - U.S. $ DENOMINATED
(Cost $3,110,129) ................................. 3,487,540
----------
----------------------------------------------------------------
3.3% FOREIGN BONDS - NON U.S. $ DENOMINATED
----------------------------------------------------------------
DM 2,000,000 Federal Republic of Germany, 6.5%, 7/15/03 .......... 1,453,682
FFr 9,000,000 Government of France OAT, 7.5%, 4/25/05 ............. 1,947,209
----------
TOTAL FOREIGN BONDS - NON U.S. $ DENOMINATED
(Cost $3,238,086) ................................. 3,400,891
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------
5.3% ASSET-BACKED SECURITIES
----------------------------------------------------------------
Credit Card
Receivables 2.9% 375,000 Chase Manhattan Credit Card Trust, 1991 "A", 7.65%,
11/15/98 .......................................... 375,116
2,500,000 Standard Credit Card Trust, Series 1990#3B, 9.85%,
7/10/97 ............................................. 2,641,400
---------
3,016,516
---------
Home Equity
Loans 1.1% 705,480 Contimortgage Home Equity Loan Trust, Series
1994-5 A1, 9.07%, 5/15/06* .......................... 708,016
470,072 United Companies Financial Corp., Home Equity
Loan Series 1993#B1, 6.075%, 7/25/14* ............. 465,371
---------
1,173,387
---------
Manufactured
Housing
Receivables 1.3% 1,298,309 Green Tree Financial Corp., Securitized NIM
Series 1994B, 7.85%, 7/15/04* ....................... 1,324,478
---------
TOTAL ASSET-BACKED SECURITIES
(Cost $5,729,122) ................................. 5,514,381
---------
----------------------------------------------------------------
13.6% CORPORATE BONDS
----------------------------------------------------------------
Financial 1.1% 1,000,000 Banc One Corp., 8.74%, 9/15/03 ...................... 1,155,160
----------
Media 1.1% 1,000,000 Time Warner Inc., 9.125%, 1/15/13 ................... 1,126,950
----------
Durables 1.2% 1,000,000 Lockheed Martin Corp., 9%, 1/15/22 .................. 1,277,360
----------
Manufacturing 4.3% 1,000,000 ARCO Chemical Co., 9.375%, 12/15/05 ................. 1,210,240
1,000,000 ITT Destinations, 6.25%, 11/15/00 ................... 1,003,560
1,000,000 ITT Destinations, 6.75%, 11/15/05 ................... 1,004,110
1,000,000 Monsanto Co., 8.7%, 10/15/21 ........................ 1,244,060
----------
4,461,970
----------
Technology 1.1% 1,000,000 Loral Corp., 8.375%, 6/15/24 ........................ 1,148,330
----------
Energy 3.6% 2,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 .............. 2,627,760
1,000,000 Enron Corp., 10%, 6/1/98 ............................ 1,093,760
----------
3,721,520
----------
Transportation 1.2% 600,000 American Airlines, 8.8%, 9/16/15 .................... 660,450
575,000 American Airlines, 8.39%, 1/2/17 .................... 615,250
----------
1,275,700
----------
TOTAL CORPORATE BONDS (Cost $12,393,590) ............ 14,166,990
----------
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO # 100.0%
(Cost $100,910,726) (a) ......................104,360,913
===========
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
21
<PAGE>
BOND PORTFOLIO
- -------------------------------------------------------------------------------
* Effective maturities will be shorter due to amortization and prepayments.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) At December 31, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $100,923,081 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of market value over tax cost ............. $3,678,945
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over market value .................. (241,113)
----------
Net unrealized appreciation ....................................... $3,437,832
==========
- --------------------------------------------------------------------------------
At December 31, 1995, the Bond Portfolio had a net tax basis capital loss
carryforward of approximately $428,367, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until December 31, 2003, whichever occurs first.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments
and U.S. Government securities), for the year ended December 31, 1995,
aggregated $75,113,605 and $122,317,664, respectively. Purchases and sales of
U.S. Government securities for the year ended December 31, 1995, aggregated
$158,950,501 and $172,496,242, respectively.
- --------------------------------------------------------------------------------
<TABLE>
COMMITMENTS:
As of December 31, 1995, the Bond Portfolio entered into the following forward
foreign currency exchange contracts resulting in net unrealized depreciation of
$20,855.
<CAPTION>
NET UNREALIZED
APPRECIATION/
SETTLEMENT DEPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
- ------------------------ ----------------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Deutschemarks 1,850,586 U.S. Dollars 1,306,523 1/22/96 13,068
French Francs 7,318,455 U.S. Dollars 1,463,106 1/22/96 (33,923)
-------
(20,855)
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $100,910,726)
(Note A).......................................................... $104,360,913
Cash................................................................ 581
Unrealized appreciation on forward currency exchange contracts
(Note A).......................................................... 13,068
Receivables:
Interest.......................................................... 1,299,285
Investments sold.................................................. 10,552,620
Portfolio shares sold............................................. 297,074
Receivable on closed forward currency exchange contracts (Note A)... 17,989
------------
Total assets................................................ 116,541,530
LIABILITIES
Payables:
Portfolio shares redeemed......................................... $43,916,987
Accrued management fee (Note B)................................... 51,700
Other accrued expenses (Note B)................................... 24,463
Unrealized depreciation on forward currency exchange
contracts (Note A).......................................... 33,923
-----------
Total liabilities........................................... 44,027,073
------------
Net assets, at market value......................................... $ 72,514,457
============
NET ASSETS
Net assets consist of:
Undistributed net investment income............................... $ 2,587,204
Net unrealized appreciation (depreciation) on:
Investments................................................. 3,450,187
Foreign currency related transactions....................... (20,098)
Accumulated net realized loss..................................... (422,732)
Paid-in capital................................................... 66,919,896
------------
Net assets, at market value......................................... $ 72,514,457
============
NET ASSET VALUE, offering and redemption price per
share ($72,514,457 -:- 10,126,562 outstanding
shares of beneficial interest, no par value,
unlimited number of shares authorized)............................ $7.16
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest........................................................ $ 9,483,844
Expenses (Note A):
Management fee (Note B)....................................... $ 657,112
Accounting fees (Note B)...................................... 43,187
Trustees' fees (Note B)....................................... 17,202
Custodian fees................................................ 19,516
Auditing...................................................... 16,326
Legal......................................................... 8,521
Other......................................................... 14,814 776,678
----------------------------
Net investment income........................................... 8,707,166
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain from:
Investments................................................... 5,316,995
Foreign currency related transactions......................... 319,329 5,636,324
----------
Net unrealized appreciation (depreciation) during the period on:
Investments................................................... 8,218,048
Foreign currency related transactions......................... (20,098) 8,197,950
---------- -----------
Net gain on investment transactions............................. 13,834,274
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $22,541,440
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income..................................................... $ 8,707,166 $ 8,806,288
Net realized gain (loss) from investment transactions..................... 5,636,324 (5,607,148)
Net unrealized appreciation (depreciation) on investment
transactions during the period.......................................... 8,197,950 (9,672,581)
------------- ------------
Net increase (decrease) in net assets resulting from operations............. 22,541,440 (6,473,441)
------------- ------------
Distributions to shareholders from:
Net investment income ($.45 and $.43 per share, respectively)............. (9,011,114) (8,525,294)
------------- ------------
Net realized gain from investment transactions ($.17 per share)........... -- (3,161,229)
------------- ------------
Portfolio share transactions:
Proceeds from shares sold................................................. 57,366,869 86,578,280
Net asset value of shares issued to shareholders in
reinvestment of distributions........................................... 9,011,114 11,686,523
Cost of shares redeemed................................................... (149,798,464) (66,398,542)
------------- ------------
Net increase (decrease) in net assets from Portfolio share transactions..... (83,420,481) 31,866,261
------------- ------------
INCREASE (DECREASE) IN NET ASSETS........................................... (69,890,155) 13,706,297
Net assets at beginning of period........................................... 142,404,612 128,698,315
------------- ------------
NET ASSETS AT END OF PERIOD (including undistributed net investment
income of $2,587,204 and $2,188,157, respectively)........................ $ 72,514,457 $142,404,612
============= ============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period................................... 21,973,579 17,350,092
------------- ------------
Shares sold............................................................... 8,433,349 12,843,292
Shares issued to shareholders in reinvestment of distributions............ 1,343,624 1,713,654
Shares redeemed........................................................... (21,623,990) (9,933,459)
------------- ------------
Net increase (decrease) in Portfolio shares............................... (11,847,017) 4,623,487
------------- ------------
Shares outstanding at end of period......................................... 10,126,562 21,973,579
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS)
--------------------------------------------------------------------- 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
--------------------------------------------------------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a)............ .44 .43 .48 .49 .52 .53 .54 .54 .49 .23 .45
Net realized and
unrealized gain
(loss) on
investment
transactions.......... .69 (.77) .38 (.02) .61 (.02) .18 (.19) (.40) .08 .44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 1.13 (.34) .86 .47 1.13 .51 .72 .35 .09 .31 .89
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income..... (.45) (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29) (.17) (.33)
Net realized gains
on investment
transactions............ -- (.17) (.15) (.19) (.02) -- -- -- -- (.03) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.45) (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29) (.20) (.33)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period............. $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) 18.17 (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22 4.90(d) 15.11(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)....... 73 142 129 113 74 42 22 3 3 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a)............ .56 .58 .61 .63 .69 .73 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%)............ 6.29 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53 6.88(c) 7.48(c)
Portfolio turnover
rate (%).................. 177.21 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05 23.82(c) 6.27(c)
<FN>
(a) Portion of expenses
reimbursed (Note B)..... $ -- $ -- $ -- $ -- $ -- $ -- $ .01 $ .04 $ .08 $ .21 $ .80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares outstanding
during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
BALANCED PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------
4.5% REPURCHASE AGREEMENT
-----------------------------------------------------------------------------
3,023,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 12/29/95 at 5.85%,
to be repurchased at $3,024,965 on 1/2/96,
collateralized by a $2,582,000 U.S. Treasury
Bond, 7.25%, 8/15/22 (Cost $3,023,000)............ 3,023,000
----------
-----------------------------------------------------------------------------
19.2% U.S. TREASURY OBLIGATIONS
-----------------------------------------------------------------------------
250,000 U.S. Treasury Bill, 5.3%, 1/11/96.................. 249,698
700,000 U.S. Treasury Bond, 7.25%, 5/15/16................. 799,309
300,000 U.S. Treasury Bond, 8.125%, 5/15/21................ 379,359
1,350,000 U.S. Treasury Bond, 6.25%, 8/15/23................. 1,389,029
275,000 U.S. Treasury Note, 4.375%, 11/15/96............... 272,982
550,000 U.S. Treasury Note, 4.75%, 2/15/97................. 546,733
250,000 U.S. Treasury Note, 6.125%, 5/31/97................ 253,048
900,000 U.S. Treasury Note, 5.25%, 7/31/98................. 900,279
200,000 U.S. Treasury Note, 5.875%, 3/31/99................ 203,562
1,000,000 U.S. Treasury Note, 6.75%, 5/31/99................. 1,044,530
1,000,000 U.S. Treasury Note, 6.375%, 1/15/00................ 1,038,280
3,650,000 U.S. Treasury Note, 5.625%, 11/30/00............... 3,683,069
1,250,000 U.S. Treasury Note, 6.375%, 8/15/02................ 1,310,738
800,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 11/15/10 (6.05**)....... 329,784
1,460,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 2/15/12 (6.13**)........ 551,646
----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $12,503,802). 12,952,046
----------
-----------------------------------------------------------------------------
2.0% U.S. GOV'T GUARANTEED MORTGAGES
-----------------------------------------------------------------------------
719,018 Government National Mortgage Association, 10%,
8/15/20 (a)....................................... 791,366
532,237 Government National Mortgage Association, 8.75%,
12/15/24 (a)...................................... 556,188
----------
TOTAL U.S. GOV'T GUARANTEED MORTGAGES
(Cost $1,278,803)................................. 1,347,554
----------
-----------------------------------------------------------------------------
2.7% U.S. GOVERNMENT AGENCY PASS-THRUS
-----------------------------------------------------------------------------
805,276 Federal National Mortgage Association, 7%,
9/1/25 (a)........................................ 811,815
993,206 Federal National Mortgage Association, 6.5%,
10/1/25 (a)....................................... 981,406
----------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost $1,751,178)................................. 1,793,221
----------
-----------------------------------------------------------------------------
0.2% COLLATERALIZED MORTGAGE OBLIGATIONS
-----------------------------------------------------------------------------
151,335 Federal National Mortgage Association, REMIC, 8.5%,
4/25/18 (Cost $145,376)........................... 153,320
----------
-----------------------------------------------------------------------------
0.8% FOREIGN BONDS - U.S. $ DENOMINATED
-----------------------------------------------------------------------------
250,000 ABN-AMRO Bank NV, 7.75%, 5/15/23................... 274,707
250,000 Seagram Co., Ltd., 6.875%, 9/1/23.................. 249,268
----------
TOTAL FOREIGN BONDS -- U.S. $ DENOMINATED
(Cost $461,469)................................... 523,975
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------
1.5% FOREIGN BONDS - NON U.S. $ DENOMINATED
-----------------------------------------------------------------------------
DM 650,000 Federal Republic of Germany, 6.5%, 7/15/03........ 472,447
FFr2,400,000 Government of France OAT, 7.5%, 4/25/05........... 519,256
---------
TOTAL FOREIGN BONDS -- NON U.S. $ DENOMINATED
(Cost $946,463)................................. 991,703
---------
-----------------------------------------------------------------------------
2.0% ASSET-BACKED SECURITIES
-----------------------------------------------------------------------------
AUTOMOBILE RECEIVABLES 0.3%
176,685 Premier Auto Trust Asset Backed Certificate
Series 1994-3, 6.8%, 12/2/99 (a)................. 178,672
---------
CREDIT CARD RECEIVABLES 0.8%
62,500 Chase Manhattan Credit Card Trust, 1991 "A",
7.65%, 11/15/98 (a).............................. 62,519
250,000 First Chicago Master Trust, Series 1991-D,
8.4%, 6/15/98.................................... 252,890
250,000 Standard Credit Card Trust, Series 1990-6B,
9.625%, 9/10/97.................................. 264,608
---------
580,017
---------
HOME EQUITY LOANS 0.3%
88,185 Contimortgage Home Equity Loan Trust, Series
1994-5 A1, 9.07%, 5/15/06 (a).................... 88,502
117,518 United Companies Financial Corp., Home Equity Loan
Series 1993-B1, 6.075%, 7/25/14 (a).............. 116,343
---------
204,845
---------
MANUFACTURED HOUSING
RECEIVABLES 0.6%
420,749 Green Tree Financial Corp. Series 1995-7 A1, 6%,
10/15/26......................................... 421,669
---------
TOTAL ASSET-BACKED SECURITIES (Cost $1,397,605)... 1,385,203
---------
-----------------------------------------------------------------------------
7.3% CORPORATE BONDS
-----------------------------------------------------------------------------
CONSUMER DISCRETIONARY 0.4%
250,000 Price/Costco Inc., 7.125%, 6/15/05................ 261,348
---------
CONSUMER STAPLES 0.4%
270,000 J. Seagram & Sons Inc., 7%, 4/15/08............... 279,083
---------
FINANCIAL 0.4%
250,000 NationsBank Corp., 7.25%, 10/15/25................ 259,420
---------
MEDIA 1.7%
1,000,000 Time Warner Inc., 9.125%, 1/15/13................. 1,126,950
---------
DURABLES 0.5%
250,000 Lockheed Martin Corp., 9%, 1/15/22................ 319,340
---------
MANUFACTURING 1.1%
250,000 Corning Inc., 8.75%, 7/15/99...................... 270,632
200,000 ITT Destinations, 6.25%, 11/15/00................. 200,712
300,000 ITT Destinations, 6.75%, 11/15/05................. 301,233
---------
772,577
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------
TECHNOLOGY 0.8%
500,000 Loral Corp., 8.375%, 6/15/24.......................... 574,165
---------
ENERGY 1.3%
500,000 Atlantic Richfield Co., 8.25%, 2/1/22................. 578,165
250,000 Enron Corp., 10%, 6/1/98.............................. 273,440
---------
851,605
---------
TRANSPORTATION 0.3%
100,000 American Airlines, 8.8%, 9/16/15...................... 110,075
100,000 American Airlines, 8.39%, 1/2/17...................... 107,000
---------
217,075
---------
UTILITIES 0.4%
250,000 Commonwealth Edison Co., 9.05%, 10/15/99.............. 266,940
---------
TOTAL CORPORATE BONDS (Cost $4,514,595)............... 4,928,503
---------
-----------------------------------------------------------------------------
0.6% PREFERRED STOCKS
-----------------------------------------------------------------------------
Shares
-----------------------------------------------------------------------------
TECHNOLOGY
Computer Software 2,500 SAP AG (Cost $372,379)................................ 378,709
---------
-----------------------------------------------------------------------------
59.2% COMMON STOCKS
-----------------------------------------------------------------------------
CONSUMER DISCRETIONARY 5.1%
Department & Chain
Stores 2.8% 15,400 Nordstrom, Inc. ...................................... 623,700
26,900 Rite Aid Corp. ....................................... 921,325
16,000 Wal-Mart Stores Inc. ................................. 358,000
---------
1,903,025
---------
Restaurants 0.9% 13,800 McDonald's Corp. ..................................... 622,725
---------
Specialty Retail 1.4% 16,300 Corporate Express, Inc.* ............................. 491,037
27,300 Intimate Brands, Inc. ................................ 409,500
---------
900,537
---------
CONSUMER STAPLES 10.6%
Alcohol & Tobacco 1.9%
14,100 Philip Morris Companies Inc. ......................... 1,276,050
---------
Consumer Electronic &
Photographic Products 0.6%
8,400 Duracell International Inc. .......................... 434,700
---------
Food & Beverage 5.2% 22,000 Albertson's Inc. ..................................... 723,250
6,000 CPC International Inc. ............................... 411,750
14,000 ConAgra Inc. ......................................... 577,500
17,500 PepsiCo Inc. ......................................... 977,812
25,600 Sara Lee Corp. ....................................... 816,000
---------
3,506,312
---------
Package Goods/
Cosmetics 2.9% 2,700 Clorox Co. ........................................... 193,387
4,800 Colgate-Palmolive Co. ................................ 337,200
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8,200 Gillette Co. ......................................... 427,425
11,900 Procter & Gamble Co. ................................. 987,700
---------
1,945,712
---------
HEALTH 10.3%
Biotechnology 0.8% 13,139 Guidant Corp. ........................................ 555,123
---------
Hospital Management 1.2% 15,800 Columbia/HCA Healthcare Corp. ........................ 801,850
---------
Medical Supply
& Specialty 1.9% 11,900 Becton, Dickinson & Co. .............................. 892,500
7,500 Medtronic Inc. ....................................... 419,062
---------
1,311,562
---------
Pharmaceuticals 6.4% 4,500 American Home Products Corp. ......................... 436,500
14,870 Eli Lilly & Co. ...................................... 836,437
10,400 Johnson & Johnson .................................... 890,500
16,500 Merck & Co. Inc. ..................................... 1,084,875
5,300 Sandoz Ltd. AG (ADR) ................................. 242,806
14,600 Schering-Plough Corp. ................................ 799,350
---------
4,290,468
---------
COMMUNICATIONS 1.6%
Cellular Telephone 0.5% 11,600 AirTouch Communications, Inc.* ....................... 327,700
---------
Telephone/
Communications 1.1% 11,300 American Telephone & Telegraph Co. ................... 731,675
---------
FINANCIAL 5.2%
Banks 1.0% 15,300 State Street Boston Corp. ............................ 688,500
---------
Insurance 2.9% 10,850 American International Group, Inc. ................... 1,003,625
6,000 EXEL, Ltd. ........................................... 366,000
7,700 MBIA Inc. ............................................ 577,500
---------
1,947,125
---------
Other Financial
Companies 1.3% 7,200 Federal National Mortgage Association ................ 893,700
---------
MEDIA 4.4%
Advertising 0.6% 9,500 Interpublic Group of Companies Inc. .................. 412,062
---------
Broadcasting &
Entertainment 3.8% 8,400 Broderbund Software Inc.* ............................ 510,300
4,000 Capital Cities/ABC Inc. .............................. 493,500
16,700 Time Warner Inc. ..................................... 632,513
11,600 Viacom Inc. "B"* ..................................... 549,550
6,600 Walt Disney Co. ...................................... 389,400
---------
2,575,263
---------
SERVICE INDUSTRIES 5.1%
EDP Services 2.3% 9,400 First Data Corp. ..................................... 628,625
16,900 General Motors Corp. "E" ............................. 878,800
---------
1,507,425
---------
Investment 0.8% 27,000 Charles Schwab Corp. ................................. 543,375
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Miscellaneous
Commercial Services 0.6% 22,900 Sensormatic Electronics Corp. .......................... 397,888
---------
Miscellaneous
Consumer Services 0.7% 11,000 Service Corp. International ............................ 484,000
---------
Printing/Publishing 0.7% 8,600 Reuters Holdings PLC "B" (ADR) ......................... 474,075
---------
DURABLES 2.7%
Aerospace 1.3% 11,400 Boeing Co. ............................................. 893,475
---------
Telecommunications
Equipment 1.4% 10,700 DSC Communications Corp.* .............................. 394,562
26,400 L.M. Ericsson Telephone Co. "B" (ADR) .................. 514,800
---------
909,362
---------
MANUFACTURING 4.5%
Chemicals 0.9% 11,900 Sigma-Aldrich Corp. .................................... 589,050
---------
Diversified
Manufacturing 2.3% 10,200 Dover Corp. ............................................ 376,125
11,700 General Electric Co. ................................... 842,400
6,150 Thermo Electron Corp.* ................................. 319,800
---------
1,538,325
---------
Electrical Products 1.3% 4,200 ASEA AB (ADR) .......................................... 406,875
5,700 Emerson Electric Co. ................................... 465,975
---------
872,850
---------
TECHNOLOGY 7.8%
Computer Software 0.8% 7,600 Informix Corp.* ........................................ 228,000
3,600 Microsoft Corp.* ....................................... 315,900
---------
543,900
---------
Diverse Electronic
Products 1.4% 10,200 Applied Materials, Inc.* ............................... 401,625
9,600 Motorola Inc. .......................................... 547,200
---------
948,825
---------
Electronic Data
Processing 1.4% 8,000 Hewlett-Packard Co. .................................... 670,000
9,100 Silicon Graphics Inc.* ................................. 250,250
---------
920,250
---------
Military Electronics 1.1% 21,200 Loral Corp. ............................................ 749,950
---------
Office/Plant
Automation 1.3% 7,700 3Com Corp.* ............................................ 359,013
6,800 Cisco Systems, Inc.* ................................... 507,450
---------
866,463
---------
Semiconductors 1.8% 14,900 Atmel Corp.* ........................................... 333,387
10,600 Intel Corp. ............................................ 601,550
9,400 LSI Logic Corp. ........................................ 307,850
---------
1,242,787
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY 1.9%
Engineering 0.9% 8,800 Fluor Corp. ........................................... 580,800
----------
Oil/Gas Transmission 1.0% 17,900 Enron Corp. ........................................... 682,437
----------
TOTAL COMMON STOCKS (Cost $32,024,744) ................ 39,869,326
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $58,419,414) (b) ............................... 67,346,560
==========
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Non-income producing security.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) Effective maturities will be shorter due to amortization and prepayments.
(b) At December 31, 1995, the net unrealized appreciation on investments based on cost for federal
income tax purposes of $58,466,593 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of market
value over tax cost ............................................................................... $9,608,851
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax
cost over market value ............................................................................ (728,884)
----------
Net unrealized appreciation ......................................................................... $8,879,967
==========
</FN>
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments and U.S. Government securities), for
the year ended December 31, 1995, aggregated $40,832,157 and $36,997,809, respectively. Purchases and sales of U.S.
Government securities for the year ended December 31, 1995, aggregated $20,096,985 and $9,538,073, respectively.
- -------------------------------------------------------------------------------------------------------------------------
COMMITMENTS:
As of December 31, 1995, the Balanced Portfolio entered into the following forward foreign currency exchange
contracts resulting in net unrealized depreciation of $6,165.
<CAPTION>
NET UNREALIZED
APPRECIATION/
SETTLEMENT DEPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
- --------------------------- --------------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Deutschemarks 659,903 U.S. Dollars 465,895 1/22/96 4,660
French Francs 2,335,440 U.S. Dollars 466,901 1/22/96 (10,825)
-------
(6,165)
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $58,419,414) (Note A).................. $67,346,560
Cash .......................................................................... 690
Unrealized appreciation on forward currency exchange contacts (Note A) ........ 4,660
Receivables:
Investments sold ............................................................ 85,270
Dividends and interest ...................................................... 412,970
Portfolio shares sold ....................................................... 195,695
-----------
Total assets .............................................................. 68,045,845
LIABILITIES
Payables:
Portfolio shares redeemed ................................................... $57,674
Accrued management fee (Note B) ............................................. 26,469
Other accrued expenses (Note B) ............................................. 25,088
Unrealized depreciation on forward currency exchange
contracts (Note A) ........................................................ 10,825
-------
Total liabilities ......................................................... 120,056
-----------
Net assets, at market value ................................................... $67,925,789
===========
NET ASSETS
Net assets consist of:
Undistributed net investment income ......................................... $ 483,837
Net unrealized appreciation (depreciation) on:
Investments ............................................................... 8,927,146
Foreign currency related transactions ..................................... (5,965)
Accumulated net realized gain ............................................... 1,831,568
Paid-in capital ............................................................. 56,689,203
-----------
Net assets, at market value ................................................... $67,925,789
===========
NET ASSET VALUE, offering and redemption price per share
($67,925,789 divided by 6,206,064 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .............. $10.95
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest ...................................................... $ 1,516,654
Dividends (net of foreign taxes withheld of $5,268) ........... 564,132
-----------
2,080,786
Expenses (Note A):
Management fee (Note B) ....................................... $ 269,230
Accounting fees (Note B) ...................................... 37,353
Trustees' fees (Note B) ....................................... 15,758
Custodian fees ................................................ 24,505
Auditing ...................................................... 6,833
Legal ......................................................... 3,253
Other ......................................................... 13,961 370,893
---------- -----------
Net investment income ........................................... $ 1,709,893
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain from:
Investments ................................................... 2,268,896
Foreign currency related transactions ......................... 38,133 2,307,029
----------
Net unrealized appreciation (depreciation) during the period on:
Investments ................................................... 9,165,065
Foreign currency related transactions ......................... (5,965) 9,159,100
---------- -----------
Net gain on investment transactions ............................... 11,466,129
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $13,176,022
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................................. $ 1,709,893 $ 1,464,324
Net realized gain (loss) from investment transactions .................. 2,307,029 (70,680)
Net unrealized appreciation (depreciation) on investment
transactions during the period ....................................... 9,159,100 (2,374,110)
----------- -----------
Net increase (decrease) in net assets resulting from operations .......... 13,176,022 (980,466)
Distributions to shareholders from:
Net investment income ($.30 and $.30 per share, respectively) .......... (1,673,390) (1,442,472)
----------- -----------
Net realized gains from investment transactions
($.06 and $.77 per share, respectively) .............................. (316,977) (3,525,834)
----------- -----------
Portfolio share transactions:
Proceeds from shares sold .............................................. 16,676,142 14,384,876
Net asset value of shares issued to shareholders in
reinvestment of distributions ........................................ 1,990,367 4,968,306
Cost of shares redeemed ................................................ (7,450,950) (12,950,121)
----------- -----------
Net increase in net assets from Portfolio share transactions ............. 11,215,559 6,403,061
----------- -----------
INCREASE IN NET ASSETS ................................................... 22,401,214 454,289
Net assets at beginning of period ........................................ 45,524,575 45,070,286
----------- -----------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $483,837 and $392,285, respectively) .............. $67,925,789 $45,524,575
=========== ===========
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period ................................ 5,076,236 4,407,727
----------- -----------
Shares sold ............................................................ 1,667,336 1,539,383
Shares issued to shareholders in reinvestment of distributions ......... 204,454 532,133
Shares redeemed ........................................................ (741,962) (1,403,007)
----------- -----------
Net increase in Portfolio shares ....................................... 1,129,828 668,509
----------- -----------
Shares outstanding at end of period ...................................... 6,206,064 5,076,236
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
<TABLE>
BALANCED PORTFOLIO
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS)
--------------------------------------------------------------------- 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
--------------------------------------------------------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period........ $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a)............... .30 .29 .30 .29 .35 .42 .40 .33 .34 .15 .31
Net realized and
unrealized gain (loss)
on investment
transactions............. 2.04 (.48) .42 .36 1.77 (.59) 1.06 .64 (.45) (.11) 1.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................. 2.34 (.19) .72 .65 2.12 (.17) 1.46 .97 (.11) .04 1.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment
income................... (.30) (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23) (.18) (.23)
Net realized gains
on investment
transactions............. (.06) (.77) (.23) (.19) -- (.05) -- -- (.13) (.09) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.......... (.36) (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36) (.27) (.23)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period.............. $10.95 $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) 26.67 (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68) .46(d) 30.60(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)........ 68 46 45 37 25 16 18 11 12 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a)............. .65 .75 .75 .75 .75 .75 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) ............ 3.01 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42 4.20(c) 4.87(c)
Portfolio turnover
rate (%)................... 87.98 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00 28.86(c) 64.12(c)
<FN>
(a) Portion of expenses
reimbursed (Note B) $ -- $ -- $ -- $ -- $ .01 $ -- $ .01 $ .03 $ .03 $ .17 $ .80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares outstanding
during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
*On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income
from a diversified portfolio of equity and fixed income securities. Prior to that date, the Portfolio was known as the
Managed Diversified Portfolio and its investment objective was to realize a high level of long-term total rate of return
consistent with prudent investment risk. The portfolio turnover rate increased due to implementing the present investment
objective. Financial highlights for the nine periods ended December 31, 1993 should not be considered representative of
the present Portfolio.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------
5.5% REPURCHASE AGREEMENT
-------------------------------------------------------------------------------
2,860,000 Repurchase Agreement with Donaldson, Lufkin
& Jenrette dated 12/29/95 at 5.85%, to be repurchased
at $2,861,859 on 1/2/96, collateralized by a $2,108,000
U.S. Treasury Bond, 8.875%, 8/15/17 (Cost $2,860,000) .. 2,860,000
---------
-------------------------------------------------------------------------------
2.5% CONVERTIBLE BONDS
-------------------------------------------------------------------------------
HEALTH 0.3%
Pharmaceuticals 140,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 .................... 132,300
---------
FINANCIAL 0.1%
Other Financial
Companies 40,000 First Financial Management Corp., 5%, 12/15/99 .......... 64,300
---------
SERVICE INDUSTRIES 0.4%
Miscellaneous
Commercial Services 335,000 ADT Operations Inc. LYON, 7/6/10 ........................ 159,963
54,000 Jardine Strategic Holdings Ltd., 7.5%, 5/7/49 ........... 58,050
---------
218,013
---------
TECHNOLOGY 1.7%
Computer Software 0.2% 120,000 Softkey International, Inc., 5.5%, 11/1/00 .............. 89,700
---------
Semiconductors 1.5% 850,000 VLSI Technology, Inc., 8.25%, 10/1/05 ................... 788,375
---------
TOTAL CONVERTIBLE BONDS (Cost $1,326,234) ............... 1,292,688
---------
-------------------------------------------------------------------------------
2.6% CONVERTIBLE PREFERRED STOCKS
-------------------------------------------------------------------------------
Shares
-------------------------------------------------------------------------------
HEALTH 1.1%
Health Industry
Services 21,500 FHP International Corp., "A", Cum. $1.25 ................. 572,438
---------
FINANCIAL 0.8%
Consumer Finance 10,400 Advanta Corp., 6.75% .................................... 399,100
---------
MANUFACTURING 0.7%
Containers & Paper 0.4% 700 Boise Cascade Corp. "G", Cum $1.58 ...................... 20,038
4,500 International Paper Co., 5.25% .......................... 202,500
---------
222,538
---------
Industrial Specialty 0.3% 10,000 Cooper Industries, Inc., 6%* ............................ 137,500
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,308,308) .... 1,331,576
---------
-------------------------------------------------------------------------------
89.4% COMMON STOCKS
-------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 3.9%
Department &
Chain Stores 3.5% 12,100 J.C. Penney Co., Inc. ................................... 576,262
1,200 May Department Stores ................................... 50,700
9,300 Melville Corp. .......................................... 285,975
13,800 Rite Aid Corp. .......................................... 472,650
</TABLE>
The accompanying notes an integral part of the financial statements.
37
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10,900 Sears, Roebuck & Co. .................................... 425,100
---------
1,810,687
---------
Specialty Retail 0.4% 13,000 Intimate Brands, Inc. ................................... 195,000
---------
CONSUMER STAPLES 12.0%
Alcohol & Tobacco 4.1% 10,400 Anheuser Busch Companies, Inc. .......................... 695,500
9,600 Philip Morris Companies Inc. ............................ 868,800
17,980 RJR Nabisco Holdings Corp. .............................. 555,132
1,080 Schweitzer-Mauduit International, Inc.* ................ 24,975
---------
2,144,407
---------
Food & Beverage 3.3% 9,700 General Mills, Inc. ..................................... 560,175
22,800 H.J. Heinz Co. .......................................... 755,250
11,000 Quaker Oats Co. ......................................... 379,500
---------
1,694,925
---------
Package Goods/
Cosmetics 4.6% 6,000 Avon Products Inc. ..................................... 452,250
6,700 Clorox Co. .............................................. 479,887
2,000 Colgate-Palmolive Co. ................................... 140,500
10,800 Kimberly-Clark Corp. .................................... 893,700
8,400 Tambrands Inc. ......................................... 401,100
---------
2,367,437
---------
HEALTH 13.3%
Health Industry
Services 0.3% 2,900 U.S. HealthCare, Inc. .................................. 134,850
---------
Medical Supply &
Specialty 1.4% 18,800 Bausch & Lomb, Inc. ..................................... 744,950
---------
Pharmaceuticals 11.6% 8,600 American Home Products Corp. ............................ 834,200
20,000 Baxter International Inc. ............................... 837,500
6,700 Bristol-Myers Squibb Co. ............................... 575,362
16,000 Carter-Wallace Inc. ..................................... 182,000
19,100 Eli Lilly & Co. ......................................... 1,074,375
13,700 Schering-Plough Corp. ................................... 750,075
10,900 SmithKline Beecham PLC (ADR)............................. 604,950
7,200 Warner-Lambert Co. ...................................... 699,300
18,200 Zeneca Group PLC......................................... 352,206
1,300 Zeneca Group PLC (ADR) .................................. 75,888
---------
5,985,856
---------
COMMUNICATIONS 5.6%
Telephone/
Communications 23,100 Alltel Corp. ............................................ 681,450
14,500 GTE Corp. ............................................... 638,000
18,500 Hong Kong Telecommunications Ltd. (ADR).................. 328,375
12,300 Koninklijke PTT Nederland ............................... 447,594
12,500 Sprint Corp.............................................. 498,438
11,800 Tele Danmark A/S (ADR) .................................. 325,975
---------
2,919,832
---------
FINANCIAL 17.0%
Banks 6.1% 9,200 Bankers Trust New York Corp. ........................... 611,800
9,700 Chemical Banking Corp. .................................. 569,875
15,800 CoreStates Financial Corp. .............................. 598,425
14,900 First Bank System Inc. .................................. 739,412
8,100 J.P. Morgan & Co., Inc. ................................ 650,025
---------
3,169,537
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insurance 3.3% 6,952 Allstate Corp. .......................................... 285,901
6,800 EXEL, Ltd. .............................................. 414,800
4,200 Hartford Steam Boiler Inspection & Insurance Co. ........ 210,000
15,300 Lincoln National Corp.................................... 822,375
---------
1,733,076
---------
Other Financial
Companies 3.4% 5,000 Federal National Mortgage Association ................... 620,625
17,000 Student Loan Marketing Association....................... 1,119,875
---------
1,740,500
---------
Real Estate 4.2% 10,584 HGI Realty, Inc. (REIT) ................................. 242,109
17,600 Health Care Property Investment Inc. (REIT) ............. 618,200
18,800 Meditrust SBI (REIT)..................................... 655,650
15,700 Nationwide Health Properties Inc. (REIT) ................ 659,400
---------
2,175,359
---------
MEDIA 0.5%
Print Media
4,600 Reader's Digest Association Inc. "A" .................... 235,750
---------
SERVICE INDUSTRIES 2.6%
Miscellaneous
Consumer Services 1.6% 20,900 H&R Block Inc. .......................................... 846,450
---------
Printing/Publishing 1.0% 14,200 Deluxe Corp. ............................................ 411,800
1,700 Dun & Bradstreet Corp. .................................. 110,075
---------
521,875
---------
DURABLES 6.2%
Aerospace 5.6% 11,742 Lockheed Martin Corp. .................................. 927,618
13,700 Rockwell International Corp. ............................ 724,388
1,300 Thiokol Corp. ........................................... 44,038
12,900 United Technologies Corp. ............................... 1,223,888
---------
2,919,932
---------
Automobiles 0.5%
9,400 Dana Corp. ............................................. 274,950
---------
Construction/
Agricultural Equipment 0.1% 500 PACCAR, Inc. ........................................... 21,063
---------
MANUFACTURING 13.1%
Chemicals 3.2% 5,400 Dow Chemical Co. ........................................ 380,025
11,200 E.I. du Pont de Nemours & Co. ........................... 782,600
2,100 Lubrizol Corp. .......................................... 58,537
18,400 Lyondell Petrochemical Co. .............................. 420,900
---------
1,642,062
---------
Diversified
Manufacturing 3.8% 25,500 Dresser Industries Inc. ................................ 621,562
4,700 Olin Corp. .............................................. 348,975
12,600 TRW Inc. ................................................ 976,500
---------
1,947,037
---------
Electrical Products 0.9%
6,500 Thomas & Betts Corp. .................................... 479,375
---------
Industrial Specialty 0.3%
4,900 Corning Inc. ............................................ 156,800
---------
Machinery/
Components/Controls 0.7% 3,000 General Signal Corp. .................................... 97,125
7,100 Timken Co. .............................................. 271,575
---------
368,700
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office Equipment/
Supplies 2.0% 7,600 Xerox Corp. ............................................. 1,041,200
---------
Specialty Chemicals 2.0% 11,300 Betz Laboratories Inc. .................................. 463,300
19,100 Witco Corp. ............................................. 558,675
---------
1,021,975
---------
Wholesale Distributors 0.2% 1,400 Alco Standard Corp. ..................................... 119,700
---------
ENERGY 8.9%
Oil Companies 7.9% 6,100 Exxon Corp. ............................................. 488,762
12,500 Murphy Oil Corp. ........................................ 518,750
8,200 Pennzoil Co. ............................................ 346,450
7,800 Repsol SA (ADR) ......................................... 256,425
3,400 Royal Dutch Petroleum Co. (New York shares) ............. 479,825
15,156 Societe Nationale Elf Aquitaine (ADR) ................... 556,983
4,900 Texaco Inc. ............................................. 384,650
14,619 Total SA (ADR)........................................... 497,046
26,700 YPF S.A. "D" (ADR) ...................................... 577,388
---------
4,106,279
---------
Oilfield Services/
Equipment 1.0% 10,300 Halliburton Co. ......................................... 521,437
---------
METALS & MINERALS 1.6%
Steel & Metals 22,500 Freeport McMoRan Copper & Gold, Inc. "A" ................ 630,000
13,500 Oregon Steel Mills Inc. ................................ 189,000
---------
819,000
---------
TRANSPORTATION 0.5%
Railroads 18,300 Canadian National Railway Co.* .......................... 274,500
---------
UTILITIES 4.2%
Electric Utilities 12,700 CINergy Corp. ........................................... 388,937
6,000 CMS Energy Corp. ........................................ 179,250
12,300 National Power PLC (ADR) ................................ 113,775
7,400 PacifiCorp .............................................. 157,250
3,300 Pacific Gas & Electric Co. ............................. 93,637
11,100 PowerGen PLC (ADR)....................................... 145,687
17,400 Southern Company ........................................ 428,475
3,100 Texas Utilities Co., Inc. ............................... 127,488
16,000 Unicom Corp. ............................................ 524,000
----------
2,158,499
----------
TOTAL COMMON STOCKS (Cost $38,498,256) 46,293,000
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $43,992,798) (a) ............................... 51,777,264
==========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------
<S> <C> <C>
* Non-income producing security.
(a) At December 31, 1995, the net unrealized
appreciation on investments based on cost for
federal income tax purposes of $44,003,751 was
as follows:
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of market value over tax cost........................ $8,264,388
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over market value........................ (490,875)
----------
Net unrealized appreciation ......................... $7,773,513
==========
- -----------------------------------------------------------------------------
Purchases and sales of investment securities (excluding
short-term investments), for the year ended December 31, 1995,
aggregated $29,962,747 and $8,412,075, respectively.
</TABLE>
41
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $43,992,798) (Note A)....... $51,777,264
Cash................................................................ 814
Receivables:
Investments sold............................................ 112,347
Dividends and interest...................................... 176,163
Portfolio shares sold....................................... 157,901
-----------
Total assets........................................ 52,224,489
LIABILITIES
Payables:
Investments purchased....................................... $ 53,204
Portfolio shares redeemed................................... 98,724
Accrued management fee (Note B)............................. 85,616
Other accrued expenses (Note B)............................. 24,511
-----------
Total liabilities................................... 262,055
-----------
Net assets, at market value ........................................ $51,962,434
===========
NET ASSETS
Net assets consist of:
Undistributed net investment income......................... $ 403,970
Net unrealized appreciation on investments.................. 7,784,466
Accumulated net realized gain............................... 665,292
Paid-in capital............................................. 43,108,706
-----------
Net assets, at market value......................................... $51,962,434
===========
NET ASSET VALUE, offering and redemption price per share
($51,962,434 DIVIDED BY 6,510,714 outstanding shares of beneficial
interest, no par value, unlimited number of
shares authorized).......................................... $7.98
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Income:
Dividends (net of foreign taxes withheld of
$9,696).......................................... $1,273,665
Interest........................................... 135,250
----------
1,408,915
Expenses (Note A):
Management fee (Note B)............................ $169,852
Accounting fees (Note B)........................... 38,256
Trustees' fees (Note B)............................ 15,468
Custodian fees..................................... 26,622
Federal registration............................... 7,475
Auditing........................................... 4,086
Legal.............................................. 2,265
Other.............................................. 6,597
--------
Total expenses before reductions................... 270,621
Management fee reduction (Note B) ................. (1,982)
--------
Expenses, net.............................................. 268,639
----------
Net investment income...................................... 1,140,276
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments........................................ 686,492
Foreign currency related transactions.............. (1,006) 685,486
--------
Net unrealized appreciation on investments during the period 8,112,233
----------
Net gain on investment transactions........................ 8,797,719
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $9,937,995
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
MAY 2, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income....................................... $ 1,140,276 $ 251,018
Net realized gain from investment transactions.............. 685,486 124,765
Net unrealized appreciation (depreciation) on investment
transactions during the period...................... 8,112,233 (327,767)
---------- -----------
Net increase in net assets resulting from operations................ 9,937,995 48,016
---------- -----------
Distributions to shareholders from:
Net investment income ($.19 and $.04 per share, respectively) (895,880) (86,114)
---------- -----------
Net realized gains from investment transactions
($.04 per share) (150,289) --
---------- -----------
Portfolio share transactions:
Proceeds from shares sold .................................. 29,272,260 22,441,709
Net asset value of shares issued to shareholders
in reinvestment of distributions.................... 1,046,169 86,114
Cost of shares redeemed..................................... (7,322,663) (2,415,483)
---------- -----------
Net increase in net assets from Portfolio share transactions........ 22,995,766 20,112,340
---------- -----------
INCREASE IN NET ASSETS.............................................. 31,887,592 20,074,242
Net assets at beginning of period................................... 20,074,842 600
---------- ---------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $403,970 and $164,132, respectively)... $51,962,434 $20,074,842
=========== ===========
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period........................... 3,204,882 100
---------- ---------
Shares sold................................................. 4,166,992 3,576,097
Shares issued to shareholders in reinvestment of
distributions 151,454 13,561
Shares redeemed.............................................. (1,012,614) (384,876)
---------- ---------
Net increase in Portfolio shares............................. 3,305,832 3,204,782
---------- ---------
Shares outstanding at end of period.................................. 6,510,714 3,204,882
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout each period (e) and other
performance information derived from the financial statements.
<CAPTION>
FOR THE PERIOD
MAY 2, 1994
YEAR (COMMENCEMENT
ENDED OF OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
1995 1994
------------ ----------------
<S> <C> <C>
Net asset value, beginning of period......................................... $ 6.26 $ 6.00(b)
------ ------
Income from investment operations:
Net investment income (a) ........................................... .23 .13
Net realized and unrealized gain (loss) on investment transactions... 1.72 .17(f)
------ ------
Total from investment operations............................................. 1.95 .30
------ ------
Less distributions from:
Net investment income................................................ (.19) (.04)
Net realized gains on investment transactions........................ (.04) --
------ ------
Total distributions.......................................................... (.23) (.04)
------ ------
Net asset value, end of period............................................... $ 7.98 $ 6.26
====== ======
TOTAL RETURN (%)............................................................. 31.74 4.91(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)....................................... 52 20
Ratio of operating expenses, net to average net assets (%) (a) .............. .75 .75(c)
Ratio of net investment income to average net assets (%)..................... 3.18 3.63(c)
Portfolio turnover rate (%) ................................................. 24.33 28.41(c)
(a) Portion of expenses waived (Note B) .................................... $ -- $ .03
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts have been calculated using the monthly average shares
outstanding during the period method.
(f) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and purchases
of Portfolio shares in relation to fluctuating market values during the period.
</TABLE>
45
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1995
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------
5.8% REPURCHASE AGREEMENT
----------------------------------------------------------------
19,661,000 Repurchase Agreement with Donaldson, Lufkin
& Jenrette dated 12/29/95 at 5.85%, to be
repurchased at $19,673,780 on 1/2/96,
collateralized by a $12,135,000 U.S. Treasury
Bond, 11.25%, 2/15/15
(Cost $19,661,000) ............................. 19,661,000
----------
----------------------------------------------------------------
1.0% PREFERRED STOCKS
----------------------------------------------------------------
Shares
----------------------------------------------------------------
FINANCIAL 0.3%
Banks 8,000 First Nationwide Bank, non-cum. 11.5% (a)......... 898,000
----------
TECHNOLOGY 0.7%
Computer Software 15,000 SAP AG............................................ 2,272,251
----------
TOTAL PREFERRED STOCKS (Cost $3,149,733) 3,170,251
----------
----------------------------------------------------------------
93.2% COMMON STOCKS
----------------------------------------------------------------
CONSUMER
DISCRETIONARY 5.3%
Department &
Chain Stores 2.3% 100,000 May Department Stores ............................ 4,225,000
120,000 Walgreen Co....................................... 3,585,000
----------
7,810,000
----------
Recreational
Products 0.3% 80,000 Acclaim Entertainment Inc.* ...................... 990,000
----------
Restaurants 2.1% 160,000 McDonald's Corp. ................................. 7,220,000
----------
Specialty
Retail 0.6% 75,600 Intimate Brands, Inc. ............................ 1,134,000
36,000 Toys "R" Us Inc.* ................................ 783,000
----------
1,917,000
CONSUMER STAPLES 6.0%
Alcohol &
Tobacco 1.1% 40,000 Philip Morris Companies Inc. .................... 3,620,000
----------
Food &
Beverage 1.7% 105,000 PepsiCo Inc. ..................................... 5,866,875
----------
Package
Goods/
Cosmetics 3.2% 70,000 Clorox Co. ....................................... 5,013,750
56,000 Estee Lauder Companies "A"* ...................... 1,953,000
45,000 Procter & Gamble Co. ............................. 3,735,000
----------
10,701,750
----------
HEALTH 15.8%
Health
Industry
Services 0.8% 115,600 Bergen Brunswig Corp. "A" ........................ 2,875,550
----------
Hospital
Management 3.3% 220,000 Columbia/HCA Healthcare Corp. .................... 11,165,000
----------
Medical
Supply &
Specialty 2.7% 68,000 Becton, Dickinson & Co. .......................... 5,100,000
70,000 Medtronic Inc. ................................... 3,911,250
----------
9,011,250
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pharmaceuticals 9.0% 7,500 Astra AB "A" (Free)...................... 299,458
133,050 Astra AB "B" (Free)...................... 5,272,284
40,000 BioChem Pharma, Inc.*.................... 1,605,000
80,000 Eli Lilly & Co. ......................... 4,500,000
80,000 Johnson & Johnson ....................... 6,850,000
102,800 Merck & Co. Inc. ........................ 6,759,100
89,000 Schering-Plough Corp. ................... 4,872,750
----------
30,158,592
----------
COMMUNICATIONS 1.5%
Cellular
Telephone 0.4% 41,000 Associated Group, Inc. "A"* ............. 773,875
32,770 Associated Group, Inc. "B"* ............. 622,630
----------
1,396,505
----------
Telephone/
Communications 1.1%
115,000 Century Telephone Enterprises............ 3,651,250
----------
FINANCIAL 13.3%
Banks 2.9% 78,600 MBNA Corp. .............................. 2,898,375
95,000 Norwest Corp. ........................... 3,135,000
80,000 Wachovia Corp. .......................... 3,660,000
----------
9,693,375
----------
Insurance 7.1% 88,500 American International Group, Inc. ...... 8,186,250
11,800 Chubb Corp. ............................. 1,141,650
60,000 EXEL, Ltd. .............................. 3,660,000
31,300 General Re Corp. ........................ 4,851,500
80,000 MBIA Inc. ............................... 6,000,000
----------
23,839,400
----------
Other
Financial
Companies 3.3%
90,000 Federal National Mortgage Association ... 11,171,250
----------
MEDIA 7.5%
Broadcasting &
Entertainment 4.6% 106,000 Capital Cities/ABC Inc. ................. 13,077,750
40,000 Walt Disney Co. ......................... 2,360,000
----------
15,437,750
----------
Cable
Television 2.4% 129,750 Comcast Corp. "A"........................ 2,359,828
84,576 Tele-Comm Liberty Media Group "A"........ 2,272,980
178,307 Tele-Communications Inc. "A"............. 3,543,852
----------
8,176,660
----------
Print Media 0.5%
28,000 Gannet Co., Inc.......................... 1,718,500
----------
SERVICE INDUSTRIES 4.7%
EDP Services 0.4% 55,400 National Data Corp. ..................... 1,371,150
----------
Environmental
Services 0.7% 40,000 Browning Ferris Industries............... 1,180,000
69,900 Destec Energy Inc.* ..................... 961,125
----------
2,141,125
----------
Investment 2.4% 35,000 Dean Witter, Discover & Co. ............. 1,645,000
127,400 Franklin Resources Inc. ................. 6,417,775
----------
8,062,775
----------
Miscellaneous
Consumer
Services 1.2% 100,000 H&R Block Inc. .......................... 4,050,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DURABLES 4.2%
Aerospace 2.8% 110,000 Rockwell International Corp. ............ 5,816,250
40,000 United Technologies Corp. ............... 3,795,000
----------
9,611,250
----------
Telecommunications
Equipment 1.4% 40,000 DSC Communications Corp.* ............... 1,475,000
60,000 General Instrument Corp.* ............... 1,402,500
46,000 Nokia AB Oy "A".......................... 1,777,553
----------
4,655,053
----------
MANUFACTURING 6.5%
Chemicals 2.0% 65,000 E.I. du Pont de Nemours & Co. ........... 4,541,875
46,000 Sigma-Aldrich Corp. ..................... 2,277,000
----------
6,818,875
----------
Diversified
Manufacturing 2.1% 60,000 Canadian Pacific Ltd. ................... 1,087,500
60,000 TRW Inc.................................. 4,650,000
21,000 Thermo Electron Corp.* .................. 1,092,000
----------
6,829,500
----------
Electrical
Products 1.4% 131,600 Philips NV (New York shares)............. 4,721,150
----------
Machinery/
Components/
Controls 1.0% 100,000 Parker-Hannifin Group.................... 3,425,000
----------
TECHNOLOGY 13.9%
Diverse
Electronic
Products 2.5% 210,000 Applied Materials, Inc.* ................ 8,268,750
----------
Electronic
Data
Processing 5.1% 65,000 Compaq Computer Corp.* .................. 3,120,000
125,000 Hewlett-Packard Co. ..................... 10,468,750
40,000 International Business Machines Corp..... 3,670,000
----------
17,258,750
----------
Military
Electronics 0.7% 65,000 Loral Corp. ............................. 2,299,375
----------
Office/Plant
Automation 2.3% 72,000 3Com Corp.* ............................. 3,357,000
25,000 Cabletron Systems Inc.* ................. 2,025,000
30,000 Cisco Systems, Inc.* .................... 2,238,750
----------
7,620,750
----------
Semiconductors 3.3% 130,000 Intel Corp. ............................. 7,377,500
30,000 Micron Technology Inc. .................. 1,188,750
50,000 Texas Instruments Inc. .................. 2,587,500
----------
11,153,750
----------
ENERGY 8.5%
Oil & Gas
Production 1.3% 78,800 Triton Energy Corp. ..................... 4,521,150
----------
Oil Companies 6.2% 79,800 Amoco Corp. ............................. 5,735,625
40,000 Mobil Corp. ............................. 4,480,000
100,000 Repsol SA (ADR) ......................... 3,287,500
51,000 Royal Dutch Petroleum Co. (New York shares) 7,197,375
----------
20,700,500
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oil/Gas
Transmission 1.0% 85,000 Enron Corp. ............................. 3,240,625
----------
TRANSPORTATION 2.5%
Airlines 1.2% 55,000 AMR Corp.* .............................. 4,083,750
----------
Railroads 1.3% 60,000 Consolidated Rail Corp. ................. 4,200,000
----------
UTILITIES 3.5%
Electric
Utilities 10,000 CILCORP, Inc. ........................... 423,750
20,000 CMS Energy Corp. ....................... 597,500
43,700 Centrais Eletricas Brasileiras
S/A (ADR)* (a)........................ 589,950
6,800 Central Costanera SA (ADR)............... 210,800
100,000 Houston Industries Inc. ................ 2,425,000
126,750 Iberdrola SA ............................ 1,159,872
30,000 Illinova Corp. .......................... 900,000
50,000 National Power PLC....................... 349,205
100,000 PowerGen PLC ............................ 826,595
79,000 Public Service Co. of New Mexico*........ 1,392,375
50,000 Scottish Power PLC....................... 287,444
30,000 TNP Enterprises Inc. .................... 562,500
60,000 Unicom Corp. ............................ 1,965,000
----------
11,689,991
-----------
- --------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $274,581,998) 313,143,976
-----------
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $297,392,731) (b) ............... 335,975,227
===========
- --------------------------------------------------------------------------------------------------------------
<FN>
* Non-income producing security.
(a) Securities valued in good faith by the Valuation Committee of the Trustees.
The cost and market value of these securities at December 31, 1995 aggregated
$1,466,894 and $1,487,950 (.44% of net assets), respectively.
(b) At December 31, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $297,392,731 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of market value over tax cost .......................................... $ 45,011,124
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over market value .......................................... (6,428,628)
------------
Net unrealized appreciation ......................................................... $ 38,582,496
============
- --------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments),
for the year ended December 31, 1995, aggregated $332,871,804 and $334,755,688,
respectively.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $297,392,731) (Note A)...... $335,975,227
Cash................................................................ 3,743
Receivables:
Investments sold............................................ 1,375,062
Dividends and interest...................................... 364,657
Portfolio shares sold....................................... 362,505
------------
Total assets........................................ 338,081,194
LIABILITIES
Payables:
Portfolio shares redeemed ................................. $216,110
Accrued management fee (Note B)............................. 132,445
Other accrued expenses (Note B)............................. 64,159
--------
Total liabilities .................................. 412,714
------------
Net assets, at market value ........................................ $337,668,480
============
NET ASSETS
Net assets consist of:
Undistributed net investment income......................... $ 1,250,850
Net unrealized appreciation on:
Investments......................................... 38,582,496
Foreign currency related transactions............... 21
Accumulated net realized gain............................... 28,441,999
Paid-in capital............................................. 269,393,114
-------------
Net assets, at market value ........................................ $ 337,668,480
=============
NET ASSET VALUE, offering and redemption price per share
($337,668,480/22,392,030 outstanding shares of beneficial
interest, no par value, unlimited number
of shares authorized)....................................... $15.08
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of
$85,921)........................................ $ 4,002,539
Interest............................................ 742,001
-----------
4,744,540
Expenses (Note A):
Management fee (Note B)............................. $ 1,383,919
Accounting fees (Note B)............................ 73,583
Trustees' fees (Note B)............................. 18,743
Custodian fees...................................... 108,047
Auditing............................................ 30,194
Legal............................................... 16,187
Other............................................... 24,335 1,655,008
----------- -----------
Net investment income....................................... 3,089,532
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments......................................... 28,459,799
Foreign currency related transactions............... (20,393) 28,439,406
------------
Net unrealized appreciation during the period on:
Investments......................................... 40,611,076
Foreign currency related transactions .............. 4,421 40,615,497
----------- -----------
Net gain on investment transactions......................... 69,054,903
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $72,144,435
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- -----------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income....................................... $ 3,089,532 $ 1,195,374
Net realized gain from investment transactions.............. 28,439,406 8,741,905
Net unrealized appreciation (depreciation) on investment
transactions during the period...................... 40,615,497 (35,951,788)
------------ -------------
Net increase (decrease) in net assets resulting from operations..... 72,144,435 (26,014,509)
------------ -------------
Distributions to shareholders from:
Net investment income ($.11 and $.05 per share, respectively) (2,245,727) (889,382)
------------ -------------
Net realized gain from investment transactions
($.43 and $1.31 per share, respectively)............ (8,804,833) (23,981,060)
------------ -------------
Portfolio share transactions:
Proceeds from shares sold................................... 125,834,281 157,574,508
Net asset value of shares issued to shareholders in
reinvestment of distributions....................... 11,050,560 24,870,442
Cost of shares redeemed .................................... (116,840,991) (131,982,527)
------------ -------------
Net increase in net assets from Portfolio share transactions 20,043,850 50,462,423
------------ -------------
INCREASE (DECREASE) IN NET ASSETS................................... 81,137,725 (422,528)
Net assets at beginning of period .................................. 256,530,755 256,953,283
------------ --------------
Net assets at end of period (including undistributed net
investment income of $1,250,850 and $507,243,
respectively)............................................... $337,668,480 $ 256,530,755
============ ==============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period........................... 20,979,934 17,184,932
------------ --------------
Shares sold................................................. 9,213,682 12,319,350
Shares issued to shareholders in reinvestment of
distributions 896,773 1,905,054
Shares redeemed............................................. (8,698,359) (10,429,402)
------------ --------------
Net increase in Portfolio shares............................ 1,412,096 3,795,002
------------ --------------
Shares outstanding at end of period................................. 22,392,030 20,979,934
============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT)
YEAR ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS)
------------------------------------------------------------------------ 31, TO JUNE 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period........ $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67 $ 7.93 $ 6.00(b)
Income from investment
operations:
Net investment income (a).. .14 .06 .06 .11 .16 .25 .35 .16 .15 .09 .19
Net realized and unrealized
gain (loss) on investment
transactions............. 3.25 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28) (.07) 1.87
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 3.39 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13) .02 2.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income..... (.11) (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09) (.07) (.13)
Net realized gains on
investment transactions. (.43) (1.31) (.27) (.23) -- (.23) -- -- (.39) (.21) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.54) (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48) (.28) (.13)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................... $15.08 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67 $ 7.93
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)............ 28.65 (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88) .26(d) 34.66(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)....... 338 257 257 167 108 45 45 17 10 1 --
Ratio of operating expenses,
net to average net
assets(%)(a).............. .57 .58 .60 .63 .71 .72 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average net
assets(%)................. 1.06 .47 .46 .95 1.49 2.71 3.51 2.17 1.68 2.21(c) 2.95(c)
Portfolio turnover rate(%).. 119.41 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34 38.78(c) 86.22(c)
(a) Portion of expenses
reimbursed (Note B).... $ -- $ -- $ -- $ -- $ -- $ -- $ .01 $ .01 $ .04 $ .20 $ .81
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares
outstanding during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</TABLE>
53
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------
7.0% REPURCHASE AGREEMENT
----------------------------------------------------------------------------------
U.S. $37,648,000 Repurchase Agreement with Donaldson, Lufkin
& Jenrette dated 12/29/95 at 5.85%, to be
repurchased at $37,672,471 on 1/2/96, collateralized
by a $39,769,000 U.S. Treasury Bill, 11/14/96
(Cost $37,648,000)...................................... 37,648,000
----------
----------------------------------------------------------------------------------
0.0% BONDS
----------------------------------------------------------------------------------
DM 350,000 Deutsche Bank AG, 8%, 4/11/00 (Cost $190,295)........... 268,517
----------
----------------------------------------------------------------------------------
3.9% PREFERRED STOCKS
----------------------------------------------------------------------------------
<CAPTION>
Shares
----------------------------------------------------------------------------------
GERMANY 3.4%
15,000 RWE AG (Producer and marketer of petroleum
and chemical products)............................... 4,188,482
92,500 SAP AG (Computer software manufacturer)................. 14,012,216
----------
18,200,698
----------
ITALY 0.5% 1,500,000 Fiat SpA (Multi-industry, automobiles).................. 2,742,749
----------
TOTAL PREFERRED STOCKS (Cost $9,723,236)................ 20,943,447
----------
----------------------------------------------------------------------------------
89.1% COMMON STOCKS
----------------------------------------------------------------------------------
ARGENTINA 0.7%
170,000 YPF S.A. "D" (ADR) (Petroleum company).................. 3,676,250
----------
AUSTRALIA 0.6%
1,556,504 Ampol Exploration Ltd. (Oil and gas exploration company)* 3,401,203
----------
BRAZIL 2.9%
8,578,870 Centrais Eletricas Brasileiras S/A "B" (pfd.)
(Electric utility).................................. 2,321,357
5,086,206 Companhia Cervejaria Brahma (pfd.) (Leading beer
producer and distributor) .......................... 2,093,249
28,110,000 Companhia Vale do Rio Doce (pfd.) (Diverse mining
and industrial complex)............................. 4,627,398
22,000,000 Petroleo Brasileiro S/A (pfd.) (Petroleum company) ..... 1,878,471
65,040,000 Telecomunicacoes Brasileiras S.A. (pfd.)
(Telecommunication services)........................ 3,131,717
2,330,200,000 Usinas Siderurgicas de Minas Gerais S/A (pfd.)
(Non-coated flat products and electrolytic
galvanized products)* .............................. 1,893,984
----------
15,946,176
----------
CANADA 2.4%
160,000 Barrick Gold Corp. (Gold exploration and production
in North and South America)......................... 4,219,007
206,500 Canadian National Railway Co. (Operator of one of
Canada's two principal railroads)*.................. 3,097,500
203,043 Canadian Pacific Ltd. (Ord.) (Transportation and
natural resource conglomerate)...................... 3,699,457
200,000 Hemlo Gold Mines, Inc. (Large gold producer, with
single mine in Ontario; active exploration
company)............................................ 1,904,413
----------
12,920,377
----------
DENMARK 0.8% 85,000 Unidanmark A/S "A" (Bank holding company) 4,212,471
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINLAND 1.5%
116,000 Nokia AB Oy "A" (Leading manufacturer of
cellular telephones) ................................ 4,482,525
247,000 Outokumpu Oy "A" (Metals and minerals).................. 3,920,139
----------
8,402,664
----------
FRANCE 6.9%
55,000 AXA SA (Insurance group providing insurance, finance
and real estate services)............................ 3,710,898
9,300 Carrefour (Hypermarket and food retailing).............. 5,649,213
36,800 Compagnie Bancaire SA (Bank)............................ 4,123,165
12,000 LVMH Moet-Hennessy Louis Vuitton SA (Producer of
wines, spirits and luxury products).................. 2,502,556
88,000 Michelin "B" (Leading tire manufacturer)................ 3,513,883
20,000 Societe Generale (Bank)................................. 2,473,932
50,780 Societe Nationale Elf Aquitaine (Petroleum company)..... 3,745,946
15,996 Societe Nationale Elf Aquitaine (ADR) .................. 587,853
72,508 Total SA "B" (International oil and gas exploration,
development and production).......................... 4,899,590
16,000 Union des Assurances Federales SA (Insurance group) .... 1,913,719
95,523 Valeo SA (Automobile and truck components
manufacturer) ....................................... 4,429,486
----------
37,550,241
----------
GERMANY 4.3%
86,980 Deutsche Bank AG (Bank) ................................ 4,127,072
14,860 Mannesmann AG (Bearer) (Diversified construction
and technology company).............................. 4,737,565
69,000 Schering AG (Pharmaceutical and chemical producer)...... 4,577,361
3,027 Siemens AG (Bearer) (Manufacturer of electrical and
electronic equipment) ............................... 1,658,775
74,200 VEBA AG (Electric utility, distributor of oil and
chemicals)........................................... 3,154,471
12,000 Viag AG (Provider of electrical power and natural gas
services, aluminum products, chemicals, ceramics
and glass)........................................... 4,816,754
----------
23,071,998
----------
HONG KONG 4.3%
3,000,000 First Pacific Co., Ltd. (International management and
investment company).................................. 3,317,168
209,787 HSBC Holdings Ltd. (Bank)............................... 3,174,275
2,700,159 Hong Kong & China Gas Co., Ltd. (Gas utility)........... 4,347,492
1,182,000 Hutchison Whampoa, Ltd. (Container terminal and real
estate company)...................................... 7,184,481
1,510,000 Television Broadcasts, Ltd. (Television broadcasting)... 5,379,955
----------
23,403,371
----------
INDONESIA 1.6%
370,000 HM Sampoerna (Foreign registered) (Tobacco company)..... 3,851,301
200,000 Indocement Tunggal (Foreign registered) (Cement
producer) ........................................... 671,332
75,400 Indonesia Satellite Corp. (ADR) (International
telecommunication services).......................... 2,752,100
402,000 Kalbe Farma (Foreign registered) (Pharmaceutical
producer and distributor)* .......................... 1,362,563
----------
8,637,296
----------
Italy 2.4%
65,000 Luxottica Group SpA (ADR) (Manufacturer and marketer
of eyeglass frames and eyeglasses)................... 3,802,500
4,210,000 Telecom Italia Mobile SpA (Cellular
telecommunication services)*......................... 7,419,262
1,130,000 Telecom Italia SpA (Telecommunication services)......... 1,759,836
----------
12,981,598
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
JAPAN 25.6%
140,000 Bridgestone Corp. (Leading automobile tire manufacturer)..... 2,222,652
508,000 Canon Inc. (Leading producer of visual image and
information equipment)..................................... 9,196,128
510 DDI Corp. (Long distance telephone and cellular operator).... 3,949,661
825 East Japan Railway Co. (Railway operator).................... 4,009,196
705,000 Fujitsu Ltd. (Leading manufacturer of computers)............. 7,848,499
190,000 Hitachi Construction Machinery Co., Ltd.
(Leading maker of hydraulic shovels)....................... 2,299,129
497,000 Hitachi Ltd. (General electronics manufacturer).............. 5,003,679
465,000 Hitachi Metals, Ltd. (Major producer of high-quality
specialty steels).......................................... 5,806,873
88,000 Horipro Inc. (Growing entertainment production company)...... 1,175,605
77,000 Ito-Yokado Co., Ltd. (Leading supermarket operator).......... 4,740,755
465,000 Itochu Corp. (Leading general trading company)............... 3,128,509
58,000 Jusco Co., Ltd. (Major supermarket operator)................. 1,510,358
830,000 Kawasaki Steel Corp. (Major integrated steelmaker)........... 2,892,546
44,000 Keyence Corp. (Specialized manufacturer of sensors).......... 5,068,732
103,000 Kyocera Corp. (Leading ceramic package manufacturer)......... 7,647,725
37,000 Mabuchi Motor Co., Ltd. (Manufacturer of DC motors).......... 2,299,516
280,000 Matsushita Electric Works, Inc. (Leading maker of
building materials and lighting equipment)................. 2,954,501
520,000 Matsushita Electrical Industrial Co., Ltd. (Consumer
electronic products manufacturer).......................... 8,456,922
500,000 Mitsubishi Heavy Industries, Ltd. (Diversified heavy
machinery manufacturer and leading shipbuilder)............ 3,983,543
380,000 NGK Spark Plug Co., Ltd. (Leading manufacturer of
automotive spark plugs).................................... 4,782,188
540,000 NSK Ltd. (Leading manufacturer of bearings and other
machinery parts)........................................... 3,920,619
33,000 Nichiei Co., Ltd. (Finance company for small and
medium-sized firms)........................................ 2,459,826
50,000 Nippon Electric Glass Co., Ltd. (Leading producer of
cathode-ray tube glass).................................... 948,693
945,000 Nisshin Steel Co., Ltd. (Blast furnace steelmaker)........... 3,814,763
390,000 Ricoh Co., Ltd. (Leading maker of copiers and
information equipment)..................................... 4,266,215
110,000 SMC Corp. (Leading maker of pneumatic equipment)............. 7,954,501
44,000 Seven-Eleven Japan Co., Ltd. (Leading convenience
store operator)............................................ 3,100,871
250,000 ShinMaywa Industries, Ltd. (Leading maker of dump
trucks and other specialty vehicles)....................... 2,061,955
530,000 Sumitomo Corp. (Leading general trading company, with
offices, subsidiaries and affiliates throughout the world). 5,387,222
1,710,000 Sumitomo Metal Industries, Ltd. (Leading integrated
crude steel producer)*..................................... 5,181,316
75,000 THK Co., Ltd. (Manufacturer of linear motion systems
for industrial machinery).................................. 2,134,559
145,000 Takeda Chemical Industries, Ltd. (Leading
pharmaceutical manufacturer).............................. 2,386,254
720,000 Toshiba Corp. (General electronics manufacturer)............ 5,638,722
-----------
138,232,233
-----------
KOREA 2.2%
186,000 Korea Electric Power Corp. (ADR) (New) (Electric utility)... 4,929,000
7,870 Pohang Iron & Steel Co., Ltd. (Leading producer
of steel products for construction and shipbuilding
industries) (b)........................................... 570,931
93,400 Pohang Iron & Steel Co., Ltd. (ADR)......................... 2,043,125
3,376 Samsung Electronics Co., Ltd. (GDS) (Voting)................ 324,096
664 Samsung Electronics Co., Ltd. (GDS) (Voting) (New (a))...... 61,752
873 Samsung Electronics Co., Ltd. (GDS) (Voting) (New (a))...... 81,189
56,650 Samsung Electronics Co., Ltd. (GDS) (Non-voting)
(Major electronics manufacturer).......................... 3,399,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
11,148 Samsung Electronics Co., Ltd. (GDS) (Non-voting) (New (a))........ 657,732
-----------
12,066,825
-----------
MALAYSIA 1.3%
445,000 Malayan Banking Bhd. (Leading banking and financial
services group)................................................. 3,749,655
2,100,000 Renong Berhad (Holding company involved in engineering and
construction, financial services, telecommunication and
information technology)......................................... 3,109,029
-----------
6,858,684
-----------
NETHERLANDS 5.4%
105,000 AEGON Insurance Group NV (Insurance company)...................... 4,653,268
24,000 Akzo-Nobel N.V. (Chemical producer)............................... 2,780,351
204,870 Elsevier NV (International publisher of scientific,
professional, business, and consumer information books)......... 2,736,545
46,137 Getronics N.V. (Computer and software distributor)................ 2,159,837
43,750 Heineken Holdings N.V. "A" (Brewery).............................. 7,181,980
85,000 Koninklijke PTT Nederland (Telecommunication services)............ 3,093,128
114,000 Philips Electronics N.V. (Leading manufacturer of
electrical equipment)........................................... 4,127,083
26,935 Wolters Kluwer CVA (Publisher).................................... 2,552,108
-----------
29,284,300
-----------
NORWAY 0.7%
271,889 Saga Petroleum AS "A" (Oil and gas exploration
and production)................................................. 3,632,035
-----------
PHILIPPINES 0.5%
4,008,000 C&P Homes, Inc. (Home construction company)*...................... 2,941,456
-----------
PORTUGAL 0.3%
30,192 Jeronimo Martins (Food producer and retailer)..................... 1,677,446
-----------
SPAIN 4.2%
41,140 Acerinox, S.A (Stainless steel producer).......................... 4,161,482
400,000 Autopistas Concesionaria Espanol SA (Motorway
builder and operator)........................................... 4,550,701
22,000 Banco Popular Espanol, S.A. (Retail bank)......................... 4,057,213
160,000 Compania Telefonica Nacional de Espana S.A.
(Telecommunication services).................................... 2,215,993
133,000 Repsol SA (Integrated oil company)................................ 4,358,409
525,000 Union Electrica Fenosa SA (Producer and distributor
of electrical energy)........................................... 3,159,522
-----------
22,503,320
-----------
SWEDEN 5.4%
99,000 Astra AB "A" (Free) (Pharmaceutical company)...................... 3,952,840
600 Astra AB "B" (Free)............................................... 23,776
101,000 Autoliv AB (Free) (Manufacturer of safety airbags for
automobiles).................................................... 5,904,475
356,400 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment)................... 6,949,800
57,000 Mo och Domsjo AB "B" (Free) (Manufacturer of newsprint,
paperboard, and various sawn timber products)................... 2,430,466
144,000 S.K.F. AB "B" (Free)* (Manufacturer of roller bearings)........... 2,755,462
270,000 Skandia Foersaekrings AB (Free) (Financial conglomerate).......... 7,302,245
-----------
29,319,064
-----------
SWITZERLAND 4.3%
5,180 Brown, Boveri & Cie. AG (Bearer) (Manufacturer of
electrical equipment)........................................... 6,021,949
5 Brown, Boveri & Cie. AG (Registered).............................. 1,132
3,600 Ciba-Geigy AG (Bearer) (Pharmaceutical company)................... 3,154,470
2,514 Nestle SA (Registered) (Food manufacturer)........................ 2,783,034
1,710 SGS Holdings SA (Bearer) (Trade inspection company)............... 3,397,302
5,000 Sandoz Ltd. AG (Registered) (Pharmaceutical company).............. 4,580,749
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
8,054 Swiss Bank Corp. (Bearer) (Universal bank).................. 3,291,054
------------
23,229,690
------------
TAIWAN 0.5%
819,000 Taiwan Semiconductor Manufacturing Co.
(Manufacturer of integrated circuits and other
semiconductor devices).................................... 2,566,222
------------
THAILAND 1.4%
175,000 Bangkok Bank Ltd. (Foreign registered) (Leading
commercial bank, providing full range of financial
services)................................................ 2,125,844
525,220 Thai Farmers Bank (Foreign registered) (Commercial bank)... 5,295,986
------------
7,421,830
------------
UNITED KINGDOM 8.9%
725,000 Argyll Group PLC (Owner and operator of retail food
supermarkets)............................................ 3,829,995
600,017 British Petroleum PLC (Major integrated world oil company). 5,010,987
236,000 Carlton Communications PLC (Television post
production products and services)........................ 3,540,345
143,938 De La Rue PLC (Printer of commercial banknotes and
securities).............................................. 1,455,921
655,706 Lasmo PLC (Oil production and exploration)................. 1,772,718
170,000 Midlands Electricity PLC (Electric companies).............. 2,007,446
137,530 National Grid Group PLC (Operator of electric
transmission system in England and Wales)................ 425,238
511,110 PowerGen PLC (Electric utility)............................ 4,224,811
307,362 RTZ Corp. PLC (Mining and finance company)................. 4,469,998
654,200 Reuters Holdings PLC (International news agency)........... 5,992,053
598,345 SmithKline Beecham PLC "A" (Manufacturer of ethical
drugs and healthcare products)........................... 6,600,720
130,000 Thorn EMI PLC (Amusement and recreational services)........ 3,063,141
300,000 Zeneca Group PLC (Manufacturing and marketing of
pharmaceutical and agrochemical products and
specialty chemicals)..................................... 5,805,588
------------
48,198,961
------------
TOTAL COMMON STOCKS (Cost $421,638,324).................... 482,135,711
------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $469,199,855) (c).................................. 540,995,675
============
- ------------------------------------------------------------------------------------------------------------------------
* Non-income producing security.
(a) New shares issued during 1995, eligible for a pro rata share of 1995 dividends.
(b) Securities valued in good faith by the Valuation Committee of the Trustees. The cost and
market value of these securities at December 31, 1995 aggregated $736,139 and $570,931
(.10% of net assets), respectively.
(c) At December 31, 1995, the net unrealized appreciation on investments based on cost for
federal income tax purposes of $469,199,855 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of market value over tax cost............................................................... $ 89,136,201
Aggregate gross unrealized depreciation for all investments in which there is an excess of
tax cost over market value.................................................................. (17,340,381)
------------
Net unrealized appreciation................................................................... $ 71,795,820
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
58
<PAGE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------
At December 31, 1995, the International Portfolio had a net tax basis capital
loss carryforward of approximately $4,914,971, which may be applied against
any realized net taxable capital gains of each succeeding year until fully
utilized or until December 31, 2003, whichever occurs first.
- -----------------------------------------------------------------------------
From November 1, 1995 through December 31, 1995, the International Portfolio
incurred approximately $3,652,097 of net realized capital losses which the
Portfolio intends to elect to defer and treat as arising in the fiscal year
ended December 31, 1996.
- -----------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments),
for the year ended December 31, 1995, aggregated $246,433,640 and $211,051,347,
respectively.
- -----------------------------------------------------------------------------
Sector breakdown of the International Portfolio's equity securities is noted
on the Portfolio Summary.
- -----------------------------------------------------------------------------
<TABLE>
Transactions in written call option contracts during the year ended
December 31, 1995 were:
<CAPTION>
PREMIUMS
PRINCIPAL AMOUNT RECEIVED ($)
-----------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994..................... - -
Contracts written.................................. JPY 3,752,000,000 1,200,836
Contracts closed................................... JPY (3,752,000,000) (1,200,836)
-----------------------------------------
Outstanding at December 31, 1995..................... - -
============= =========
</TABLE>
- -----------------------------------------------------------------------------
<TABLE>
COMMITMENTS:
As of December 31, 1995, the International Portfolio entered into the following
forward foreign currency exchange contracts resulting in net unrealized appreciation
of $7,747,842.
<CAPTION>
NET UNREALIZED
APPRECIATION/
SETTLEMENT DEPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
- --------------------------- -------------------------- ----------- ---------------
<S> <C> <C> <C>
Japanese Yen 1,434,720,000 U.S. Dollars 17,133,031 4/15/96 3,033,949
Japanese Yen 2,705,000,000 U.S. Dollars 27,617,540 5/17/96 921,852
Japanese Yen 2,206,000,000 U.S. Dollars 25,723,533 7/12/96 3,792,041
-----------
7,747,842
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
<TABLE>
- -----------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $469,199,855) (Note A)......... $ 540,995,675
Cash................................................................... 788,449
Unrealized appreciation on forward currency exchange contracts (Note A) 7,747,842
Receivables:
Investments sold..................................................... 2,062,098
Portfolio shares sold................................................ 1,122,116
Foreign taxes recoverable ........................................... 795,897
Dividends and interest .............................................. 279,722
-------------
Total assets...................................................... 553,791,799
LIABILITIES
Payables:
Investments purchased ............................................... $3,256,983
Portfolio shares redeemed ........................................... 1,583,122
Accrued management fee (Note B)...................................... 390,027
Other accrued expenses (Note B)...................................... 184,759
Payable on closed forward currency exchange contracts (Note A)...... 174,415
----------
Total liabilities................................................. 5,589,306
-------------
Net assets, at market value $ 548,202,493
=============
NET ASSETS
Net assets consist of:
Undistributed net investment income................................. $ 5,598,231
Net unrealized appreciation on:
Investments ..................................................... 71,795,820
Foreign currency related transactions............................ 7,763,610
Accumulated net realized loss....................................... (8,741,483)
Paid-in capital..................................................... 471,786,315
-------------
Net assets, at market value............................................ $ 548,202,493
=============
NET ASSET VALUE, offering and redemption price per share
($548,202,493/46,398,169 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized)...... $11.82
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
- -----------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $1,092,029).......... $ 7,980,980
Interest......................................................... 2,125,283
-----------
10,106,263
Expenses (Note A):
Management fee (Note B).......................................... $ 4,357,541
Accounting fees (Note B)......................................... 277,867
Trustees' fees (Note B) ......................................... 23,623
Custodian fees .................................................. 581,990
Auditing ........................................................ 62,767
Legal ........................................................... 33,163
Other ........................................................... 55,614 5,392,565
---------- -----------
Net investment income .............................................. 4,713,698
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments...................................................... (7,286,434)
Options.......................................................... 736,708
Foreign currency related transactions............................ (1,376,862) (7,926,588)
----------
Net unrealized appreciation during the period on:
Investments ..................................................... 46,850,491
Foreign currency related transactions............................ 9,269,441 56,119,932
---------- -----------
Net gain on investment transactions................................. 48,193,344
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $52,907,042
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
- -------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income........................................... $ 4,713,698 $ 2,210,527
Net realized gain (loss) from investment transactions........... (7,926,588) 3,671,002
Net unrealized appreciation (depreciation) on investment
transactions during the period................................ 56,119,932 (14,866,907)
------------ ------------
Net increase (decrease) in net assets resulting from
operations...................................................... 52,907,042 (8,985,378)
------------ ------------
Distributions to shareholders from:
Net investment income ($.01 and $.07 per share, respectively)... (572,293) (1,958,854)
------------ ------------
Net realized gain from investment transactions ($.04 per share). (1,628,833) -
------------ ------------
Portfolio share transactions:
Proceeds from shares sold....................................... 383,866,201 313,276,872
Net asset value of shares issued to shareholders in
reinvestment of distributions................................. 2,201,126 1,958,854
Cost of shares redeemed......................................... (360,607,349) (70,378,561)
------------ ------------
Net increase in net assets from Portfolio share transactions...... 25,459,978 244,857,165
------------ ------------
INCREASE IN NET ASSETS............................................ 76,165,894 233,912,933
Net assets at beginning of period................................. 472,036,599 238,123,666
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed
net investment income of $5,598,231 and $722,015,
respectively)................................................... $548,202,493 $472,036,599
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period......................... 44,139,826 21,943,195
------------ ------------
Shares sold..................................................... 34,890,301 28,463,330
Shares issued to shareholders in reinvestment of distributions.. 216,220 177,916
Shares redeemed................................................. (32,848,178) (6,444,615)
------------ ------------
Net increase in Portfolio shares................................ 2,258,343 22,196,631
------------ ------------
Shares outstanding at end of period............................... 46,398,169 44,139,826
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 1, 1987
(COMMENCEMENT
YEARS ENDED DECEMBER 31, OF OPERATIONS)
------------------------------------------------------------------------- TO DECEMBER 31,
1995(E) 1994(E) 1993(E) 1992(E) 1991(E) 1990(E) 1989(E) 1988(E) 1987
------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......... $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a)... .11 .06 .09 .10 .12 .25 .10 .09 --
Net realized and unrealized
gain (loss) on investment
transactions.............. 1.07 (.15) 2.90 (.36) .77 (.89) 2.22(f) .79 (.64)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. 1.18 (.09) 2.99 (.26) .89 (.64) 2.32 .88 (.64)
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income.. (.01) (.07) (.14) (.09) (.20) (.04) -- -- --
In excess of net investment
income.................... -- -- (.12) -- -- -- -- -- --
From net realized gains on
investment transactions... (.04) -- -- -- -- -- -- -- (.10)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.05) (.07) (.26) (.09) (.20) (.04) -- -- (.10)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period...................... $11.82 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%).............. 11.11 (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73 (10.64)(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................ 548 472 238 65 41 35 17 3 2
Ratio of operating expenses,
net to average net
assets(%)(a)................ 1.08 1.08 1.20 1.31 1.39 1.38 1.50 1.50 1.50(c)
Ratio of net investment income
to average net assets(%).... .95 .57 .91 1.23 1.43 2.89 1.30 1.59 .02(c)
Portfolio turnover rate(%).... 45.76 33.52 20.36 34.42 45.01 26.67 57.69 110.42 146.08(c)
(a) Portion of expenses
reimbursed (Note B)...... $ -- $ -- $ -- $ -- $ -- $ -- $ .02 $ .14 $ .07
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares
outstanding during the period method.
(f) Includes provision for federal income tax of $.03 per share.
</TABLE>
63
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. Its shares of beneficial interest are divided into six separate
diversified series, called "Portfolios." The Portfolios are comprised of the
Money Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, and International Portfolio.
<TABLE>
The Fund is intended to be the funding vehicle for variable annuity
contracts and variable life insurance policies to be offered by the separate
accounts of certain life insurance companies ("Participating Insurance
Companies"). As of December 31, 1995, ownership breakdown of the Portfolios by
each Participating Insurance Company is as follows:
<CAPTION>
PORTFOLIOS
-------------------------------------------------------------------------------------
GROWTH
PARTICIPATING MONEY AND CAPITAL INTERNA-
INSURANCE COMPANIES MARKET BOND BALANCED INCOME GROWTH TIONAL
- ----------------------------------- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Life Insurance & Annuity Co. .... --% --% --% --% --% 46.5%
AUSA Life Insurance Co. ............... -- -- -- -- -- 1.2
Banner Life Insurance Co. ............. 0.7 1.3 7.3 2.2 1.7 0.6
Charter National Life Insurance Co. ... 55.9 32.5 73.5 87.4 27.5 15.2
Companion Life Insurance Co.
of New York ......................... -- 0.1 -- -- -- --
Fortis Benefits Insurance Co. ......... -- -- -- -- -- 0.3
Intramerica Life Insurance Co. ........ 5.3 3.0 5.2 9.2 2.4 1.5
Lincoln Benefit Life Co. .............. -- 2.2 3.6 -- -- --
Mutual of America Life Insurance Co. .. -- 55.1 -- -- 62.9 24.4
Paragon Life Insurance Co. ............ -- 0.1 0.4 -- 0.1 0.1
Providentmutual Life and Annuity Co.
of America .......................... -- 5.2 -- 1.2 -- 0.1
Safeco Life Insurance Co. ............. -- -- 10.0 -- -- 2.6
Security First Life Insurance Co. ..... -- -- -- -- -- 0.1
Union Central Life Insurance Co. ...... 37.7 -- -- -- 5.0 7.2
United Companies Life Insurance Co. ... 0.1 -- -- -- -- --
United of Omaha Life Insurance Co. .... 0.3 0.5 -- -- -- 0.2
USAA Life Insurance Co. ............... -- -- -- -- 0.4 --
---------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
The policies described below are followed consistently by the Fund in
the preparation of the financial statements for its Portfolios in conformity
with generally accepted accounting principles.
SECURITY VALUATION. The Money Market Portfolio values all securities
utilizing the amortized cost method permitted in accordance with Rule 2a-7
under the Investment Company Act of 1940, as amended, and pursuant to which the
Portfolio must adhere to certain conditions. Under this method, which does not
take into account unrealized gains or losses on securities, an instrument is
initially valued at its cost and thereafter assumes a constant
accretion/amortization to maturity of any discount/premium.
Securities in each of the remaining Portfolios are valued in the following
manner:
Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation
is used. Securities quoted on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are
no such sales, the value is the high or "inside" bid quotation. Securities
which are not quoted on the
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NASDAQ System but are traded in another over-the-counter market are valued
at the most recent sale price on such market. If no sale occurred, the security
is then valued at the calculated mean between the most recent bid and asked
quotations. If there are no such bid and asked quotations, the most recent
bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty
days are valued by pricing agents approved by the officers of the Fund, which
quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Trustees.
OPTIONS. An option contract is a contract in which the writer of the
option grants the buyer of the option the right to purchase from (call option),
or sell to (put option), the writer a designated instrument at a specified
price within a specified period of time. Certain options, including options on
indices, will require cash settlement by the Fund if the option is exercised.
During the period, the International Portfolio purchased put options on
currencies and wrote call options on currencies as a hedge against potential
adverse price movements in the value of portfolio assets.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency transactions are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, other assets and
liabilities at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend
and interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions.
The Portfolios do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract (forward contract) is a commitment to purchase or sell a
foreign currency at the settlement date at a negotiated rate. During the
period, the non-money market Portfolios utilized forward contracts as a hedge
in connection with portfolio purchases and sales of securities denominated in
foreign currencies and the Bond Portfolio, Balanced Portfolio, and the
International Portfolio utilized forward contracts as a hedge against changes
in exchange rates relating to foreign currency denominated assets.
Forward contracts are valued at the prevailing forward exchange rate of
the underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge the Fund gives up the
opportunity to profit from favorable exchange rate movements during the term of
the contract.
65
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund on behalf of each Portfolio may enter
into repurchase agreements with U.S. and foreign banks and broker/dealers
whereby the Fund, through its custodian, receives delivery of the underlying
securities, the amount of which at the time of purchase and each subsequent
business day is required to be maintained at such a level that the market
value, depending on the maturity of the repurchase agreement and the underlying
collateral, is equal to at least 100.5% of the resale price.
FEDERAL INCOME TAXES. Each Portfolio is treated as a single corporate
taxpayer as provided for in the Internal Revenue Code of 1986, as amended. It
is each Portfolio's policy to comply with the requirements of the Internal
Revenue Code which are applicable to regulated investment companies and to
distribute all of its investment company taxable income to the separate
accounts of the Participating Insurance Companies which hold its shares.
Accordingly, the Portfolios paid no federal income taxes and no provision for
federal income taxes was required.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Money
Market Portfolio is declared as a dividend to shareholders of record as of the
close of business each day and is paid to shareholders monthly. Dividends
from the Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, and
the Capital Growth Portfolio are declared and paid quarterly in April, July,
October and January. All of the net investment income of the International
Portfolio normally will be declared and distributed as a dividend annually.
During any particular year, net realized gains from investment transactions for
each Portfolio, in excess of available capital loss carryforwards, would be
taxable to the Portfolio if not distributed and, therefore, will be distributed
to the Participating Insurance Companies.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
The differences primarily relate to investments in forward contracts, passive
foreign investment companies, post October loss deferral, non-taxable
distributions, and certain securities sold at a loss. As a result, net
investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Portfolios may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of each Portfolio.
The Portfolios use the specific identification method for determining realized
gain or loss on investments for both financial and federal income tax reporting
purposes.
EXPENSES. Each Portfolio is charged for those expenses which are directly
attributable to it, such as management fees and custodian fees, while other
expenses (reports to shareholders, legal and audit fees) are allocated based on
relative net asset value among the Portfolios.
OTHER. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All original
issue discounts are accreted for both tax and financial reporting purposes.
B. RELATED PARTIES
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Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens and Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser
a fee, based on average daily net assets, equal to an annual rate of 0.37%
for the Money Market Portfolio, 0.475% for the Bond Portfolio, 0.475% for the
Balanced Portfolio, 0.475% for the Growth and Income Portfolio, 0.475% for
the Capital Growth Portfolio, and 0.875% for the International Portfolio.
The Trustees authorized the Fund on behalf of each Portfolio to pay Scudder
Fund Accounting Corp., a subsidiary of the Adviser, for determining the daily
net asset value per share and maintaining the portfolio and general accounting
records of the Fund.
Related fees for such services are detailed in each Portfolio's statement of
operations.
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NOTES TO FINANCIAL STATEMENTS
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For a period of five years from the date of execution of a Participation
Agreement with the Fund, and from year to year thereafter as agreed by the Fund
and the Participating Insurance Companies, each of the Participating Insurance
Companies has agreed to reimburse the Fund to the extent that the annual
operating expenses of any Portfolio of the Fund, other than the International
Portfolio, exceed three-quarters of one percent (0.75 of 1%) of that
Portfolio's average annual net assets. The Participating Insurance Companies
have agreed to reimburse the Fund to the extent that such expenses of the
International Portfolio exceed one and one-half percent (1.50 of 1%) of the
Portfolio's average annual net assets. The Adviser may advance some or all of
such reimbursement to the Fund prior to receiving payment therefore from a
Participating Insurance Company, but it is under no obligation to do so. If the
Adviser does advance such reimbursement to the Fund and does not receive
payment therefore, it will be entitled to be repaid such amounts by the Fund.
In addition to the reimbursement by Participating Insurance Companies noted
above, until April 30, 1996, the Adviser has agreed to waive part or all of its
fees for the Growth and Income Portfolio to the extent that the Portfolio's
expenses will be maintained at 0.75%.
The Fund pays each Trustee not affiliated with the Adviser and not a
Trustee of other Scudder affiliated funds $12,000 annually plus specified
amounts for attended board and committee meetings. The Fund pays
each Trustee not affiliated with the Adviser and who is a Trustee of other
Scudder affiliated funds $7,500 annually plus specified amounts for attended
board and committee meetings. Allocated Trustees' fees for each Portfolio for
the year ended December 31, 1995 are detailed in each Portfolio's statement of
operations.
C. LINE OF CREDIT
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The International Portfolio and several other Funds ("The Participants")
share in a $500 million revolving credit facility for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. The Participants are charged an
annual commitment fee which is allocated among each of the Participants.
Interest is calculated based on the market rates at the time of the borrowing.
The International Portfolio may borrow up to a maximum of 25 percent of its net
assets under the agreement. In addition, the International Portfolio also
maintains an uncommitted line of credit.
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SCUDDER VARIABLE LIFE INVESTMENT FUND
REPORT OF INDEPENDENT ACCOUNTANTS
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TO THE TRUSTEES AND SHAREHOLDERS OF SCUDDER VARIABLE LIFE INVESTMENT FUND:
We have audited the accompanying statements of assets and liabilities of
Scudder Variable Life Investment Fund (comprised of the six Portfolios
identified in Note A), including the investment portfolios, as of December 31,
1995, and the related statements of operations, the statements of changes in
net assets, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Scudder Variable Life Investment Fund (comprised of the six
Portfolios identified in Note A) as of December 31, 1995, the results of their
operations, the changes in their net assets, and their financial highlights for
each of the periods indicated therein in conformity with generally accepted
accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
January 29, 1996
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TAX INFORMATION
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Pursuant to section 852 of the Internal Revenue Code, the Balanced Portfolio,
Capital Growth Portfolio, and Growth and Income Portfolio designate $812,877,
$13,576,749, and $587,060, respectively, as capital gain dividends for the
year ended December 31, 1995.
Pursuant to section 854 of the Internal Revenue Code, the percentages of
ordinary income dividends paid in calendar year 1995 which qualify for the
dividends received deduction for corporations are as follows: Balanced
Portfolio 34.09%, Capital Growth Portfolio 59.53%, and Growth and Income
Portfolio 100%.
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Celebrating Over 75 Years of Serving Investors
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Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 37 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped Scudder become one
of the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
An investment in the Money Market Portfolio is neither insured nor
guaranteed by the United States Government and there can be no assurance that
the Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
