[NEF Logo]
Class Y shares of:
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND VALUE FUND
Prospectus and Application -- May 1, 1996
New England Capital Growth Fund, New England Balanced Fund, New
England International Equity Fund, New England Star Advisers Fund and
New England Value Fund, series of New England Funds Trust I, and New
England Growth Opportunities Fund, a series of New England Funds
Trust II, are separate mutual funds (the "Funds" and each a "Fund").
New England Funds Trust I and New England Funds Trust II are referred
to in this prospectus as the "Trusts."
The Funds offer four classes of shares: Class Y (for qualified
institutional investors) and Classes A, B and C (for other
investors). This prospectus sets forth information investors should
know before investing in Class Y shares. Please read it carefully
and keep it for future reference. A Statement of Additional
Information in two parts (the "Statement") about the Funds dated May
1, 1996 has been filed with the Securities and Exchange Commission
(the "SEC") and is available free of charge. Write to New England
Funds, L.P. (the "Distributor"), SAI Fulfillment Desk, 399 Boylston
Street, Boston, Massachusetts 02116 or call toll free at 1-800-225-
5478. The Statement contains more detailed information about the
Funds and is incorporated into this prospectus by reference. Class
A, Class B and Class C shares of the Funds are described in a
separate prospectus. To obtain more information about Class A, Class
B and Class C shares, please call the Distributor toll-free at 1-800-
225-5478.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
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.
T a b l e O f C o n t e n t s
Page
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees
Financial Highlights
INVESTMENT STRATEGY
Investment Objectives
How the Funds Pursue Their
Objectives
Fund Investments
INVESTMENT RISKS
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment
Ways to Buy Fund Shares
[] By wire transfer
[] By mail
OWNING FUND SHARES
Exchanging Among New England
Funds
Fund Dividend Payments
SELLING FUND SHARES
Ways to Sell Fund Shares
[] By telephone
[] By mail
FUND DETAILS
Determination of Net Asset Value
Income Tax Considerations
Performance Criteria
Additional Facts About the Funds
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest in the
Funds. The following tables summarize your maximum transaction costs
from investing in Class Y shares of the Funds and estimated annual
expenses for the Funds' Class Y shares. The Example on the following
page shows the cumulative expenses attributable to a hypothetical
$1,000 investment in Class Y shares of the Funds for the periods
specified.
Shareholder transaction expenses
All Funds
Class Y
Maximum Initial Sales Charge Imposed on a None
Purchase
Maximum Contingent Deferred Sales Charge None
Annual Fund operating expenses
(as a percentage of average net assets)
New England
International
Equity Fund*
Class Y
Management Fees
(after voluntary fee waiver and expense reduction) 0.18%**
12b-1 Fees None
Other Expenses 0.82%
Total Fund Operating Expenses
(after voluntary fee waiver and expense reduction) 1.00%**
New England New England
Capital Balanced
Growth Fund
Fund
Class Y Class Y
Management Fees 0.75% 0.74%
12b-1 Fees None None
Other Expenses 0.61% 0.37%
Total Fund 1.36% 1.11%
Operating Expenses
New England New England New England
Star Value Growth
Advisers Fund Opportunities
Fund Fund*
Class Y Class Y Class Y
Management Fees 1.05% 0.74% 0.70%
12b-1 Fees None None None
Other Expenses 0.52% 0.38% 0.46%
Total Fund 1.57% 1.12% 1.16%
Operating Expenses
* The information contained in this table and its footnotes for New
England International Equity Fund and New England Growth
Opportunities Fund has been restated to reflect fees and expenses
currently in effect for those Funds.
**Without the voluntary fee waiver and expense reduction by the
Fund's adviser, Management Fees would be 0.68% and Total Fund
Operating Expenses would be 1.50%. These voluntary limitations can
be terminated by the Fund's adviser at any time. See "Fund
Management."
Example
A $1,000 investment in Class Y shares of the Funds would incur the
following dollar amount of transaction costs and operating expenses,
assuming a 5% annual return and redemption at period end. The 5%
return and expenses in the Example should not be considered indicative
of actual or expected Fund performance or expenses, both of which may
be more or less than those shown.
New England New England
Capital Growth Fund Balanced Fund
Class Y Class Y
1 year $14 $11
3 years $43 $35
5 years $74 $61
10 years $164 $135
New England New England
International Star Advisers
Equity Fund Fund
Class Y Class Y
1 year $10 $16
3 years $32 $50
5 years $55 $86
10 years $122 $187
New England New England Growth
Value Fund Opportunities Fund
Class Y Class Y
1 year $11 $12
3 years $36 $37
5 years $62 $64
10 years $136 $141
The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly
if you invest in the Funds. For additional information about the
Funds' fees and other expenses, please see "Fund Management" and
"Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if
you elect to transfer redemption proceeds by wire.
FINANCIAL HIGHLIGHTS
(For a Class Y share of each Fund, except New England Capital Growth
and New England Growth Opportunities Funds, outstanding throughout the
indicated period. In the case of New England Capital Growth and New
England Growth Opportunities Funds which had no Class Y shares
outstanding during 1995, financial highlights are presented for a
Class A, B and C share of each Fund outstanding throughout the
indicated period.)
The Financial Highlights presented on pages 6 through 14 have been
included in financial statements for the Funds. The financial
statements for New England Value Fund, New England Balanced Fund, New
England International Equity Fund, New England Capital Growth Fund and
New England Star Advisers Fund for periods through December 31, 1995
have been examined by Price Waterhouse LLP, independent accountants.
The financial statements for the Growth Opportunities Fund's Class A
shares for the years ended May 31, 1986, 1987 and 1988, the seven
month period ended December 31, 1988 and the years ended December 31,
1989, 1990, 1991, 1992, 1993, 1994 and 1995 and the Fund's Class B
shares for the period September 13, 1993 through December 31, 1993 and
the years ended December 31, 1994 and 1995 have been examined by
Coopers & Lybrand LLP, independent accountants. The Financial
Highlights should be read in conjunction with the financial statements
and the notes thereto incorporated by reference in Part II of the
Statement. Each Fund's annual report contains additional performance
information and is available upon request and without charge.
New England Capital Growth Fund
Class A
Aug. 3
(a)
through
Dec. 31, Year Ended December 31,
1992 1993 1994 1995
Net Asset
Value,
Beginning of
Period $12.50 $14.23 $15.27 $15.02
Income From Investment Operations
Net Investment
Income (Loss) 0.02 0.00 (0.08) (0.11)(e)
Net Gain
(Loss) on
Investments
(both realized
and
unrealized) 1.84 1.12 (0.17) 4.74
Total Income
(Loss) From
Investment
Operations 1.86 1.12 (0.25) 4.63
Less Distributions
Distributions
(from net
investment
income) (0.02) 0.00 0.00 0.00
Distributions
(from net
realized
capital gains) (0.11) (0.08) 0.00 (1.24)
Total
Distributions (0.13) (0.08) 0.00 (1.24)
Net Asset
Value, End of
Period $14.23 $15.27 $15.02 $18.41
Total Return
(%) (c) 14.9 7.9 (1.6) 30.7
Ratios/Supplemental Data
Net Assets,
End of Period
(000) $34,772 $98,735 $95,803 $123,504
Ratio of
Operating
Expenses to
Average Net
Assets (%)(d) 1.00(b) 1.23 1.63 1.61
Ratio of Net
Investment
Income (Loss)
to Average Net
Assets (%) 0.74(b) (0.03) (0.45) (0.67)
Portfolio
Turnover Rate
(%) 15 77 82 69
New England Capital Growth Fund [continued]
Class B Class C
Sept. 13
(a) Year Year
through Ended Ended
Dec. 31, Dec. 31, Dec. 31,
1993 1994 1995 1995 (a)
Net Asset
Value,
Beginning of
Period $14.79 $15.24 $14.89 $14.89
Income From Investment Operations
Net Investment 0.00 (0.08) (0.16)(e) (0.09)(e)
Income (Loss)
Net Gain
(Loss) on
Investments 0.53 (0.27) 4.60 4.52
(both realized
and
unrealized)
Total Income
(Loss) From 0.53 (0.35) 4.44 4.43
Investment
Operations
Less Distributions
Distributions
(from net
investment
income) 0.00 0.00 0.00 0.00
Distributions
(from net
realized
capital gains) (0.08) 0.00 (1.24) (1.24)
Total
Distributions (0.08) 0.00 (1.24) (1.24)
Net Asset
Value, End of
Period $15.24 $14.89 $18.09 $18.08
Total Return
(%) (c) 3.6 (2.3) 29.7 29.7
Ratios/Supplemental Data
Net Assets,
End of Period
(000) $6,748 $15,390 $26,234 $354
Ratio of
Operating
Expenses to
Average Net
Assets (%)(d) 2.29(b) 2.38 2.36 2.36
Ratio of Net
Investment
Income (Loss)
to Average Net
Assets (%) (1.15)(b) (1.20) (1.42) (1.42)
Portfolio
Turnover Rate
(%) 77 82 69 69
(a) The Fund commenced operations on August 3, 1992. Class B shares
were first offered on September 13, 1993. Class C shares were first
offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and contingent
deferred sales charge in the case of Class B shares are not reflected
in total return calculations. Periods of less than one year are not
annualized.
(d) The ratio of operating expenses to average net assets without
giving effect to the voluntary expense limitations in effect from
August 3, 1992 through September 30, 1993 would have been: (%)
Class A Class B
8/3/92 - Year Ended 9/13/93 -
12/31/92 12/31/93 12/31/93
2.20(b) 1.58 2.97(b)
(e) Per share investment income (loss) does not reflect the
current period's reclassification of permanent differences between
book and tax basis net investment income (loss).
New England Value Fund
Class Y
March 31
(a) Year
through Ended
Dec. 31, Dec. 31,
1994 1995
Net asset value, beginning of period $7.57 $7.24
Income from investment operations
Net investment income 0.10 0.12
Net gains or losses on investments (both
realized and unrealized) 0.08 2.21
Total income from investment operations 0.18 2.33
Less distributions
Distributions (from net investment
income) (0.10) (0.11)
Distributions (from capital gains) (0.41) (0.71)
Total distributions (0.51) (0.82)
Net asset value, end of period $7.24 $8.75
Total return (%) 2.4 (c) 32.8
Ratios/Supplemental data
Net assets, end of period (000) $4,001 $6,738
Ratio of operating expenses to average
net assets (%) 1.54 (b) 1.12
Ratio of net investment income to average
net assets (%) 1.05 (b) 1.47
Portfolio turnover rate (%) 29 52
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
New England Balanced Fund
Class Y
Mar. 8 (a) Year
through Ended
Dec. 31, Dec. 31,
1994 1995
Net asset value, beginning of period $12.20 $11.27
Income from investment operations
Net investment income 0.38 0.46
Net gains or losses on investments
(both realized and unrealized) (0.72) 2.51
Total income from investment
operations (0.34) 2.97
Less distributions
Distributions (from net investment
income) (0.38) (0.45)
Distributions (from net realized
capital gains) (0.21) (0.64)
Total distributions (0.59) (1.09)
Net asset value, end of period $11.27 $13.15
Total return (%) (2.8)(c) 26.8
Ratios/Supplemental data
Net assets, end of period (000) $39,183 $59,411
Ratio of operating expenses to
average net assets (%) 0.99 (b) 1.11
Ratio of net investment income to
average net assets (%) 3.69 (b) 3.62
Portfolio turnover rate (%) 36 54
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
New England International Equity Fund
Class Y
Sept. 9,
(a) Year
through Ended
Dec. 31, Dec. 31,
1993 1994 1995
Net asset value, beginning
of period $15.19 $14.86 $15.64
Income from investment
operations
Net investment income 0.13 0.00 0.42
Net gains or losses on
investments (both realized
and unrealized) (0.01) 1.32 0.60
Total income from investment
operations 0.12 1.32 1.02
Less distributions
Distributions (from net
investment income) (0.13) 0.00 (0.41)
Distributions (from net
realized capital gains) (0.32) (0.53) 0.00
Distributions (from paid in
capital) 0.00 (0.01) 0.00
Total distributions (0.45) (0.54) (0.41)
Net asset value, end of
period $14.86 $15.64 $16.25
Total return (%) 0.7 (c) 8.9 6.6
Ratios/Supplemental data
Net assets, end of period
(000) $7,006 $56,561 $83,119
Ratio of operating expenses
to average net assets (%)
(d) 1.00 (b) 1.00 1.00
Ratio of net investment
income to average net assets
(%) 0.33 (b) 0.76 1.49
Portfolio turnover rate (%) 101 (c) 123 119
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets without
giving effect to the voluntary expense limitations would have been
1.35 (b) and 1.04%, respectively.
New England Growth Opportunities Fund (a)
Class A
Seven
Year Ended May 31, Months
Ended
1986 1987 1988(b) 12/31/88(b)
Net asset
value,
beginning of
period $10.77 $12.70 $11.92 $10.37
Income from investment operations
Net invest-
ment income 0.35 0.35 0.33 0.19
Net gains or
losses on
investments
(both
realized and
unrealized) 2.97 0.73 (1.22) 0.25
Total income
from invest-
ment opera-
tions 3.32 1.08 (0.89) 0.44
Less distributions
Distribu-
tions (from
net invest-
ment income) (0.34) (0.34) (0.35) (0.18)
Distribu-
tions (in
excess of net
investment
income) 0.00 0.00 0.00 0.00
Distribu-
tions (from
net realized
capital
gains) (1.05) (1.52) (0.30) (1.08)
Distribu-tion
(from paid-in
capital) 0.00 0.00 (0.01) 0.00
Total
distribu-
tions (1.39) (1.86) (0.66) (1.26)
Net asset
value, end of
period $12.70 $11.92 $10.37 $9.55
Total return
(%) (f) 31.3 8.9 (7.3) 7.3(e)
Ratios/Supplemental data
Net assets,
end of period
(000) $72,862 $70,427 $58,552 $55,041
Ratio of
operating
expenses to
average net
assets (%) 1.00 1.24 1.25(d) 1.33(e)
Ratio of net
investment
income to
average net
assets (%) 3.01 2.65 2.90 3.10(e)
Portfolio
turnover rate
(%) 21 25 8 83(e)
<TABLE>
New England Growth Opportunities Fund (a)
Class A
Year Ended December 31,
1989 1990 1991 1992 1993* 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning
of period $9.55 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41
Income from investment operations
Net
invest-
ment
income 0.29 0.30 0.26 0.23 0.21 0.22 0.18
Net gains
or losses
on invest-
ments
(both
realized
and un-
realized)
2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01
Total
income
from
invest-
ment
opera-
tions 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19
Less distributions
Distribu-
tions
(from net
invest-
ment
income) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18)
Distribu-
tions (in
excess of
net
invest-
ment
income) 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
Distribu-
tions
(from net
realized
capital
gains) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03)
Distribu-
tion
(from
paid-in
capital) (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00
Total
distribu-
tions (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21)
Net asset
value,
end of
period $10.88 $9.54 $11.79 $12.20 $12.67 $12.41 $14.39
Total
return
(%) (f) 27.6 (4.3) 30.6 9.3 8.0 1.0 35.1
Ratios/Supplemental data
Net
assets,
end of
period
(000) $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693
Ratio of
operating
expenses
to
average
net
assets
(%) 1.15 1.18 1.23 1.94 1.21 1.28 1.38
Ratio of
net
invest-
ment
income to
average
net 2.68 2.92 2.28 1.18 1.70 1.75 1.31
assets
(%)
Portfolio
turnover
rate (%) 17 6 12 10 4 6 69
</TABLE>
New England Growth Opportunities Fund (a) [continued]
Class B Class C
Sept.
13, (c) Year May 1(c)
through Ended through
Dec. 31, Dec. 31, Dec. 31,
1993 1994 1995 1995
Net asset value, beginning of
period $12.95 $12.66 $12.42 $13.84
Income from investment
operations
Net investment income 0.06 0.16 0.10 0.06
Net gains or losses on
investments (both realized
and un-realized) 0.01 (0.09) 4.01 2.58
Total income from investment
operations 0.07 0.07 4.11 2.64
Less distributions
Distributions (from net
investment income) (0.03) (0.14) (0.10) (0.06)
Distributions in excess of
net investment income (0.06) 0.00 0.00 0.00
Distributions (from net
realized capital gains) (0.27) (0.17) (2.03) (2.03)
Distribution (from paid in
capital) 0.00 0.00 0.00 0.00
Total distributions (0.36) (0.31) (2.13) (2.09)
Net asset value, end of $12.66 $12.42 $14.40 $14.39
period
Total return (%) (f) 0.60 0.60 34.3 20.2
Ratios/Supplemental data
Net assets, end of period
(000) $1,498 $5,185 $29,026 $4,707
Ratio of operating expenses
to average net assets (%) 2.08(e) 1.93 2.11 2.11 (e)
Ratio of net investment
income to average net assets
(%) 0.71(e) 1.10 0.56 0.56 (e)
Portfolio turnover rate (%) 4 6 69 69
(a) Information shown for all years is audited. The accountants'
report incorporated by reference in the Statement covers years ended
May 31, 1987 through December 31, 1995. Accountants' reports for the
year ended through May 31, 1986 is on file with the SEC.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The
Fund's former adviser, Back Bay Advisors, L.P., assumed that function
on July 27, 1988.
(c) Commencement of offering of Class B or Class C shares.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors,
L.P., voluntarily agreed to limit total Fund expenses to 1.25% of the
Fund's average annual net assets. Without such limitation, the ratio
of operating expense to average net assets for the year ended May 31,
1988 would have been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a contingent
deferred sales charge in the case of the Class B shares are not
reflected in total return calculations. Unless otherwise indicated,
periods of less than one year are not annualized.
* As of January 1, 1993, the Fund discontinued the
use of equalization accounting.
The Fund's current adviser and subadviser assumed
those functions on May 1, 1995. The financial highlights prior to
that date reflect results achieved by earlier advisers under
investment policies that are no longer in effect.
New England Star Advisers Fund
Class Y
Nov. 15,(a) Year
through Ended
Dec. 31, Dec. 31,
1994 1995
Net asset value, beginning of
period $13.59 $13.24
Income from investment operations
Net investment income 0.06 0.00
Net gains or losses on investments
(both realized and unrealized)
(0.35) 4.58
Total income from investment
operations (0.29) 4.58
Less distributions
Distributions (from net investment
income) (0.06) 0.00
Distributions (from realized
capital gains) 0.00 (0.99)
Total distributions (0.06) (0.99)
Net asset value, end of period $13.24 $16.83
Total return (%) (2.1) (c) 34.8
Ratios/Supplemental data
Net assets, end of period (000) $196 $5,569
Ratio of operating expenses to
average net assets (%) (d) 1.79 (b) 1.57
Ratio of net investment income to
average net assets (%) 2.26 (b) (0.08)
Portfolio turnover rate (%) 100 142
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets (computed
on an annualized basis) without giving effect to the voluntary expense
limitations in effect from November 15, 1994 through December 31, 1994
would have been 1.90% for the period ended December 31, 1994.
I n v e s t m e n t S t r a t e g y
Investment Objectives
NEW ENGLAND CAPITAL GROWTH FUND (the "Capital Growth Fund")
The Fund seeks long-term growth of capital.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles"),
Chicago, IL
NEW ENGLAND BALANCED FUND
(the "Balanced Fund")
The Fund seeks a reasonable long-term investment return from a
combination of long-term capital appreciation and moderate current
income.
Subadviser: Loomis Sayles, Pasadena, CA
NEW ENGLAND INTERNATIONAL EQUITY FUND
(the "International Equity Fund")
The Fund seeks total return from long-term growth of capital and
dividend income, primarily through investment in international equity
securities.
Subadviser: Draycott Partners, Ltd. ("Draycott")
NEW ENGLAND STAR ADVISERS FUND
(the "Star Advisers Fund")
The Fund seeks long-term growth of capital.
Subadvisers: Berger Associates, Inc. ("Berger"), Founders Asset
Management, Inc. ("Founders"), Janus Capital Corporation
("Janus Capital") and Loomis Sayles, Detroit, MI
NEW ENGLAND VALUE FUND
(the "Value Fund")
The Fund seeks a reasonable long-term investment return from a
combination of market appreciation and dividend income from equity
securities.
Subadviser: Loomis Sayles
NEW ENGLAND GROWTH OPPORTUNITIES FUND
(the "Growth Opportunities Fund")
The Fund seeks opportunities for long-term growth of capital and
income.
Subadviser: Westpeak Investment Advisors, L.P. ("Westpeak")
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other
investors in that Fund to invest in a managed portfolio consisting of
securities appropriate to each Fund's investment objective and
policies. There can be no assurance that any Fund will achieve its
objective. Each Fund is a "diversified" mutual fund, except for the
Star Advisers Fund.
Fund Investments
[] Capital Growth Fund
The Capital Growth Fund seeks to attain its objective by investing
substantially all of its assets in equity securities. Investments are
selected based on their growth potential; current income is not a
consideration. The Fund normally will invest primarily in equity
securities of companies with medium or large market capitalization
(capitalization of $1 billion to $5 billion and over $5 billion,
respectively), but will also invest a portion of its assets in equity
securities of companies with relatively small market capitalization
(under $1 billion).
The Fund's subadviser selects investments based upon fundamental
research and analysis of individual companies and industries. The
subadviser selects investments for the Fund based on qualitative and
quantitative criteria including, among others, industry dominance and
competitive position, consistent earnings growth, a history of high
profitability, the subadviser's expectation of continued high
profitability and overall financial strength, although not every
investment will have all of these characteristics. The Fund may
invest in foreign securities.
[] Value Fund
Substantially all of the Value Fund's investments are normally in
equity securities. In selecting investments for the Fund, the
emphasis is ordinarily placed on undervalued securities. Although
long-term market appreciation is ordinarily the basis for security
selection, current income may be a significant consideration when
yields appear to be favorable compared to overall opportunities for
capital appreciation. The Fund may invest in foreign securities.
[] Balanced Fund
The Balanced Fund is "flexibly managed" in that sometimes it invests
more heavily in equity securities and at other times it invests more
heavily in fixed-income securities, depending on the Fund's
subadviser's view of the economic and investment outlook. Most of the
Fund's equity investments are normally in dividend-paying common
stocks of recognized investment quality that are expected to achieve
growth in earnings and dividends over the long term. In selecting
equity investments for the Fund, an emphasis is ordinarily placed on
undervalued securities. Fixed-income securities include notes, bonds,
non-convertible preferred stock and money market instruments. The
Fund invests at least 25% of its assets in fixed-income senior
securities and, under normal market conditions, more than 50% of its
assets in equity securities. The Fund may invest in foreign
securities.
[] International Equity Fund
The International Equity Fund seeks to achieve its objective by
investing primarily in common stocks, although the Fund may invest in
any type of equity securities. Normally the Fund will invest at least
65% of its total assets in equity securities of issuers headquartered
outside the United States, and substantially all of its assets (other
than cash and short-term investments) in such equity securities or
equity securities of issuers (including closed-end investment
companies) that derive a substantial part of their revenues or profits
from countries outside the United States. Under normal conditions the
Fund's portfolio will contain equity securities of issuers from at
least three countries outside the United States. The Fund may also
engage in certain options and futures transactions.
The Fund's subadviser will make investment decisions on behalf of the
Fund by, first, selecting countries where it anticipates sustainable
growth that will exceed current market expectations. Within the
selected countries, the subadviser will identify economic sectors that
appear to present the most potential for risk-adjusted growth and,
finally, within the chosen economic sectors, the subadviser will
select securities that are expected to offer the best value.
[] Growth Opportunities Fund
It is normally the policy of the Growth Opportunities Fund to invest
in a diversified portfolio of common stocks considered by the Fund's
subadviser to have possibilities for long-term appreciation of capital
and income. Emphasis will be given to both undervalued securities
("value" style) and securities of companies with growth potential
("growth" style). The Fund will ordinarily invest substantially all
of its assets in equity securities. The Fund may invest in foreign
securities that are traded in U.S. markets.
[] Star Advisers Fund
The Star Advisers Fund seeks to attain its objective by investing
primarily in equity securities. The Fund may also invest in other
securities, as described below. Under normal market conditions,
however, at least 65% of the Fund's assets will be invested in equity
securities. Capital invested in the Fund will be allocated on an
equal basis among four different subadvisers. Each subadviser will
manage its segment of the Fund's assets in accordance with that
subadviser's own investment style and strategy. The Fund, in the
discretion of each subadviser, may invest without limit in securities
of companies with smaller capitalization. The Fund may in the
discretion of each of its subadvisers invest without limit in
securities of foreign issuers (including issuers in emerging markets)
as well as in securities of U.S. issuers.
NEFM, the adviser of the Star Advisers Fund, believes that a multi-
adviser approach to equity investing - one that combines the varied
styles of a number of subadvisers in selecting securities for the
Fund's portfolio - offers a different investment opportunity than
equity funds run by a single adviser using a single style.
Any given management style tends to produce better returns than other
styles under certain market and economic conditions, and to perform
less well under other conditions. Therefore, most single-adviser
funds have not consistently maintained superior performance rankings
relative to their peers over long periods. NEFM believes that
consistency of results, minimizing under-performance even at the cost
of out-performance at times, is likely to produce higher performance
over time.
NEFM believes that assigning portfolio management responsibility for
the Star Advisers Fund to four subadvisers, whose varying styles have
resulted in records of success, may increase the likelihood that the
Fund may produce superior long-term results for its shareholders, with
less variability of return and less risk of persistent under-
performance than a single-adviser fund. Of course, past results
should not be considered a prediction of future performance, and there
is no assurance that the Fund will in fact achieve superior results
over any time period. The investment styles described below will be
those applied by each of the subadvisers to the segment of the Fund's
portfolio for which that subadviser is responsible.
Berger places primary emphasis on established companies which it
believes have favorable growth prospects, regardless of the company's
size. Berger emphasizes stocks with potential for rapid earnings
expansion. Berger seeks companies with the capability to perform well
under varying economic conditions, including the ability to compete in
the global marketplace. Berger also seeks companies with the ability
to market increasing amounts of products or services, in order to
increase shareholder equity at an above-average rate. Berger also
places considerable emphasis on the quality of the corporate
leadership of companies under consideration. Common stocks will
generally constitute all or most of the segment of the Fund managed by
Berger, but this segment of the portfolio may from time to time take
substantial positions in securities convertible into common stocks,
and may also purchase preferred stocks, government securities, zero-
coupon securities and other senior securities when Berger believes it
is appropriate to do so. This segment of the portfolio may also
invest in Rule 144A securities (see "Investment Risks --
Miscellaneous" below) and may purchase put and call options on stock
indices and futures contracts and options thereon for the purpose of
hedging.
Founders' segment of the portfolio will invest primarily in common
stocks of well-established, high-quality growth companies with mid or
high market capitalization. Founders manages its segment of the
Fund's portfolio by investing primarily in established companies with
above-average prospects for growth in earnings per share. This
segment will invest primarily in mid-cap and large capitalization
stocks. Founders believes that mid-cap companies (companies with
between $1.0 billion and $5.0 billion of market capitalization) can
produce returns close to those of smaller-cap companies, but with less
risk because of their stronger infrastructures and performance records
and more solid market positions, and that large-capitalization stocks
add stability to the portfolio. These companies tend to have strong
performance records, with solid continuous operating records of three
years or more. Founders' approach to investment management gives
greater emphasis to the fundamental financial, marketing and operating
characteristics of individual companies, and is less concerned with
the short-term impact of changes in macroeconomics and market
conditions, than some other investment firms. This segment of the
portfolio may invest in bonds, debentures and other corporate
obligations when Founders believes that these investments offer
opportunity for growth of capital. This segment of the portfolio may
also invest in Rule 144A securities and may enter into futures
contracts or options thereon for hedging purposes.
Janus Capital pursues the Fund's investment objective by investing
substantially all of Janus Capital's segment of the portfolio in
common stocks when its portfolio manager believes that the relevant
market environment favors profitable investing in such securities.
Janus Capital manages its segment of the portfolio to seek long-term
capital growth primarily from investing in common stocks of companies
of any size, including large, well-established companies and smaller,
emerging growth companies. Janus Capital's analysis and selection
process focus on stocks with earnings growth potential that may not be
recognized by the market. This segment of the portfolio may also
invest in preferred stocks, warrants, government securities, corporate
bonds and debentures or other debt securities or repurchase agreements
when its portfolio manager perceives an opportunity for capital growth
from such securities or to receive a return on idle cash. Janus
Capital's segment may also invest in Rule 144A securities and may
enter into options, futures and forward contracts.
Loomis Sayles manages its segment of the portfolio by investing
primarily in stocks of small cap companies with good earnings growth
potential, that Loomis Sayles believes are undervalued by the market.
Typically, such companies range in size from $100 million to $500
million in market capitalization, have better than average growth
rates at below average price/earnings ratios and have strong balance
sheets and cash flow. Loomis Sayles seeks to build a core small cap
portfolio of solid growth company stocks, with a smaller emphasis on
special situations and turnarounds (companies that have experienced
significant business problems but which Loomis Sayles believes have
favorable prospects for recovery), as well as unrecognized stocks.
Under unusual market conditions as determined by any of the four
subadvisers, all or any portion of the segment of the portfolio
managed by that subadviser may be invested, for temporary, defensive
purposes, in short-term debt instruments or in cash. In addition,
under normal conditions, a portion of each segment's assets may be
invested in short-term assets for liquidity purposes or pending
investment in other securities. Short-term investments may include
U.S. Government securities, certificates of deposit, commercial paper
and other obligations of corporate issuers rated in the top two rating
categories by a major rating agency or, if unrated, determined to be
of comparable quality by the subadviser, and repurchase agreements
that are fully collateralized by cash, U.S. Government securities or
high-quality money market instruments.
[] Additional Information
Equity securities are securities that represent an ownership interest
(or the right to acquire such an interest) in a company, and include
common and preferred stocks and securities exercisable for or
convertible into common or preferred stocks (such as warrants,
convertible debt securities and convertible preferred stock). The
Capital Growth, Growth Opportunities, International Equity, Star
Advisers and Value Funds seek to attain their objectives by normally
investing substantially all of their assets in equity securities.
When the particular Fund's adviser or subadviser deems it appropriate,
however, the Capital Growth, Growth Opportunities and Value Funds may,
for temporary defensive purposes, hold a substantial portion of their
assets in cash or fixed-income investments, including U.S. Government
obligations, investment grade (and comparable unrated) corporate bonds
or notes, money market instruments and repurchase agreements.
Corporate obligations in the lowest investment grade category (rated
BBB by Standard & Poor's Ratings Group ["S&P"] or Baa by Moody's
Investors Service, Inc. ["Moody's"]) have some speculative
characteristics and may be more adversely affected by changing
economic conditions than are higher grade obligations. The
International Equity Fund may, for temporary purposes, hold all or any
portion of its assets in cash, repurchase agreements, short-term debt
obligations of U.S. or foreign corporate issuers or U.S. or foreign
government obligations of any maturity rated AAA, AA, A or BBB by S&P,
Aaa, Aa, A or Baa by Moody's or unrated but determined by the Fund's
subadviser to be of comparable quality to securities in those rating
categories. No estimate can be made as to when or for how long a Fund
will employ defensive strategies. Under some market conditions, the
Balanced Fund may, for temporary purposes, invest less than 50% of its
assets in equity securities and the balance in cash and fixed-income
investments.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a Fund
before you invest.
[] Equity Securities
While offering greater potential for long-term growth, equity
securities are more volatile and more risky than some other forms of
investment. Therefore, the value of your investment in a Fund may
sometimes decrease instead of increase. Each Fund may invest in
equity securities of companies with relatively small market
capitalization. Securities of such companies may be more volatile
than the securities of larger, more established companies and the
broad equity market indices. See "Small Companies" below. Each
Fund's investments may include securities traded "over-the-counter" as
well as those traded on a securities exchange. Some over-the-counter
securities may be more difficult to sell under some market conditions.
Each Fund may invest in convertible securities, including corporate
bonds, notes or preferred stocks that can be converted into common
stocks or other equity securities. Convertible securities also
include other securities, such as warrants, that provide an
opportunity for equity participation. Because convertible securities
can be converted into equity securities, their values will normally
increase or decrease as the values of the underlying equity securities
increase or decrease. The movements in the prices of convertible
securities, however, may be smaller than the movements in the value of
the underlying equity securities. The value of convertible securities
that pay dividends or interest, like the value of other fixed-income
securities, generally fluctuates inversely with changes in interest
rates. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them.
They do not represent ownership of the securities for which they are
exercisable, but only the right to buy such securities at a particular
price. Less than 35% of each Fund's respective net assets will be
invested in convertible securities rated below investment grade and
unrated convertible securities of comparable quality.
[] Small Companies
Investments in companies with relatively small capitalization may
involve greater risk than is usually associated with more established
companies. These companies often have sales and earnings growth rates
which exceed those of companies with larger capitalization. Such
growth rates may in turn be reflected in more rapid share price
appreciation. However, companies with smaller capitalization often
have limited product lines, markets or financial resources and they
may be dependent upon a relatively small management group. The
securities may have limited marketability and may be subject to more
abrupt or erratic movements in price than securities of companies with
larger capitalization or the market averages in general. The net
asset value of funds that invest in companies with smaller
capitalization therefore may fluctuate more widely than market
averages.
[] Foreign Securities
Investments in foreign securities present risks not typically
associated with investments in comparable securities of U.S. issuers.
There may be less information publicly available about a foreign
corporate or governmental issuer than about a U.S. issuer, and foreign
corporate issuers are not generally subject to accounting, auditing
and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S.
issuers. Foreign brokerage commissions and securities custody costs
are often higher than those in the United States, and judgments
against foreign entities may be more difficult to obtain and enforce.
With respect to certain foreign countries, there is a possibility of
governmental expropriation of assets, confiscatory taxation, political
or financial instability and diplomatic developments that could affect
the value of investments in those countries. The receipt of interest
on foreign government securities may depend on the availability of tax
or other revenues to satisfy the issuer's obligations.
The International Equity and Star Advisers Funds' investments in
foreign securities may include investments in emerging or developing
countries, whose economies or securities markets are not yet highly
developed. Special considerations associated with these investments
(in addition to the considerations regarding foreign investments
generally) may include, among others, greater political uncertainties,
an economy's dependence on revenues from particular commodities or on
international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such
securities and delays and disruptions in securities settlement
procedures.
The Funds may invest in foreign equity securities either by purchasing
such securities directly or by purchasing "depository receipts."
Depository receipts are instruments issued by a bank that represent an
interest in equity securities held by arrangement with the bank.
Depository receipts can be either "sponsored" or "unsponsored."
Sponsored depository receipts are issued by banks in cooperation with
the issuer of the underlying equity securities. Unsponsored
depository receipts are arranged without involvement by the issuer of
the underlying equity securities. Less information about the issuer
of the underlying equity securities may be available in the case of
unsponsored depository receipts.
[] Foreign Currency (Capital Growth, Balanced, International Equity,
Star Advisers and Value Funds)
Most foreign securities in the Capital Growth, Balanced, International
Equity, Star Advisers and Value Funds' portfolios will be denominated
in foreign currencies or traded in securities markets in which
settlements are made in foreign currencies. Similarly, any income on
such securities is generally paid to the Fund in foreign currencies.
The value of these foreign currencies relative to the U.S. dollar
varies continually, causing changes in the dollar value of the Fund's
portfolio investments (even if the local market price of the
investments is unchanged) and changes in the dollar value of the
Fund's income available for distribution to its shareholders. The
effect of changes in the dollar value of a foreign currency on the
dollar value of the Fund's assets and on the net investment income
available for distribution may be favorable or unfavorable.
The Capital Growth, Balanced, International Equity, Star Advisers and
Value Funds may incur costs in connection with conversions between
various currencies. In addition, those Funds may be required to
liquidate portfolio assets, or may incur increased currency conversion
costs, to compensate for a decline in the dollar value of a foreign
currency occurring between the time when the Fund declares and pays a
dividend, or between the time when the Fund accrues and pays an
operating expense in U.S. dollars.
[] Fixed-Income Securities
Fixed-income securities include a broad array of short, medium and
long term obligations issued by the U.S. or foreign governments,
government or international agencies and instrumentalities, and
corporate issuers of various types. Some fixed income securities
represent uncollateralized obligations of their issuers; in other
cases, the securities may be backed by specific assets (such as
mortgages or other receivables) that have been set aside as collateral
for the issuer's obligation. Fixed-income securities generally
involve an obligation of the issuer to pay interest or dividends on
either a current basis or at the maturity of the security, as well as
the obligation to repay the principal amount of the security at
maturity.
Fixed-income securities involve both credit risk and market risk.
Credit risk is the risk that the security's issuer will fail to
fulfill its obligation to pay interest, dividends or principal on the
security. Market risk is the risk that the value of the security
will fall because of changes in market rates of interest. (Generally,
the value of fixed-income securities falls when market rates of
interest are rising.) Some fixed-income securities also involve
prepayment or call risk. This is the risk that the issuer will repay
a Fund the principal on the security before it is due, thus depriving
the Fund of a favorable stream of future interest or dividend
payments.
Because interest rates vary, it is impossible to predict the income of
a fund that invests in fixed-income securities for any particular
period. Fluctuations in the value of a Fund's investments in fixed-
income securities will cause a Fund's net asset value to increase or
decrease.
All non-convertible fixed-income securities purchased by the Funds
other than the Balanced and Star Advisers Funds will, at the time of
purchase, either be rated investment grade by at least one major
rating agency or be unrated but determined to be of investment grade
quality by the Fund's subadviser.
[] Lower Quality Fixed-Income Securities (Balanced and Star Advisers
Funds)
Fixed-income securities rated BB or lower by S&P or Ba or lower by
Moody's (and comparable unrated securities) are of below "investment
grade" quality. Lower quality fixed-income securities generally
provide higher yields, but are subject to greater credit and market
risk, than higher quality fixed-income securities. Lower quality
fixed-income securities are considered predominantly speculative with
respect to the ability of the issuer to meet principal and interest
payments. Achievement of the investment objective of a mutual fund
investing in lower quality fixed-income securities may be more
dependent on the fund's adviser's or subadviser's own credit analysis
than for a fund investing in higher quality bonds. The market for
lower quality fixed-income securities may be more severely affected
than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market
or by legislation that limits the ability of certain categories of
financial institutions to invest in these securities. In addition,
the market may be less liquid for lower rated fixed-income securities.
This lack of liquidity at certain times may affect the valuation of
these securities and may make the valuation and sale of these
securities more difficult. During the fiscal year ended December 31,
1995, the Balanced and Star Advisers Funds had on average 1.2% and 0%
of their assets, respectively, invested in fixed-income securities
rated below investment grade. Securities of below investment grade
quality are considered high yield, high risk securities and are
commonly known as "junk bonds." For more information, including a
detailed description of the ratings assigned by S&P and Moody's,
please refer to the Statement's "Appendix A - Description of Bond
Ratings."
[] Zero Coupon, Pay-In-Kind and Step Coupon Securities and "Strips"
(Star Advisers Fund)
The Star Advisers Fund may invest in zero coupon, pay-in-kind and step
coupon securities and in "strips." Zero coupon bonds do not make
regular interest payments; rather, they are sold at a discount from
face value. Principal and accrued discount (representing interest
accrued but not paid) are paid at maturity. "Strips" are debt
securities that are stripped of their interest coupon after the
securities are issued, but otherwise are comparable to zero coupon
bonds. Step coupon bonds trade at a discount from their face value
and pay coupon interest. The coupon rate is low for an initial period
and then increases to a higher coupon rate thereafter. Pay-in-kind
bonds normally give the issuer an option to pay cash at a coupon
payment date or give the holder of the security a similar bond with
the same coupon rate and a face value equal to the amount of the
coupon payment that would have been made. The market values of
"strips" and zero coupon, pay-in-kind and step coupon securities
generally fluctuate in response to changes in interest rates to a
greater degree than do conventional interest-paying securities of
comparable term and quality. Under many market conditions,
investments in such securities may be illiquid, making it difficult
for the Fund to dispose of them or determine their current value.
[] Repurchase Agreements
Under a repurchase agreement, a Fund buys securities from a seller,
usually a bank or brokerage firm, with the understanding that the
seller will repurchase the securities at a higher price at a later
date. If the seller fails to repurchase the securities, the Fund has
rights to sell the securities to third parties. Repurchase agreements
can be regarded as loans by the Fund to the seller, collateralized by
the securities that are the subject of the agreement. Repurchase
agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low market risk, although the Fund may be
subject to various delays and risks of loss if the seller fails to
meet its obligation to repurchase. The staff of the SEC is currently
of the view that repurchase agreements maturing in more than 7 days
are illiquid securities.
[] Investments in Other Investment Companies (International Equity
Fund)
The International Equity Fund may invest up to 10% of its total assets
in securities of other investment companies. Because of restrictions
on direct investment by U.S. entities in certain countries, investing
indirectly in such countries (by purchasing shares of another fund
that is permitted to invest in such countries) may be the most
practical or efficient way for the Fund to invest in such countries.
In other cases, where the Fund's subadviser desires to make only a
relatively small investment in a particular country, investing through
another fund that holds a diversified portfolio in that country may be
more effective than investing directly in issuers in that country. As
an investor in another investment company, the Fund will indirectly
bear its share of the expenses of that investment company. These
expenses are in addition to the Fund's own costs of operations. In
some cases, investing in an investment company may involve the payment
of a premium over the value of the assets held in that investment
company's portfolio.
[] Short-Term Trading
Although each Fund seeks long-term growth or return, each Fund may,
consistent with its investment objective, engage in portfolio trading
in anticipation of, or in response to, changing economic or market
conditions and trends. These policies may result in higher turnover
rates in the Fund's portfolio, which may produce higher transaction
costs and a higher level of taxable capital gains. Portfolio turnover
considerations will not limit any adviser's or subadviser's investment
discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above under
"Financial Highlights."
[] Options, Futures, Swap Contracts and Currency Transactions
(International Equity, Star Advisers and Growth Opportunities
Funds)
The International Equity and Star Advisers Funds may buy, sell or
write options on securities, securities indexes, currencies or futures
contracts. These Funds may buy and sell futures contracts on
securities, securities indexes or currencies. These Funds may also
enter into swap contracts. These Funds may engage in these
transactions either for the purpose of enhancing investment return, or
to hedge against changes in the value of other assets that the Fund
owns or intends to acquire. These Funds may also conduct foreign
currency exchange transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market. These
Funds may enter into interest rate, currency and securities index
swaps. These Funds will enter into these transactions primarily to
seek to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against currency fluctuations, as
a duration management technique or to protect against an increase in
the price of securities the Fund anticipates purchasing at a later
date.
The Growth Opportunities Fund may buy and sell futures contracts on a
variety of stock indexes. The Fund would buy such a futures contract
only when the Fund is experiencing significant cash inflows, and then
only for the purpose of maintaining the Fund's exposure to the equity
markets during the time before the Fund has fully invested incoming
cash in equity securities directly. Similarly, the Fund would sell
stock index futures only during periods of cash outflows from the
Fund, for the purpose of reducing equity market exposure before
holdings of stock are liquidated. The Fund will not use futures
contracts for speculative purposes or to hedge against changes in the
value of the Fund's securities portfolios.
Options, futures and swap contracts fall into the broad category of
financial instruments known as "derivatives" and involve special
risks. Use of options, futures or swaps for other than hedging
purposes may be considered a speculative activity, involving greater
risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options.
There are two parties to a typical options transaction: the "writer"
and the "buyer." A call option gives the buyer the right to buy a
security or other asset (such as an amount of currency or a futures
contract) from, and a put option the right to sell a security or other
asset to, the option writer at a specified price, on or before a
specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or
other asset if the option is exercised, and results in a loss if the
option expires unexercised. The writer of an option receives a
premium from writing an option, which may increase its return if the
option expires or is closed out at a profit. If a Fund as the writer
of an option is unable to close out an unexpired option, it must
continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and
the buyer to take delivery of the type of instrument or cash at the
time and in the amount specified in the contract. Although many
futures contracts call for the delivery (or receipt) of the specified
instrument, futures are usually closed out before the settlement date
through the purchase (or sale) of a comparable contract. If the price
of the sale of the futures contract by a Fund exceeds (or is less
than) the price of the offsetting purchase, the Fund will realize a
gain (or loss).
Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal). A currency swap is
an agreement to exchange cash flows on a notional amount based on
changes in the relative values of the specified currencies. An index
swap is an agreement to make or receive payments based on the
different returns that would be achieved if a notional amount were
invested in a specified basket of securities (such as the Standard &
Poor's Composite Index of 500 Stocks [the "S&P 500"]) or in some other
investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a
Fund and a Fund's positions in swap contracts may fluctuate up or down
based on a variety of market and economic factors. In some cases, the
fluctuations may offset (or be offset by) changes in the value of
securities held in the Fund's portfolio. All transactions in options,
futures or swaps involve costs and the possible risk of loss to the
Fund of all or a significant part of the value of its investment. In
some cases, the risk of loss may exceed the amount of the Fund's
investment. The Fund will be required, however, to set aside with its
custodian bank certain assets in amounts sufficient at all times to
satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend
on the subadvisers' ability to forecast stock market, currency or
other financial market movements correctly. A Fund's ability to hedge
against adverse changes in the value of securities held in its
portfolio through options, futures and swap transactions also depends
on the degree of correlation between the changes in the value of
futures, options or swap positions and changes in the values of the
portfolio securities. The successful use of futures and exchange-
traded options also depends on the availability of a liquid secondary
market to enable the Fund to close its positions on a timely basis.
There can be no assurance that such a market will exist at any
particular time. In the case of swap contracts and of options that
are not traded on an exchange ("over-the-counter" options), the Fund
is at risk that the other party to the transaction will default on its
obligations, or will not permit the Fund to terminate the transaction
before its scheduled maturity. As a result of these characteristics,
the Fund will treat most swap contracts and over-the-counter options
(and the assets it segregates to cover its obligations thereunder) as
illiquid. Certain provisions of the Internal Revenue Code (the
"Code") and certain regulatory requirements may limit a Fund's ability
to engage in futures, options and swap transactions.
[] Currency Hedging Transactions (International Equity and Star
Advisers Funds)
The International Equity and Star Advisers Funds may, at the
discretion of their subadvisers, engage in foreign currency exchange
transactions, in connection with the purchase and sale of portfolio
securities, to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which
current or future Fund portfolio holdings are denominated or quoted.
Currency hedging transactions may include forward contracts (contracts
with another party to buy or sell a currency at a specified price on a
specified date), futures contracts (which are similar to forward
contracts but are traded on an exchange) and swap contracts. For more
information on foreign currency hedging transactions, see Part II of
the Statement.
[] Miscellaneous
No Fund will invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable,
which may include securities whose disposition is restricted by
federal securities laws.
The Balanced, International Equity and Star Advisers Funds may
purchase Rule 144A securities. These are privately offered securities
that can be resold only to certain qualified institutional buyers.
The Star Advisers Fund may also purchase commercial paper issued under
Section 4(2) of the Securities Act of 1933. Rule 144A securities and
Section 4(2) commercial paper are treated as illiquid, unless a
subadviser has determined, under guidelines established by New England
Funds Trust I's trustees, that the particular issue of Rule 144A
securities or commercial paper is liquid. Investment in restricted or
other illiquid securities involves the risk that a Fund may be unable
to sell such a security at the desired time. Also, a Fund may incur
expenses, losses or delays in the process of registering restricted
securities prior to resale.
The International Equity and Star Advisers Funds may purchase
securities on a "when-issued" or "delayed-delivery" basis. This means
that a Fund enters into a commitment to buy the security before the
security has been issued, or, in the case of a security that has
already been issued, to accept delivery of the security on a date
beyond the usual settlement period. If the value of a security
purchased on a "when-issued" or "delayed delivery" basis falls or
market rates of interest increase between the time a Fund commits to
buy the security and the delivery date, the Fund may sustain a loss in
value of or yield on the security. For more information on "when-
issued" and "delayed delivery" securities, see Part II of the
Statement.
To the extent the Star Advisers Fund may invest in derivative
securities for other than bona fide hedging purposes, such investments
may be speculative in nature and may involve additional risks.
The Star Advisers Fund is a "non-diversified" fund and as such is not
required to meet any diversification requirements under the Investment
Company Act of 1940 (the "1940 Act"), although the Fund must meet
certain diversification standards to qualify as a "regulated
investment company" under the Code. Since the Fund may invest a
relatively high percentage of its assets in the obligations of a
limited number of issuers, the Fund may be more susceptible than a
more widely-diversified fund to any single economic, political or
regulatory occurrence.
[] Special Considerations Regarding the Multi-Adviser Approach (Star
Advisers Fund)
NEFM, the adviser of the Star Advisers Fund, oversees the portfolio
management services provided to the Fund by each of the four
subadvisers. NEFM does not, however, determine what investments will
be purchased or sold for any segment of the portfolio. Because each
subadviser will be managing its segment of the portfolio independently
from the other subadvisers, the same security may be held in two
different segments of the portfolio, or may be acquired for one
segment of the portfolio at a time when the subadviser of another
segment deems it appropriate to dispose of the security from that
other segment. Similarly, under some market conditions, one or more
of the subadvisers may believe that temporary, defensive investments
in short-term instruments or cash are appropriate when another
subadviser or subadvisers believe continued exposure to the equity
markets is appropriate for their segments of the portfolio. Because
each subadviser directs the trading for its own segment of the
portfolio, and does not aggregate its transactions with those of the
other subadvisers, the Fund may incur higher brokerage costs than
would be the case if a single adviser or subadviser were managing the
entire portfolio. Also, because each segment of the portfolio will
perform differently from the other segments depending upon the
investments it holds and changing market conditions, one segment may
be larger or smaller at various times than other segments. For
example, as of December 31, 1995, the percentage of the Fund's net
assets held in the segments of the Fund managed by Berger, Founders,
Janus Capital and Loomis Sayles were 24%, 27%, 25% and 24%,
respectively. Net cash inflows or outflows resulting from sales and
redemptions of the Fund's shares will, however, continue to be
allocated on an equal basis among the four segments of the portfolio
without regard to the relative size of the segments. The Fund does
not intend to reallocate assets among the segments to reduce these
differences in size.
NEFM may, at its discretion, terminate its agreement with a segment's
subadviser. In such case, NEFM will either enter into an agreement
with another subadviser to manage the segment or will allocate the
segment's assets equally among the other segments of the Fund.
F u n d M a n a g e m e n t
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street,
Boston, Massachusetts, 02116, serves as the adviser to each Fund.
NEFM oversees, evaluates and monitors the subadvisory services
provided to each Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments
will be purchased by the Funds.
The subadviser of the Capital Growth Fund, the Balanced Fund and the
Value Fund is Loomis Sayles. Founded in 1926, Loomis Sayles, One
Financial Center, Boston, Massachusetts 02111, is one of the country's
oldest and largest investment counsel firms. Richard W. Hurckes and
Scott S. Pape, Vice Presidents of Loomis Sayles, have served as the
portfolio managers of the Capital Growth Fund since its inception in
1992. As of June 30, 1996, Bruce A. Ebel, Vice President of Loomis
Sayles, will replace Mr. Hurckes as co-portfolio manager of the
Capital Growth Fund. Carol C. McMurtrie, Vice President and Managing
Partner of Loomis Sayles, and Tricia H. Mills and Douglas D. Ramos,
Vice Presidents of Loomis Sayles, have served as portfolio managers of
the Value Fund since March 1993. Douglas D. Ramos and Meri Anne Beck
have served as portfolio managers of the Balanced Fund since 1990; Ms.
Beck is also a Vice President of Loomis Sayles. All of the foregoing
persons have been employed by Loomis Sayles for five years except Mr.
Pape and Mr. Ebel who, prior to the time they joined Loomis Sayles,
were Equity Portfolio Manger of the Illinois State Board of Investment
and Senior Vice President of Kemper Asset Management, respectively.
The subadviser of the Growth Opportunities Fund is Westpeak, 1011
Walnut Street, Boulder, Colorado 80302. The portfolio manager of the
Growth Opportunities Fund is Gerald H. Scriver, President and Chief
Executive Officer of Westpeak. Mr. Scriver has been with Westpeak
since its inception in 1991. Mr. Scriver was Director of Quantitative
Strategies of INVESCO from 1989 through 1991.
The subadviser of the International Equity Fund is Draycott, 66
Buckingham Gate, London SW1E 6AU, England (prior to May 10, 1996 the
address was 8 City Road, London EC2Y 1HE, England). Draycott was
organized in 1991 to provide investment advice and management services
to institutional investors' accounts and to mutual funds distributed
to both institutional and retail customers. Draycott is a member of
the Investment Management Regulatory Organization Limited (IMRO), the
U.K. regulator of investment advisers. Nicholas D. P. Carn, Chief
Investment Officer, President and Chief Executive Officer of Draycott,
Timothy S. Griffen, Senior Portfolio Manager and Pacific Rim
Specialist of Draycott, Gregory D. Eckersley, Portfolio Manager and
United Kingdom Specialist of Draycott, and Nigel Hankin, Portfolio
Manager and European Specialist of Draycott, have served as the
portfolio managers of the International Equity Fund since the Fund's
inception in 1992. Prior to Draycott's organization in 1991, Mr. Carn
was Managing Director, International Equities Group, Mr. Griffen was a
Vice President and Portfolio Manager, Mr. Eckersley was Investment
Manager and Mr. Hankin was European Fund Manager, all at CIGNA
International Investment Advisors, Ltd.
Each Fund pays NEFM a management fee at the annual rate set forth in
the following table:
Management fee paid by Fund to NEFM
(as a percentage of average daily net
Fund assets of the Fund)
Balanced Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of
$500 million
Capital Growth Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of
$500 million
Growth Opportunities 0.70% of the first $200 million
Fund 0.65% of the next $300 million
0.60% of amounts in excess of
$500 million
International Equity 0.90% of the first $200 million
Fund 0.85% of the next $300 million
0.80% of amounts in excess of
$500 million
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net
assets of the Fund)
Star Advisers Fund 1.05% of all assets
Value Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of
$500 million
The advisory fee rates payable by the Balanced, Capital Growth,
International Equity, Star Advisers and Value Funds are higher than
those paid by most other mutual funds but are comparable to fee rates
paid by some mutual funds with similar investment objectives and
policies to these Funds. In the case of the Star Advisers Fund, this
difference in the fee rate is partially due to the multi-adviser
format.
Subject to the supervision of NEFM, each subadviser manages the
portfolio(s) of the Fund(s) to which it serves as subadviser (in the
case of the Star Advisers Fund, its segment of such Fund's portfolio)
in accordance with the Fund's investment objective and policies, makes
investment decisions for that Fund or segment, places orders to
purchase and sell securities for that Fund or segment, and employs
professional advisers and securities analysts who provide research
services to that Fund or segment. The Funds pays no direct fees to
any of their subadvisers.
Below is a brief description of the subadvisers of the Star Advisers
Fund.
Berger, 210 University Boulevard, Suite 900, Denver, Colorado 80206.
Rodney L. Linafelter, Vice President of Berger, has day-to-day
responsibility for the management of the segment of the Fund managed
by Berger. Kansas City Southern Industries, Inc. ("KCSI"), a publicly
traded holding company, owns approximately 80% of the outstanding
shares of Berger.
Founders, 2930 East Third Avenue, Denver, Colorado 80206. To
facilitate day-to-day investment management, Founders employs a unique
team-and-lead-manager system. The management team for a portfolio or
fund is comprised of Founders' Chief Investment Officer Bjorn K.
Borgen, a lead portfolio manager, assistant portfolio managers,
portfolio traders and research analysts. Team members share
responsibility for providing ideas, information, knowledge and
expertise in the management of Founders' segment of the Fund. Each
team member has one or more areas of expertise that is applied to the
management of Founders' segment of the Fund. Daily decisions on
portfolio selection rest with the lead portfolio manager, who, through
participation in the team process, utilizes the input of other team
members in making purchase and sale determinations. Edward F. Keely
is lead portfolio manager for the segment of the Fund that is managed
by Founders. Mr. Borgen has served as Founders' Chief Investment
Officer since 1969 and owns all of Founders' outstanding shares.
Janus Capital, 100 Fillmore Street, Denver, Colorado 80206. Warren B.
Lammert has day-to-day management responsibility for those assets of
the Fund allocated to Janus Capital, where he serves as a portfolio
manager and Vice President of Investments. KCSI owns approximately
83% of the outstanding voting stock of Janus Capital. Thomas H.
Bailey, President and Chairman of the Board of Janus Capital, owns
approximately 12% of Janus Capital's voting stock and, by agreement
with KCSI, selects a majority of Janus Capital's board of directors.
Loomis Sayles. Jeffrey C. Petherick and Mary Champagne, Vice
Presidents of Loomis Sayles, have day-to-day management responsibility
for the segment of the Fund that is allocated to Loomis Sayles. Mr.
Petherick, who joined Loomis Sayles in 1990, has co-managed the Loomis
Sayles segment of the Fund since the Fund's inception. Ms. Champagne
has co-managed the Loomis Sayles segment of the Fund since July 1995.
Prior to joining Loomis Sayles in 1993, Ms. Champagne served as a
portfolio manager at NBD Bank for 10 years.
NEFM pays each subadviser of the Star Advisers Fund a subadvisory fee
at the annual rate of 0.55% of the first $50 million of the average
daily net assets of the segment of the Fund that the subadviser
manages and 0.50% of such assets in excess of $50 million. The
Distributor in its discretion may, but is not obligated to, pay an
incentive bonus to the subadviser whose segment of the Fund's
portfolio has the highest relative total return for the prior year
versus that segment's investment peer group as tracked by a major
independent mutual fund reporting service.
NEFM pays the subadvisers of the following Funds a subadvisory fee at
the annual rate set forth in the following table:
Subadvisory fee payable by NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
Balanced Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Capital Growth Loomis 0.60% of the first $25 million
Fund Sayles 0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of
$500 million
Growth Westpeak 0.50% of the first $25 million
Opportunities 0.40% of the next $75 million
Fund 0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
International Draycott 0.54% of the first $200 million
Equity Fund 0.49% of the next $300 million
0.44% of amounts in excess of
$500 million
Value Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Prior to January 2, 1996 (December 29, 1995, in the case of the
International Equity Fund), the current subadvisers to the Balanced,
Capital Growth, International Equity and Value Funds served as those
Funds' respective advisers, and New England Investment Companies, L.P.
("NEIC") served as adviser to the Star Advisers Fund. Prior to May 1,
1995, the Growth Opportunities Fund was advised by a different adviser
and paid a lower rate of advisory fees.
The general partners of each of NEFM, the Distributor, Loomis Sayles
and Westpeak are special purpose corporations. These corporations are
indirect wholly-owned subsidiaries of NEIC, whose sole general
partner, New England Investment Companies, Inc. ("NEIC Inc."), is a
wholly-owned subsidiary of New England Mutual Life Insurance Company
("The New England"). The New England and Metropolitan Life Insurance
Company ("MetLife") have entered into an agreement to merge, with
MetLife to be the survivor of the merger. The merger is conditioned
upon, among other things, approval by the policyholders of The New
England and MetLife and receipt of certain regulatory approvals.
After such merger, NEIC Inc. will be a wholly-owned subsidiary of
MetLife.
Draycott is an indirect wholly-owned subsidiary of Cursitor Alliance
LLC, which is indirectly controlled by The Equitable Life Assurance
Society of the United States, the parent company of which is
controlled by AXA, a French holding company.
Subject to applicable regulatory restrictions and such policies as the
Trusts' trustees may adopt, the Funds' advisers or subadvisers may
consider sales of shares of the Funds and other mutual funds they
manage as a factor in the selection of broker-dealers to effect
portfolio transactions for the Funds. Subject to procedures adopted
by the trustees of the Trusts, Fund brokerage transactions may be
executed by brokers that are affiliated with NEIC, NEFM or any
subadviser. See "Portfolio Transactions and Brokerage" in Part II of
the Statement.
NEFM provides executive and other personnel for the management of the
Trusts. Each Trust's Board of Trustees supervises the affairs of the
Trust as conducted by NEFM and the Funds' subadvisers.
NEFM and the Distributor have voluntarily agreed to reduce their fees
and to bear certain operating expenses charged to the International
Equity Fund to the extent that the total of such fees and expenses
would exceed 1.75% annually of the average daily net assets of the
Fund's Class A shares and 2.50% annually of the average daily net
assets of the Fund's Class B and Class C shares. NEFM and the
Distributor may terminate these voluntary limitations at any time. In
such event, the Fund would supplement its prospectus.
In addition to the management fee paid to its adviser, each Fund pays
all expenses not borne by its adviser, subadviser(s) or the
Distributor, including, but not limited to, the charges and expenses
of each Fund's custodian and transfer agent, independent auditors and
legal counsel for the Fund and the Trusts' independent trustees, all
brokerage commissions and transfer taxes in connection with portfolio
transactions, all taxes and filing fees, the fees and expenses for
registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to
shareholders and the compensation of trustees who are not directors,
officers or employees of The New England or its affiliates, other than
affiliated registered investment companies. Certain expenses are
allocated differently between each Fund's Class A, Class B and Class C
shares, on the one hand, and its Class Y shares, on the other hand.
(See "Additional Facts about the Funds" below.)
B u y i n g F u n d S h a r e s
Minimum Investment
Class Y shares of the Funds may be purchased by endowments,
foundations, bank trust departments or trust companies. The minimum
initial investment is $1 million for these entities and $10,000 is the
minimum for each subsequent investment. Class Y shares may also be
purchased by plan sponsors of 401(a), 401(k), 457 or 403(b) plans
("Retirement Plans") that have total investment assets in these plans
of at least $10 million, and by The New England and any other
insurance company affiliated with The New England or any of their
successor entities ("Insurance Company Accounts"). Plan sponsors'
investment assets in multiple Retirement Plans can be aggregated for
purposes of meeting this minimum. Class Y shares may also be
purchased by any separate account of The New England, any other
insurance company affiliated with The New England ("Separate
Accounts") and, in the case of the International Equity Fund, by bank
common trusts, bank collective trust funds and dedicated corporate or
trusted funds, such as nuclear decommissioning trusts and hospital
depreciation funds ("Special Accounts"). Class Y shares may also be
purchased by wrap fee programs of certain broker-dealers as to which
no service or marketing fees are paid to broker-dealers by the Fund,
NEFM or the Distributor ("Wrap Fee Programs"). There is no minimum
initial or subsequent investment amount for Retirement Plans, Separate
Accounts, Special Accounts, Insurance Company Accounts or Wrap Fee
Programs. Investments in the Funds may also be made by certain
individual retirement accounts if the amounts invested represent
rollover distributions from investments by any of the foregoing plans
of amounts invested in the Funds. The Distributor serves as the
principal underwriter of the Fund's shares. Shares may be purchased
on any day when the New York Stock Exchange (the "Exchange") is open
for business (a "business day"). Investors should contact New England
Funds before attempting to place an order for Fund shares. The Funds
and the Distributor reserve the right at any time to reject a purchase
order.
Ways To Buy Fund Shares
A shareholder may purchase Class Y shares for cash on any business day
by the two methods described below:
BY WIRE TRANSFER: Prior to an initial investment, obtain an account
number and wire transfer instructions by calling 1-800-225-5478
between 8:00 a.m. and 7:00 p.m. (Eastern time). All funds should be
transmitted to State Street Bank and Trust Company, ABA #011000028,
DDA #99011538, Credit [Fund Name] Class Y shares, Shareholder Name,
and Shareholder Account Number.
BY MAIL: For an initial investment, simply complete the attached
application and return it with a check payable to New England Funds
and mailed to New England Funds, L.P. P O. Box 8551, Boston, MA 02266-
8551. All purchases made by check should be in U.S. dollars and made
payable to New England Funds, or, in the case of a retirement account,
the custodian or trustee. Third party checks will not accepted. When
purchases are made by check, redemptions will not be allowed until the
investment being redeemed has been in the account for 10 calendar
days.
Class Y shares of each Fund other than the Star Advisers Fund may also
be purchased by exchanging securities on deposit with a custodian
acceptable to the subadviser of the Fund or by a combination of such
securities and cash. Purchase of shares of the Funds in exchange for
securities is subject in each case to the determination by the Fund's
subadviser that the securities to be exchanged are acceptable for
purchase by the Fund. Securities accepted by the Fund's subadviser in
exchange for Fund shares will be valued in the same manner as the
Fund's assets (generally the last quoted sales price), as described
below under "Determination of Net Asset Value," as of the time of the
Fund's next determination of net asset value after such acceptance.
All dividends and subscription or other rights which are reflected in
the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund upon
receipt by the investor from the issuer. A gain or loss for federal
income tax purposes would be realized upon the exchange by an investor
that is subject to federal income taxation, depending upon the
investor's basis in the securities tendered. A shareholder who wishes
to purchase shares by exchanging securities should obtain instructions
by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities in
exchange for shares of a Fund it manages unless (1) the subadviser, in
its sole discretion, believes the securities are appropriate
investments for the Fund; (2) the investor represents and agrees that
all securities offered to the Fund are not subject to any restrictions
upon their sale by the Fund under the Securities Act of 1933, or
otherwise; (3) the securities are eligible to be acquired under the
Fund's investment policies and restrictions; and (4) the securities
have a value which is readily ascertainable (not established by
evaluation procedures alone) as evidenced by a listing on the New York
Stock Exchange, the American Stock Exchange, NASDAQ or the principal
securities exchange of countries in which the Fund may invest. No
investor owning 5% or more of the Fund's shares may purchase
additional Fund shares by exchange of securities (other than shares of
other funds in the New England Funds).
General
The purchase price of shares of each Fund is the net asset value next
determined after a purchase order is received in good order by New
England Funds. For purposes of calculating the purchase price of Fund
shares, a purchase order is considered received by the Fund on the day
that it is "in good order" unless it is rejected by the Fund. For a
purchase order to be in "good order" on a particular day, in the case
of a purchase of Fund shares in exchange for securities, the
investor's securities must be placed on deposit at a depository
acceptable to the Fund's subadviser by 4:00 p.m. (Eastern time) and,
in the case of a cash investment, Federal funds must be wired to the
Fund between 9:00 a.m. and 4:00 p.m. (Eastern time) or a check for the
purchase price of the shares, accompanied by a completed application,
must have been received by New England Funds before 4:00 p.m. (Eastern
time) on that day. Orders received after 4:00 p.m. (Eastern time)
will receive the next day's price.
Purchases will be made in full and fractional Class Y shares
calculated to three decimal places. The shareholder will receive a
statement of Fund shares owned following each transaction. Investors
will not receive certificates representing Class Y shares. The Funds
and the Distributor reserve the right at any time to reject a purchase
order.
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
You may exchange Class Y shares of the Funds or any other series of
the Trusts for Class Y shares of any other series of the Trusts which
offers Class Y shares or for Class A shares of New England Cash
Management Trust Money Market Series or U.S. Government Series or New
England Tax Exempt Money Market Trust (the "Money Market Funds").
To make an exchange, please call 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time) or, write to New England Funds. Exchange
requests after 4:00 p.m. (Eastern time), or after the Exchange closes
if it closes earlier than 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day
that the Exchange is open. All exchanges are subject to the minimum
investment and eligibility requirements of the series into which you
are exchanging. In connection with any exchange, you must receive a
current prospectus of the series into which you are exchanging. The
exchange privilege may be exercised only in those states where shares
of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by
telephone. New England Funds, L.P. will employ reasonable procedures
to confirm that telephone instructions are genuine, and, if it does
not, it may be liable for any losses due to unauthorized or fraudulent
instructions. New England Funds, L.P. will require a form of personal
identification prior to acting upon telephone instructions, will
provide shareholders with written confirmations of such transactions
and will record your instructions.
Except as otherwise permitted by SEC rule, shareholders will receive
at least 60 days' advance notice of any material change to the
exchange privilege.
Fund Dividend Payments
The Capital Growth Fund, the International Equity Fund, the Value Fund
and the Star Advisers Fund pay dividends annually and the Balanced
Fund and the Growth Opportunities Fund pay dividends quarterly. Each
Fund pays as dividends substantially all net investment income (other
than long-term capital gains) each year and distributes annually all
net realized long-term capital gains (after applying any available
capital loss carryovers). The trustees of the Trusts may adopt a
different schedule as long as payments are made at least annually. If
you intend to purchase shares of a Fund shortly before it declares a
dividend should be aware that a portion of the purchase price may be
returned to you as a taxable dividend.
You have the option to reinvest all distributions in additional Class
Y shares of the Fund or in Class Y shares of other series of the
Trusts, to receive distributions from dividends and interest in cash
while reinvesting distributions from capital gains in additional Class
Y shares of the Fund or of other series of the Trusts, or to receive
all distributions in cash. Income distributions and capital gains
distributions will be reinvested in Class Y shares of the respective
Fund at net asset value unless you select another option. You may
change your distribution option by notifying New England Funds in
writing or by calling 1-800-225-5478. If you elect to receive your
dividends in cash and the dividend checks sent to you are returned
"undeliverable" to the Fund or remain uncashed for six months, your
cash election will automatically be changed and your future dividends
will be reinvested.
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program that allows
you to have all dividends and any other distributions automatically
invested in Class Y shares of another New England Fund, subject to the
investor eligibility requirements of that other fund and to state
securities law requirements. Shares will be purchased at the selected
fund's net asset value on the dividend record date. A dividend
diversification account must be in the same registration (shareholder
name) as the distributing fund account and, if a new account in the
purchased fund is being established, the purchased fund's minimum
investment requirements must be met. Before establishing a dividend
diversification program into any other New England Fund, you must
obtain a copy of that fund's prospectus.
S e l l i n g F u n d S h a r e s
Ways to Sell Fund Shares
You may sell Class Y shares of the Funds in the following ways:
[] By telephone:
You may redeem (sell) shares by telephone for cash by the two methods
described below:
Wired to Your Bank Account -- If you have previously selected the
telephone redemption privilege on your account, shares may be redeemed
by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. The proceeds
generally will be wired on the next business day to the bank account
previously chosen by you on your application. A wire fee (currently
$5.00) will be deducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a
correspondent bank that is a member. If your account is with a
savings bank, it must have only one correspondent bank that is a
member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) and
requesting that a check for the proceeds be mailed to the address on
your account, provided that the address has not changed over the
previous month and that the proceeds are for $100,000 or less.
Generally, the check will be mailed to you on the business day after
your redemption request is received.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after
the Exchange closes if it closes before 4:00 p.m., will be processed
at the net asset value determined at the close of regular trading on
the next day that the Exchange is open.
[] By mail:
You may redeem your shares at their net asset value next determined
after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number,
the exact name(s) in which your shares are registered, the number of
shares or the dollar amount to be redeemed and whether you wish the
proceeds mailed to your address of record or wired to your bank
account or transmitted through ACH. All owners of the shares must
sign the request in the exact names in which the shares are registered
(this appears on your confirmation statement) and indicate any special
capacity in which they are signing (such as trustee, custodian or
under power of attorney or on behalf of a partnership, corporation or
other entity).
If you are redeeming shares worth less than $100,000 and the proceeds
check is made payable to the registered owner(s) and mailed to the
record address, no signature guarantee is required. Otherwise, you
generally must have your signature guaranteed by an eligible guarantor
institution in accordance with procedures established by New England
Funds, L.P. Signature guarantees by notaries public are not
acceptable.
Additional written information may be required for redemptions by
certain benefit plans and IRAs. Contact the Distributor or your
investment dealer for details.
General. Redemption requests will be effected at the net asset value
next determined after the redemption request is received in proper
form by State Street Bank and Trust Company ("State Street Bank").
Redemption proceeds will normally be mailed to you within seven days
after State Street Bank or the Distributor receives your request in
good order. However, in those cases where you have recently
purchased your shares by check or an electronic funds transfer through
the ACH system and you make a redemption request within 10 days after
such purchase or transfer, the Fund may withhold redemption proceeds
until the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone
redemptions may be difficult to implement. If you are unable to
contact the Distributor by telephone, shares may be redeemed by
delivering the redemption request in person to the Distributor or by
mail as described above. Requests are processed at the net asset
value next determined after the request is received.
Special rules apply with respect to redemptions under powers of
attorney. Please call the Distributor for more information.
Telephone redemptions are not available for tax qualified retirement
plans or for Fund shares in certificate form. If certificates have
been issued for your investment, you must send them to New England
Funds along with your request before a redemption request can be
honored. See the instructions for redemption by mail above.
The Funds may suspend the right of redemption and may postpone payment
for more than seven days when the Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when
trading on the Exchange is restricted or during an emergency which
makes it impracticable for the Funds to dispose of their securities or
to determine fairly the value of their net assets, or during any other
period permitted by the SEC for the protection of investors.
If a Fund's subadviser(s) determine(s), in its or their sole
discretion, that it would be detrimental to the best interests of the
remaining shareholders of the Fund to make payment wholly or partly in
cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of readily marketable securities held by the Fund
in lieu of cash. Securities used to redeem Fund shares in kind will
be valued in accordance with the Funds' procedures for valuation
described under "Determination of Net Asset Value." Securities
distributed by a Fund in kind will be selected by the Fund's
subadviser(s) in light of the Fund's objective and will not generally
represent a pro rata distribution of each security held in the Fund's
portfolio. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions. The Funds'
right to pay redemptions in kind is limited by an election made by the
Funds under Rule 18f-1 under the 1940 Act. See "Redemptions" in Part
II of the Statement.
F u n d D e t a i l s
How Fund Share Price Is Determined
The net asset value of each Fund's shares is determined as of the
close of regular trading (normally 4:00 p.m. [Eastern time]) on the
Exchange on each day that the Exchange is open for trading. Each
Fund's holdings of equity securities are valued at the most recent
sales prices on an applicable exchange or NASDAQ, or, in the case of
unlisted securities (or listed securities which were not traded during
the day), at the last quoted bid prices. Price information on listed
securities is generally taken from the closing price on the exchange
where the security is primarily traded. Securities traded primarily
on an exchange outside the United States which closes before the close
of the Exchange generally will be valued for purposes of calculating
the Fund's net asset value at the last sale or bid price on that non-
U.S. exchange, except that when an occurrence after the closing of
that exchange is likely to have materially changed such a security's
value, such security will be valued at fair value as of the close of
regular trading on the Exchange. An option that is written by the
Fund generally will be valued at the last sale price or, in the
absence of the last sale price, the last offer price. The value of a
futures contract will be equal to the unrealized gain or loss on the
contract that is determined by marking the contract to the current
settlement price. A settlement price may not be used if the market
makes a limit move with respect to a particular futures contract or if
the securities underlying the futures contract experience significant
price fluctuations after the determination of the settlement price.
When a settlement price is not used, futures contracts will be valued
at their fair value as determined by or under the direction of each
Trust's Board of Trustees. Short-term notes are valued at cost, or,
where applicable, amortized cost, which method is intended to
approximate market value. All other securities and assets of each
Fund's portfolio (or, in the case of the Star Advisers Fund, each
segment of the Fund's portfolio) are valued at their fair market value
as determined in good faith by the adviser or subadviser of that Fund
or segment (or a pricing service selected by the adviser or
subadviser) under the supervision of each Trust's Board of Trustees.
The value of any assets for which the market price is expressed in
terms of a foreign currency will be translated into U.S. dollars at
the prevailing market rate on the date of the net asset value
computation, or, if no such rate is quoted at such time, at such other
appropriate rate as may be determined by or under the direction of
each Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing
the value of each class's securities (determined as explained above)
plus any cash and other assets (including dividends and interest
receivable but not collected) less all liabilities (including accrued
expenses), by the number of shares of such class outstanding. The
public offering price of each Fund's Class Y shares is the net asset
value per share.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary to
qualify as a regulated investment company and thus does not expect to
pay any federal income tax on investment income and capital gains
distributed to shareholders in cash or in additional shares. Unless
you are a tax-exempt entity, your distributions derived from a Fund's
short-term capital gains and ordinary income are taxable to you as
ordinary income. (A portion of these distributions may qualify for
the dividends-received deduction for corporations.) Distributions
derived from a Fund's long-term capital gains ("capital gains
distributions"), if designated as such by a Fund, are taxable to you
as long-term capital gains, regardless of how long you have owned
shares in the Fund. Both income distribution and capital gains
distributions are taxable whether you elected to receive them in cash
or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income and net
capital gains earned during that calendar year. If declared in
December to shareholders of record in that month, and paid the
following January, these distributions will be considered for federal
income tax purposes to have been received by shareholders on December
31.
Each Fund is required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide a
correct, certified taxpayer identification number, if a Fund is
notified that you have underreported income in the past or if you fail
to certify to a Fund that you are not subject to such withholding. In
addition, each Fund will be required to withhold 31% of the gross
proceeds of Fund shares you redeem if you have not provided a correct,
certified taxpayer identification number. If you are a tax-exempt
shareholder, however, these backup withholding rules will not apply so
long as you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you
will receive a Form 1099 to assist you in reporting the prior calendar
year's distributions on your federal income tax return. You should
consult your tax adviser about any state or local taxes that may apply
to such distributions. Be sure to keep the Form 1099 as a permanent
record. A fee may be charged for any duplicate information requested.
The International Equity Fund may be liable to foreign governments for
taxes relating primarily to investment income or capital gains on
foreign securities in the Fund's portfolio. The Fund may in some
circumstances be eligible to, and in its discretion may, make an
election under the Code which would allow Fund shareholders who are
U.S. citizens or U.S. corporations to claim a foreign tax credit or
deduction (but not both) on their U.S. income tax return. If the Fund
makes the election, the amount of each shareholder's distribution
reported on the information returns filed by the Fund with the
Internal Revenue Service must be increased by the amount of the
shareholder's portion of the Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax consequences
of an investment in a Fund for shareholders who are U.S. citizens or
corporations. Shareholders should consult a competent tax adviser as
to the effect of an investment in a Fund on their particular federal,
state and local tax situations. Shareholders of the International
Equity Fund should also consult their tax advisers about consequences
of their investment under foreign laws.
Performance Criteria
Each Fund may include total return information for each class of
shares in advertisements or other written sales material. Each Fund
may show each class's average annual total return for the one-, five-
and ten-year periods (or the life of the class, if shorter) through
the end of the most recent calendar quarter, or, in the case of the
Growth Opportunities Fund's Class A shares, from July 27, 1988, when
there was a change in that Fund's investment adviser, to the end of
the most recent calendar quarter. Total return is measured by
comparing the value of a hypothetical $1,000 investment in a class at
the beginning of the relevant period to the value of the investment at
the end of the period (assuming deduction of the current maximum sales
charge on Class A shares, automatic reinvestment of all dividends and
capital gains distributions and, in the case of Class B shares,
imposition of the CDSC relevant to the period quoted). Total return
may be quoted with or without giving effect to any voluntary expense
limitations in effect for the class in question during the relevant
period. The class may also show total return over other periods, on
an aggregate basis for the period presented, or without deduction of a
sales charge. If a sales charge is not deducted in calculating total
return, the class's total return will be higher.
The Balanced Fund may also include the yield of each class of its
shares, accompanied by the total return, in advertising and other
written material. Yield will be computed in accordance with the SEC's
standardized formula by dividing the adjusted net investment income
per share earned during a recent thirty-day period by the maximum
offering price of a share of the relevant class (reduced by any earned
income expected to be declared shortly as a dividend) on the last day
of the period. Yield calculations will reflect any voluntary expense
limitations in effect for the Fund during the relevant period.
The Balanced Fund may also present one or more distribution rates for
each class in its sales literature. These rates will be determined by
annualizing the class's distributions from net investment income and
net short-term capital gain over a recent 12-month, 3-month or 30-day
period and dividing that amount by the maximum offering price or the
net asset value on the last day of such period. If the net asset
value, rather than the maximum offering price, is used to calculate
the distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of each Fund
can be expected to achieve a higher investment return than the Fund's
Class A, Class B or Class C shares.
All performance information is based on past results and is not an
indication of likely future performance.
Additional Facts About the Funds
[] New England Funds Trust I was organized in 1985 as a
Massachusetts business trust and is authorized to issue an unlimited
number of full and fractional shares in multiple series. The Value
and Balanced Funds were organized prior to 1985 and conducted
investment operations as separate corporations until their
reorganization as series of New England Funds Trust I in January 1987.
The International Equity Fund and the Capital Growth Fund were
organized in 1992 and the Star Advisers Fund was organized in 1994.
[] New England Funds Trust II was organized in 1931 as a
Massachusetts business trust and is authorized to issue an unlimited
number of full and fractional shares in multiple series. The Growth
Opportunities Fund is the original series of shares of the Trust and
has been in operation since 1931.
[] When you invest in a Fund, you acquire freely transferable shares
of beneficial interest that entitle you to receive annual or quarterly
dividends as determined by the respective Trust's trustees and to cast
a vote for each share you own at shareholder meetings. Shares of each
Fund vote separately from shares of other series of the same Trust,
except as otherwise required by law. Shares of all classes of a Fund
vote together, except as to matters relating to a class's Rule 12b-1
plan, on which only shares of that class are entitled to vote. No
Rule 12b-1 plan applies to the Class Y shares of any Fund.
[] Class A, Class B and Class C shares are identical to Class Y
shares, except that Class A and Class B shares are subject to a sales
load or contingent deferred sales charge, Class A, Class B and Class C
shares bear a service fee at the annual rate of 0.25% of average net
assets (and in the case of Class B and Class C shares a 0.75%
distribution fee) and have separate voting rights in certain
circumstances. Class Y bears its own transfer agency and prospectus
printing costs. The minimum investment in Class A, Class B and Class
C shares is $2,500 (but lower minimums apply to purchases under
certain special programs).
[] Except for matters that are explicitly identified as
``fundamental'' in this prospectus or Part I of the Statement, the
investment policies of each Fund may be changed by the relevant
Trust's trustees without shareholder approval or, in most cases, prior
notice. The investment objectives of the Value and Balanced Funds are
fundamental. The investment objectives of the Capital Growth,
International Equity and Star Advisers Funds are not fundamental. The
investment objective of the Growth Opportunities Fund is not
fundamental but, as a matter of policy, the trustees would not change
the objective without shareholder approval. If there is a change in
the objectives of the Capital Growth, International Equity, Star
Advisers or Growth Opportunities Funds, shareholders should consider
whether these Funds remain appropriate investments in light of their
current financial position and needs.
[] The Trusts do not generally hold regular shareholder meetings and
will do so only when required by law. Shareholders of a Trust may
remove the trustees of that Trust from office by votes cast at a
shareholder meeting or by written consent.
[] The transfer and dividend paying agent for the Funds is New
England Funds, L.P., 399 Boylston Street, Boston, MA 02116. New
England Funds, L.P. has subcontracted certain of its obligations as
such to State Street Bank, 225 Franklin Street, Boston, MA 02110.
[] The Trusts, together with the Money Market Funds, constitute the
New England Funds. Each Trust offers only its own funds' shares for
sale, but it is possible that a Trust might become liable for any
misstatements in this prospectus that relate to the other Trust. The
trustees of each Trust have considered this possible liability and
approved the use of this combined prospectus for Funds of both Trusts.
[] Each Fund's annual report contains additional performance
information and is made available upon request and without charge.
Each Fund will send a single copy of its annual and semi-annual
reports to an address at which more than one shareholder of record
with the same last name has indicated that mail is to be delivered.
Shareholders may request additional copies of any annual or semi-
annual report in writing or by telephone.
[] The Class A, Class B, Class C and Class Y structure could be
terminated should certain IRS rulings be rescinded.
[] The Distributor has entered into a selling agreement with
investment dealers, including a broker-dealer that is an affiliate of
the Distributor, for the sale of the Funds' Class Y Shares. The
Distributor may at its expense pay an amount not to exceed 0.50% of
the amount invested to dealers who have selling agreements with the
Distributor. Registered representatives of the affiliated broker-
dealer are also employees of New England Investment Associates, Inc.
("NEIA"), an indirect, wholly owned subsidiary of NEIC. NEIA may
receive compensation with respect to certain sales of each Fund's
Class Y shares from the Fund's subadviser.
[NEF Logo]
Class Y shares of:
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
Prospectus and Application _ May 1, 1996
New England Government Securities Fund, New England Strategic Income
Fund and New England Bond Income Fund, series of New England Funds
Trust I, and New England Limited Term U.S. Government Fund and New
England Adjustable Rate U.S. Government Fund, series of New England
Funds Trust II, are separate mutual funds (the "Funds" and each a
"Fund"). New England Funds Trust I and New England Funds Trust II are
referred to in this prospectus as the "Trusts."
The Funds offer Class Y shares (for qualified investors). New England
Limited Term U.S. Government Fund, New England Strategic Income Fund
and New England Bond Income Fund offer Class A, Class B and Class C
shares (for other investors). New England Government Securities Fund
and New England Adjustable Rate U.S. Government Fund offer Class A and
Class B shares (for other investors). This prospectus sets forth
information investors should know before investing in Class Y shares.
Please read it carefully and keep it for future reference. A
Statement of Additional Information in two parts (the "Statement")
about the Funds dated May 1, 1996 has been filed with the Securities
and Exchange Commission (the "SEC") and is available free of charge.
Write to New England Funds, L.P. (the "Distributor"), SAI Fulfillment
Desk, 399 Boylston Street, Boston, Massachusetts 02116 or call toll-
free at 1-800-225-5478. The Statement contains more detailed
information about the Funds and is incorporated into this prospectus
by reference. Class A, Class B and Class C shares are described in a
separate prospectus. To obtain more information about Class A, Class
B and Class C shares, please call the Distributor toll-free at 1-800-
225-5478.
New England Strategic Income Fund may invest up to all of its assets
in lower rated bonds commonly known as junk bonds. This type of
investment is subject to greater risk than higher rated bonds with
respect to principal and interest payments, including the risk of
default. Investors should assess carefully the risks associated with
investment in this fund. See "Investment Risks--Lower Rated Fixed-
Income Securities."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
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.
T a b l e O f C o n t e n t s
Page
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees
Financial Highlights
INVESTMENT STRATEGY
Investment Objectives
How the Funds Pursue Their
Objectives
Fund Investments
INVESTMENT RISKS
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment
Ways to Buy Fund Shares
[] By wire transfer
[] By mail
OWNING FUND SHARES
Exchanging Among New England
Funds
Fund Dividend Payments
SELLING FUND SHARES
Ways to Sell Fund Shares
[] By telephone
[] By mail
FUND DETAILS
Determination of Net Asset Value
Income Tax Considerations
Performance Criteria
Additional Facts About the Funds
Appendix A
Appendix B
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest in the
Funds. The following tables summarize your maximum transaction costs
from investing in Class Y shares of the Funds and estimated annual
expenses for the Funds' Class Y shares. The Example on the following
page shows the cumulative expenses attributable to a hypothetical
$1,000 investment in Class Y shares of the Funds for the periods
specified.
Shareholder transaction expenses
All Funds
Class Y
Maximum Initial Sales Charge Imposed None
on a Purchase
Maximum Contingent Deferred Sales None
Charge
Annual Fund operating expenses
(as a percentage of average net assets)
New England New England
Government Limited Term New England
Securities U.S. Government Bond Income
Fund Fund* Fund
Class Y Class Y Class Y
Management Fees 0.65% 0.64% 0.44%
12b-1 Fees None None None
Other Expenses 0.45% 0.23% 0.45%
Total Fund Operating 1.10% 0.87% 0.89%
Expenses
New England
Adjustable
Rate U.S.
Government
Fund*
Class Y
Management Fees
(after voluntary fee waiver and 0.22% **
expense reduction)
12b-1 Fees None
Other Expenses 0.19%
Total Fund Operating Expenses
(after voluntary fee waiver and 0.41% **
expense reduction)
New England
Strategic Income
Fund
Class Y
Management Fees (after voluntary fee 0.30% ***
waiver)
12b-1 Fees None
Other Expenses 0.68%
Total Fund Operating Expenses (after 0.98% ***
voluntary fee waiver)
* The expense information contained in this table and its footnotes
for New England Adjustable Rate U.S. Government Fund and New
England Limited Term U.S. Government Fund has been restated to
reflect fees and expenses currently in effect for those Funds.
** Without the voluntary fee waiver and expense reduction by the
Fund's adviser, Management Fees would be 0.39% and Total Fund
Operating Expenses would be 0.58%. These voluntary limitations can
be terminated by the Fund's adviser at any time. See "Fund
Management."
*** Without the voluntary fee waiver by the Fund's subadviser,
Management Fees would be 0.65% and Total Fund Operating Expenses
would be 1.33%. This voluntary limitation can be terminated by the
Fund's subadviser at any time. See "Fund Management."
Example
You would pay the following expenses on a $1,000 investment assuming
(1) a 5% annual return and (2) unless otherwise noted, redemption at
period end. The 5% return and expenses in the Example should not be
considered indicative of actual or expected Fund performance or
expenses, both of which may be more or less than those shown.
New England New England
New England Limited Term Adjustable
Government U.S. Rate U.S.
Securities Government Government
Fund Fund Fund
Class Y Class Y Class Y
1 year $11 $9 $4
3 years $35 $28 $13
5 years $61 $48 $23
10 years $134 $107 $52
New England New England
Strategic Bond Income
Income Fund Fund
Class Y Class Y
1 year $10 $9
3 years $31 $28
5 years $54 $49
10 years $120 $110
The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly
if you invest in the Funds. For additional information about the
Funds' management fees, and other expenses, please see "Fund
Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if
you elect to transfer redemption proceeds by wire.
Financial Highlights
(For a Class Y share of New England Limited Term U.S. Government Fund,
New England Government Securities Fund and New England Bond Income
Fund outstanding throughout the indicated period. In the case of New
England Adjustable Rate U.S. Government Fund and New England Strategic
Income Fund, which had no Class Y shares outstanding during 1995,
financial highlights are presented for a Class A and Class B (and
Class C for Strategic Income Fund) share of each Fund outstanding
throughout the indicated period.)
The Financial Highlights presented on pages 6 through 12 have been
included in financial statements for the Funds. The financial
Statements for New England Government Securities Fund, New England
Bond Income Fund and New England Strategic Income Fund have been
examined by Price Waterhouse LLP, independent accountants, and the
financial statements for the New England Limited Term U.S. Government
Fund and New England Adjustable Rate U.S. Government Fund have been
examined by Coopers & Lybrand LLP, independent accountants. The
Financial Highlights should be read in conjunction with the financial
statements and the notes thereto incorporated by reference in the
Statement. Each Fund's annual report contains additional performance
information and is made available upon request and without charge.
New England Government Securities Fund
Class Y
Mar. 31 (a) Year
through Ended
Dec. 31, Dec. 31,
1994 1995
Net asset value, beginning of
period $11.20 $10.44
Income from investment
operations
Net investment income 0.54 0.80
Net gains or losses on
investments (both realized
and unrealized) (0.77) 1.26
Total income from investment
operations (0.23) 2.06
Less distributions
Distributions (from net
investment income) (0.53) (0.79)
Total distributions (0.53) (0.79)
Net asset value, end of period $10.44 $11.71
Total return (%) (2.0) (c) 20.3
Ratios/Supplemental data
Net assets, end of period (000) $4,104 $7,364
Ratio of operating expenses to
average net assets (%) 0.93 (b) 1.10
Ratio of net investment income
to average net assets (%) 7.25 (b) 6.94
Portfolio turnover rate (%) 809 559
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
New England Limited Term U.S. Government Fund
Class Y
Mar. 31 (a) Year
through Ended
Dec. 31, Dec. 31,
1994 1995
Net asset value, beginning
of period $12.11 $11.51
Income from investment
operations
Net investment income 0.71 0.86
Net gains or losses on
investments
(both realized and
unrealized) (0.74) 0.63
Total income from
investment operations (0.03) 1.49
Less distributions
Distributions (from net
investment income) (0.57) (0.87)
Total distributions (0.57) (0.87)
Net asset value, end of
period $11.51 $12.13
Total return (%) (c) (0.80) 13.3
Ratios/Supplemental data
Net assets, end of period
(000) $1,822 $5,723
Ratio of operating
expenses to average net
assets (%) 0.83 (b) 0.87
Ratio of net investment
income to average net
assets (%) 7.15 (b) 7.53
Portfolio turnover rate
(%) 244 247
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
New England Bond Income Fund*
Class Y
Year
Ended
Dec. 31,
1995
Net asset value, beginning of period $10.95
Income from investment operations
Net investment income 0.80
Net gains or losses on investments (both
realized and unrealized) 1.44
Total income from investment operations 2.24
Less distributions
Distributions (from net investment income) (0.79)
Total distributions (0.79)
Net asset value, end of period $12.40
Total return (%) 21.0
Ratios/Supplemental data
Net assets, end of period (000) $2,241
Ratio of operating expenses to average net
assets (%) 0.89
Ratio of net investment income to average
net assets (%) 7.06
Portfolio turnover rate (%) 81
* On March 31, 1994, the Fund's shares became effective but had no
activity until December 31, 1994.
New England Bond Income Fund
Class A
Year July 1
Ended through
June 30, Dec. 31, Year Ended December 31,
1986 1986 (d) 1987 1988 1989
Net asset
value,
beginning of
period $10.93 $11.45 $11.73 $10.98 $10.89
Income from investment operations
Net
investment
income 0.98 0.49 0.90 0.85 0.91
Net gains or
losses on
investments
(both
realized and
unrealized) 0.71 0.26 (0.75) (0.06) 0.34
Total income
from
investment
operations 1.69 0.75 0.15 0.79 1.25
Less distributions
Distributions
(from net
investment
income) (1.17) (0.47) (0.90) (0.88) (0.91)
Distributions
(from net
realized
capital
gains) 0.00 0.00 0.00 0.00 0.00
Total
distributions (1.17) (0.47) (0.90) (0.88) (0.91)
Net asset
value, end of
period $11.45 $11.73 $10.98 $10.89 $11.23
Total return 16.6 6.7 1.4 7.4 11.9
(%) (c)
Ratios/Supplemental data
Net assets,
end of period
(000) $46,175 $54,210 $60,071 $67,548 $76,662
Ratio of
operating
expenses to
average net
assets (%) 8.80 1.02(b) 1.31 1.20 1.18
Ratio of net
investment
income to
average net
assets (%) 0.92 8.29(b) 8.03 7.68 8.27
Portfolio
turnover rate
(%) 242 352(b) 307 88 77
New England Bond Income Fund [continued]
Class A
Year Ended December 31,
1990 1991 1992 1993 1994 1995
Net asset
value,
beginning of
period $11.23 $11.12 $12.14 $12.12 $12.18 $10.95
Income from investment operations
Net
investment
income 0.89 0.88 0.85 0.77 0.72 0.81
Net gains or
losses on
investments
(both
realized and
unrealized) (0.10) 1.04 0.01 0.66 (1.23) 1.40
Total income
from
investment
operations 0.79 1.92 0.86 1.43 (0.51) 2.21
Less distributions
Distributions
(from net
investment
income) (0.90) (0.90) (0.86) (0.78) (0.72) (0.80)
Distributions
(from net
realized
capital
gains) 0.00 0.00 (0.02) (0.59) 0.00 0.00
Total
distributions (0.90) (0.90) (0.88) (1.37) (0.72) (0.80)
Net asset
value, end of
period $11.12 $12.14 $12.12 $12.18 $10.95 $12.36
Total return
(%) (c) 7.5 18.1 7.5 12.1 (4.2) 20.8
Ratios/Supplemental data
Net assets,
end of period
(000) $85,372 $113,759 $145,184 $179,264 $155,362 $200,285
Ratio of
operating
expenses to
average net
assets (%) 1.18 1.15 1.08 1.04 1.08 1.14
Ratio of net
investment
income to
average net
assets (%) 8.05 7.69 7.08 6.10 6.46 6.81
Portfolio
turnover rate
(%) 126 218 89 202 77 81
New England Bond Income Fund [continued]
Class B Class C
Sept. 13
(a) Year Year
through Ended Ended
Dec. 31, Dec. 31, Dec. 31,
1993 1994 1995 1995 (a)
Net asset value,
beginning of period $13.06 $12.18 $10.95 $10.95
Income from investment operations
Net investment
income 0.20 0.63 0.72 0.56
Net gains or losses
on investments
(both realized and
unrealized) (0.30) (1.23) 1.40 1.40
Total income from
investment
operations (0.10) (0.60) 2.12 1.96
Less distributions
Distributions (from
net investment
income) (0.19) (0.63) (0.71) (0.55)
Distributions (from
net realized
capital gains) (0.59) 0.00 0.00 0.00
Total distributions (0.78) (0.63) (0.71) (0.55)
Net asset value,
end of period $12.18 $10.95 $12.36 $12.36
Total return (%)
(c) (0.8) (4.9) 19.9 18.1
Ratios/Supplemental data
Net assets, end of
period (000) $2,661 $9,435 $23,398 $1,009
Ratio of operating
expenses to average
net assets (%) 1.81(b) 1.83 1.89 1.89
Ratio of net
investment income
to average net
assets (%) 4.79(b) 5.71 6.06 6.06
Portfolio turnover
rate (%) 202(e) 77 81 81
(a) Class B shares were first offered on September 13, 1993. Class C
shares were first offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent
deferred sales charge in the case of Class B shares are not reflected
in total return calculations. Periods of less than one year are not
annualized.
(d) Fiscal year end changed in 1986 from June 30 to December 31.
(e) Represents portfolio turnover rate for the Fund as a whole for
the entire fiscal year.
New England Adjustable Rate U.S. Government Fund
Class A
Oct. 18,
(a)
through
Dec. 31, Year Ended December 31,
1991 1992 1993 1994 1995
Net asset value,
beginning of
period $7.50 $7.50 $7.46 $7.45 $7.20
Income from investment operations
Net investment
income 0.09 0.42 0.33 0.37 0.47
Net gains or
losses on
investments (both
realized and
unrealized) 0.00 (0.06) (0.03) (0.31) 0.14
Total income from
investment
operations 0.09 0.36 0.30 0.06 0.61
Less distributions
Distributions
(from net
investment income) (0.09) (0.40) (0.31) (0.31) (0.44)
Total
distributions (0.09) (0.40) (0.31) (0.31) (0.44)
Net asset value,
end of period $7.50 $7.46 $7.45 $7.20 $7.37
Total return (%)
(c) 1.2 4.9 4.0 0.8 8.6
Ratios/Supplemental data
Net assets, end of
period (000) $60,684 $294,687 $734,251 $489,637 $331,112
Ratio of operating
expenses to
average net assets
(%) (d) 0.50(c) 0.57 0.60 0.60 0.66
Ratio of net
investment income
to average net
assets (%) 6.43(c) 5.39 4.39 4.85 6.29
Portfolio turnover
rate (%) 52(c) 49 54 17 73
New England Adjustable Rate U.S. Government Fund [continued]
Class B
Sept.
13, (a) Year
through Ended
Dec. 31, Dec. 31,
1993 1994 1995
Net asset value,
beginning of
period $7.52 $7.45 $7.20
Income from investment operations
Net investment
income 0.08 0.29 0.41
Net gains or
losses on
investments (both
realized and
unrealized) (0.08) (0.29) 0.14
Total income from
investment
operations 0.00 0.00 0.55
Less distributions
Distributions
(from net
investment income) (0.07) (0.25) (0.38)
Total
distributions (0.07) (0.25) (0.38)
Net asset value,
end of period $7.45 $7.20 $7.37
Total return (%)
(c) 0.0 0.10 7.8
Ratios/Supplemental data
Net assets, end of
period (000) $855 $2,056 $2,368
Ratio of operating
expenses to
average net assets
(%) (d) 1.35(c) 1.35 1.41
Ratio of net
investment income
to average net
assets (%) 3.50(c) 4.10 5.54
Portfolio turnover
rate (%) 54(e) 17 73
(a) The Fund commenced operations on October 18, 1991. Class B
shares were first offered on September 13, 1993.
(b) Commencing June 1, 1995, expenses were voluntarily limited to
0.70% of Class A average net assets. From May 1, 1995 through June 1,
1995 expenses were voluntarily limited to 0.65% of Class A average net
assets. The ratio of operating expenses to average net assets without
giving effect to this expense limitation would have been 0.89% for the
year ended December 31, 1995. From April 1, 1992 through May 1, 1995
expenses were voluntarily limited to 0.60% of Class A average net
assets. The ratio of operating expenses to average net assets without
giving effect to this expense limitation would have been 0.96%, 0.86%
and 0.88% for the years ended December 31, 1992, 1993 and 1994,
respectively. From October 19, 1991 through March 31, 1992, expenses
were voluntarily limited to 0.50% of average net assets. The ratio of
operating expenses to average net assets without giving effect to this
expense limitation would have been 1.26% for the period ended December
31, 1991. Commencing June 1, 1995, expenses were voluntarily limited
to 1.45% of Class B average net assets. From May 1, 1995 through June
1, 1995 expenses were voluntarily limited to 1.40% of Class B average
net assets. The ratio of operating expenses to average net assets
without giving effect to this expense limitation would have been 1.65%
for the year ended December 31, 1995. From September 13, 1993 through
May 1, 1995 expenses were voluntarily limited to 1.35% of Class B
average net assets. The ratio of operating expenses for Class B
shares would have been 1.61% for the period ended December 31, 1993
and 1.63% for the year ended December 31, 1994.
(c) Computed on an annualized basis.
(d) A sales charge in the case of Class A shares and a contingent
deferred sales charges in the case of Class B shares are not reflected
in total return calculations. Periods of less than one year are not
annualized.
(e) Represents portfolio turnover rate for the Fund as a whole for
the entire fiscal year.
New England Strategic Income Fund
Class A Class B Class C
May 1 (a) May 1 (a) May 1 (a)
through through through
Dec. 31, Dec. 31, Dec. 31,
1995 1995 1995
Net asset value, beginning of period $12.50 $12.50 $12.50
Income from investment operations
Net investment income 0.74 0.68 0.67
Net gains or losses on investments
(both realized and unrealized) 0.49 0.49 0.49
Total income from investment 1.23 1.17 1.16
operations
Less distributions
Distributions (from net investment (0.73) (0.67) (0.66)
income)
Distributions (in excess of net (0.01) (0.01) (0.01)
investment income)
Total distributions (0.74) (0.68) (0.67)
Net asset value, end of period $12.99 $12.99 $12.99
Total return (%)(c) 10.3 9.7 9.7
Ratios/Supplemental data
Net assets, end of period (000) $36,939 $38,767 $12,252
Ratio of operating expenses to average 0.93(b) 1.68(b) 1.68(b)
net assets(%)
Ratio of net investment income to 8.75(b) 8.00(b) 8.00(b)
average net assets(%)
Portfolio turnover rate(%) 22(b) 22(b) 22(b)
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent
deferred sales charge in the case of Class B shares are not
reflected in total return calculations. Periods of less than one
year are not annualized.
(d) The ratio of operating expenses to average net assets
without giving effect to the voluntary expense
limitations would have been (%):
1.58(b) 2.33(b) 2.33(b)
I n v e s t m e n t S t r a t e g y
Investment Objectives
NEW ENGLAND GOVERNMENT SECURITIES FUND
(the "Government Securities Fund")
The Fund seeks a high level of current income consistent with safety
of principal by investing in U.S. Government securities.
Subadviser: Back Bay Advisors, L.P. ("Back Bay Advisors")
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
(the "Limited Term U.S. Government Fund")
The Fund seeks a high current return consistent with preservation of
capital.
Subadviser: Back Bay Advisors
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
(the "Adjustable Rate Fund")
The Fund seeks a high level of current income consistent with low
volatility of principal. The Fund intends to pursue its objective by
investing only in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Subadviser: Back Bay Advisors
NEW ENGLAND STRATEGIC INCOME FUND
(the "Strategic Income Fund")
The Fund seeks high current income with a secondary objective of
capital growth.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles")
NEW ENGLAND BOND INCOME FUND
(the "Bond Income Fund")
The Fund seeks a high level of current income consistent with what the
Fund considers reasonable risk. The Bond Income Fund invests
primarily in corporate and U.S. Government bonds.
Subadviser: Back Bay Advisors
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other
investors in that Fund to invest in a managed portfolio consisting of
securities appropriate to the Fund's investment objective and
policies. There can be no assurance that any Fund will achieve its
objective. Each Fund is a "diversified" mutual fund.
Fund Investments
[] Government Securities Fund
The Government Securities Fund expects that under normal market
conditions it will invest 100% of its net assets in securities issued
or guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities that are backed by the full faith and credit of the
U.S. Government. These securities include, for example, U.S. Treasury
bills, bonds and notes, mortgage participation certificates guaranteed
by the Government National Mortgage Association ("GNMA") and Federal
Housing Administration debentures.
The Fund may invest in securities of any maturity and in zero coupon
securities. In addition to investing directly in U.S. Government
securities, the Fund may purchase "stripped" securities.
For hedging purposes, the Government Securities Fund may also purchase
and sell interest rate futures contracts on U.S. Government securities
and may write and purchase options on such futures and options on U.S.
Government securities. Transactions involving futures and options on
futures may help to reduce the volatility of the Fund's net asset
value, but this result cannot be assured. Options and futures are not
backed by the U.S. Government.
It is a fundamental policy of the Fund that under normal market
conditions it will invest at least 65% of its total assets in "U.S.
Government Securities," which term as used in this prospectus includes
all securities issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities.
[] Limited Term U.S. Government Fund
The Fund seeks to achieve its objective by investing in U.S.
Government Securities. Under normal market conditions, 65% or more of
the Fund's total assets will be invested in U.S. Government Securities
(including zero coupon bonds) and collateralized mortgage obligations
("CMOs"). The Fund limits its investments in CMOs to those issued by
instrumentalities of the U.S. Government. The Fund may also invest in
asset-backed securities rated Aaa by Moody's Investors Service, Inc.
("Moody's") or AAA by Standard & Poor's Ratings Group ("S&P") or
unrated but determined by the Fund's subadviser to be of comparable
quality to securities in those rating categories. For hedging
purposes, the Fund may purchase and sell financial futures contracts
and options. The Fund may also engage in securities lending.
The Fund's subadviser, Back Bay Advisors, provides a continuous
investment program designed to maximize current return while
minimizing fluctuations in the value of the Fund's portfolio, thus
stabilizing the net asset value of the Fund's shares. Because the
market value of fixed-income securities fluctuates in response to
changes in interest rates, there is a risk of a decline in the value
of the Fund's portfolio (and a corresponding decrease in the value of
the Fund's shares) if interest rates increase. To reduce this risk,
the Fund will ordinarily seek to maintain an average dollar-weighted
maturity of three to seven years. The Fund may hold individual
securities with maturities of more than seven years as long as its
average maturity remains within this limit.
"Duration" is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an
interest rate change (i.e., the change in price one can expect from a
given change in interest rates). Many investors and investment
analysts consider duration to be a more useful measure of price
sensitivity than "maturity." A debt instrument's duration is derived
by discounting principal and interest payments to their present value
using the instrument's current yield to maturity and calculating the
dollar-weighted average time until these payments will be received.
The Fund will seek to maintain an average portfolio duration of four
years or less. The Fund's portfolio may include fixed-income
securities with durations of more than four years, so long as the Fund
seeks to maintain an average portfolio duration of four years or less.
The values of securities having shorter durations generally fluctuate
less than securities with longer durations. A portfolio with an
average duration of four years or less should provide investors with a
reduced risk of loss due to rising interest rates. For example, based
on yields of 5.2% for a five-year U.S. Treasury security and 6.05% for
a 30-year U.S. Treasury security, a 1% increase in interest rates
would be expected to result in approximately a 4.3% reduction in the
value of the five-year security (duration 4.3) as compared to
approximately a 13% reduction in the value of the 30-year security
(duration 13). Conversely, a 1% decrease in interest rates would be
expected to result in similar increases in value. These expectations
represent Back Bay Advisors' estimate of portfolio volatility based
upon historic data collected under a wide variety of market
conditions, but there is no assurance that actual volatility will be
consistent with such expectations.
[] Adjustable Rate Fund
The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in adjustable rate
mortgage securities ("ARMs") or other securities collateralized by or
representing interests in mortgages (collectively, "mortgage
securities"), which have interest rates that are reset at periodic
intervals and which are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. The Fund also may invest in CMOs
issued by instrumentalities of the U.S. Government, but will not
invest in privately issued CMOs. Other securities purchased by the
Fund will be limited to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities but will not include any
stripped securities (such as interest only or principal only
obligations) or zero coupon obligations. As more fully described in
Part I of the Statement, the Fund also intends to limit its
investments to those that would be permissible investments for federal
credit unions and national banks. When maintaining a temporary
defensive position, the Fund may invest its assets, without limit, in
U.S. Government Securities of any type.
[] Strategic Income Fund
The Fund seeks to achieve its investment objectives by investing at
least 65% of its total assets in debt instruments. The Fund may
invest in debt instruments issued by corporations based in the United
States or abroad and debt instruments that are convertible into equity
securities. The Fund may also invest in U.S. Government Securities
and in securities issued or guaranteed by foreign governments
(including their political subdivisions, agencies, authorities and/or
instrumentalities) ("Foreign Government Securities") and securities
issued by supranational agencies. The Fund may invest in debt
instruments in any rating category including debt instruments rated in
the lowest rating categories (C by Moody's and D by S&P) and in
instruments that are unrated. For more information about the risks of
investing in low rated, high risk securities and securities of foreign
issuers, see "Investment Risks _ Lower Rated Fixed-Income Securities"
and "Foreign Securities."
Under normal market conditions, the Fund will invest in debt
instruments of both domestic and foreign issuers and in corporate as
well as government issues. At any time, however, the Fund may invest
up to 100% of its assets in debt instruments of U.S. issuers, in debt
instruments of foreign issuers, in corporate debt instruments or in
government securities. The Fund may invest up to a total of 35% of
its total assets in preferred stocks, dividend-paying common stocks
and shares of closed-end investment companies (which shares will not
exceed 10% of the Fund's total assets).
The proportion of Fund assets invested in corporate bonds, government
bonds and preferred or common stock will vary over time based on
changing market conditions. When Loomis Sayles believes that a
particular market presents more opportunity than other markets, it may
increase the proportion of the Fund's assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging purposes,
the Fund may also purchase and sell options and futures and engage in
foreign currency transactions. The Fund may also invest in mortgage-
backed securities, zero coupon bonds, stripped securities and pay-in-
kind securities. For more information about all these types of
investments, see "Investment Risks" below.
[] Bond Income Fund
The Bond Income Fund invests primarily in corporate and U.S.
Government bonds. At least 80% of its total assets will be invested
in bonds carrying investment grade ratings from one of the recognized
rating services. The Fund may also purchase non-rated or lower-rated
bonds. Bonds rated BBB by S&P or Baa by Moody's (the lowest ratings
that are considered investment grade) have some speculative
characteristics, and unfavorable changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity of
issuers of these bonds to make principal and interest payments than is
the case with higher grade bonds. If an investment rated BBB or Baa
is downgraded by a major rating agency, the Fund's subadviser will
consider whether the investment remains appropriate for the Fund. The
Fund may invest in debt instruments rated in the rating categories of
B (by Moody's and S&P) or higher and in instruments that are unrated.
The Fund may invest in securities of any maturity and in zero coupon
securities. The Fund may also invest in CMOs. The Fund will normally
maintain an average dollar-weighted portfolio maturity of less than
ten years. The Fund may invest in convertible securities and in Rule
144A securities.
The Fund may invest in foreign securities but will do so only when the
Fund's subadviser believes the associated risks are minimal as
compared to similar securities of domestic issuers.
The Fund may engage in a variety of options and futures transactions
with respect to U.S. or Foreign Government Securities and corporate
fixed-income securities. See "Investment Risks -- Options, Futures,
Swap Contracts and Currency Transactions" for information about these
kinds of transactions.
[] U.S. and Foreign Government Securities
Different types of U.S. and Foreign Government Securities have
different kinds of government support. U.S. Government Securities
include securities backed by the full faith and credit of the U.S.
Government, as well as many other securities that are not full faith
and credit obligations. For example, obligations of the Federal Home
Loan Banks are supported by the right of the issuer to borrow from the
U.S. Treasury, and obligations of the Federal Home Loan Mortgage
Corporation (the "FHLMC") and the Federal National Mortgage
Association (the "FNMA") are supported only by the credit of those
corporations. Similarly, obligations of foreign governmental entities
include obligations issued or guaranteed by governments with taxing
power or by their agencies. Some Foreign Government Securities are
supported by the full faith and credit of a foreign national
government or political subdivision (such as a province of Canada) and
some are not. For example, Foreign Government Securities include
securities issued by corporations which have been charged with a
public purpose and a majority of whose outstanding equity securities
are owned by a foreign government or government agency. Such
securities may be supported only by the credit of the issuing
corporation and not by that of the government or agency.
In addition to investing directly in U.S. and Foreign Government
Securities, the Government Securities and Strategic Income Funds may
purchase "stripped" securities evidencing undivided ownership
interests in interest payments or principal payments, or both, on U.S.
and Foreign Government Securities. These investments may be more
volatile than other types of U.S. or Foreign Government Securities.
[] Foreign Currency Exchange Transactions
The Funds that may invest in securities denominated in foreign
currencies or traded in foreign markets may engage in related foreign
currency exchange transactions to protect the value of specific
portfolio positions or in anticipation of changes in relative values
of currencies in which current or future portfolio holdings are
denominated or quoted.
The Bond Income and Strategic Income Funds may engage in transactions
in currency forward contracts. A currency forward contract is a
contract with a major international bank that obligates the bank and
the other party to the contract to exchange specified amounts of
different currencies at a specified future date. For example, the
bank may agree to deliver a specified number of French francs, in
exchange for a specified number of U.S. dollars on a certain date.
From time to time, a portion of the Bond Income or Strategic Income
Fund's assets may be invested in securities that are denominated in
foreign currencies or that are traded in markets where purchase or
sale transactions settle in a foreign currency. Currency forward
contracts may be used both (1) to facilitate settlement of a Fund's
transactions in these securities and (2) to hedge against possible
adverse changes in the relative values of the currencies in which the
Fund's portfolio holdings (or intended future holdings) are
denominated.
Currency forward contracts involve transaction costs and the risk that
the banks with which a Fund enters into such contracts will fail
financially. Each Fund's subadviser will, however, monitor the
creditworthiness of these banks on an ongoing basis. Successful use
of currency forward contracts for hedging purposes also depends on the
accuracy of the subadviser's forecasts as to future changes in the
relative values of currencies. The accuracy of such forecasts cannot
be assured. The Fund will set aside with its custodian certain assets
to provide for satisfaction of its obligations under currency forward
contracts.
Although both Funds are permitted to use currency forward contracts,
they are not obligated to do so. Thus, the Funds will not necessarily
be fully (or even partially) hedged against the risk of adverse
currency price movements at any given time.
Foreign currency transactions involve costs and may result in losses.
See Part II of the Statement for more information.
[] Additional Information
Each Fund may purchase securities for its portfolio on a "when-issued"
basis. This means that the Fund will enter into the commitment to buy
the security before the security has been issued. The Fund's payment
obligation and the interest rate on the security are determined when
the Fund enters into the commitment. The security is typically
delivered to the Fund 15 to 120 days later. No interest accrues on
the security between the time the Fund enters into the commitment and
the time the security is delivered.
The Funds, consistent with their investment objectives, attempt to
maximize yields by engaging in portfolio trading and by buying and
selling portfolio investments in anticipation of or in response to
changing economic market conditions and trends. The Government
Securities and Strategic Income Funds also invest to take advantage of
what are believed to be temporary disparities in the yields of the
different segments of the market for U.S. Government Securities.
These policies may result in higher turnover rates in the Funds'
portfolios, which may produce higher transaction costs and a higher
level of taxable capital gains. Portfolio turnover considerations
will not limit any Fund's subadviser's investment discretion in
managing the Fund's assets. Recent portfolio turnover rates for the
Funds are set forth above under "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a Fund
buys securities from a seller, usually a bank or brokerage firm, with
the understanding that the seller will repurchase the securities at a
higher price at a later date. If the seller fails to repurchase the
securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the Fund
to the seller, collateralized by the securities that are the subject
of the agreement. Repurchase agreements afford an opportunity for the
Fund to earn a return on available cash at relatively low credit risk,
although the Fund may be subject to various delays and risks of loss
if the seller fails to meet its obligation to repurchase. The staff
of the SEC is currently of the view that repurchase agreements
maturing in more than seven days are illiquid securities.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a Fund
before you invest.
[] Fixed-Income Securities (All Funds)
The Funds invest principally in fixed-income securities. Because
interest rates vary, it is impossible to predict the income of a Fund
for any particular period. The net asset value of your shares will
vary as a result of changes in the value of the bonds and other
securities in a Fund's portfolio.
Fixed-income securities include a broad array of short, medium and
long term obligations issued by the U.S. or foreign governments,
government or international agencies and instrumentalities, and
corporate issuers of various types. Some fixed-income securities
represent uncollateralized obligations of their issuers; in other
cases, the securities may be backed by specific assets (such as
mortgages or other receivables) that have been set aside as collateral
for the issuer's obligation. Fixed-income securities generally
involve an obligation of the issuer to pay interest or dividends on
either a current basis or at the maturity of the securities, as well
as the obligation to repay the principal amount of the security at
maturity.
Fixed-income securities are subject to market and credit risk. Credit
risk relates to the ability of the issuer to make payments of
principal and interest. In the case of municipal bonds, the issuer
may make these payments from money raised through a variety of
sources, including (1) the issuer's general taxing power, (2) a
specific type of tax such as a property tax, or (3) a particular
facility or project such as a highway. The ability of an issuer of
municipal bonds to make these payments could be affected by
litigation, legislation or other political events, or the bankruptcy
of the issuer. U.S. Government Securities do not involve the credit
risks associated with other types of fixed-income securities; as a
result, the yields available from U.S. Government Securities are
generally lower than the yields available from corporate fixed-income
securities. Market risk is the risk that the value of the security
will fall because of changes in market rates of interest. (Generally,
the value of fixed-income securities falls when market rates of
interest are rising.) Some fixed-income securities also involve
prepayment or call risk. This is the risk that the issuer will repay
a Fund the principal on the security before it is due, thus depriving
the Fund of a favorable stream of future interest or dividend
payments.
Because interest rates vary, it is impossible to predict the income of
a fund that invests in fixed-income securities for any particular
period. Fluctuations in the value of a Fund's investments in fixed-
income securities will cause the Fund's net asset value to increase or
decrease.
[] Lower Rated Fixed-Income Securities (Strategic Income Fund and
Bond Income Fund)
Fixed-income securities rated BB or lower by S&P or Ba or lower by
Moody's (and comparable unrated securities) are of below "investment
grade" quality. Lower quality fixed-income securities generally
provide higher yields, but are subject to greater credit and market
risk, than higher quality fixed-income securities, including U.S.
Government and many Foreign Government Securities. Lower quality
fixed-income securities are considered predominantly speculative with
respect to the ability of the issuer to meet principal and interest
payments. Achievement of the investment objective of a mutual fund
investing in lower quality fixed-income securities may be more
dependent on the fund's adviser's or subadviser's own credit analysis
than for a fund investing in higher quality bonds. The market for
lower quality fixed-income securities may be more severely affected
than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market
or by legislation that limits the ability of certain categories of
financial institutions to invest in these securities. In addition,
the secondary market may be less liquid for lower rated fixed-income
securities. This lack of liquidity at certain times may affect the
valuation of these securities and may make the valuation and sale of
these securities more difficult. Securities of below investment grade
quality are considered high yield, high risk securities and are
commonly known as "junk bonds." For more information, including a
detailed description of the ratings assigned by S&P and Moody's,
please refer to the Statement's "Appendix A -- Description of Bond
Ratings."
During the fiscal year ended December 31, 1995, 18% of the average
month-end net assets of the Bond Income Fund were invested in fixed-
income securities rated in the rating category just below investment
grade (BBB/Baa). The portfolio composition of the Strategic Income
Fund during the fiscal year ended December 31, 1995 is summarized in
Appendix B to this prospectus.
[] Foreign Securities (Strategic Income Fund and Bond Income Fund)
Foreign Government Securities and foreign corporate securities present
risks not associated with investments in U.S. Government or corporate
securities.
Since most foreign securities are denominated in foreign currencies or
traded primarily in securities markets in which settlements are made
in foreign currencies, the value of these investments and the net
investment income available for distribution to shareholders of a Fund
may be affected favorably or unfavorably by changes in currency
exchange rates or exchange control regulations. Because the Strategic
Income Fund and the Bond Income Fund may purchase securities
denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S.
dollar value of the Fund's assets and the Fund's income available for
distribution.
In addition, although a Fund's income may be received or realized in
foreign currencies, a Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the value of a currency
relative to the U.S. dollar declines after a Fund's income has been
earned in that currency, translated into U.S. dollars and declared as
a dividend, but before payment of such dividend, the Fund could be
required to liquidate portfolio securities to pay such dividend.
Similarly, if the value of a currency relative to the U.S. dollar
declines between the time a Fund incurs expenses in U.S. dollars and
the time such expenses are paid, the amount of such currency required
to be converted into U.S. dollars in order to pay such expenses in
U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign
corporate or government issuer than about a U.S. issuer, and foreign
corporate issuers are not generally subject to accounting, auditing
and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S.
issuers. Foreign brokerage commissions and other fees in some
circumstances may be higher than in the United States. With respect
to certain foreign countries, there is a possibility of expropriation
of assets, confiscatory taxation, political or financial instability
and diplomatic developments that could affect the value of investments
in those countries. The receipt of interest on foreign government
securities may depend on the availability of tax or other revenues to
satisfy the issuer's obligations. A Fund may have limited legal
recourse should a foreign government be unwilling or unable to repay
the principal or interest owed.
The Strategic Income Fund will invest all or any portion of its assets
in the securities of emerging markets. Investments in emerging
markets include investments in countries whose economies or securities
markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations
regarding foreign investments as discussed above) may include, among
others, greater political uncertainties, an economy's dependence on
revenues from particular commodities or on international aid or
development assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.
In addition, the Funds may invest in securities issued by
supranational agencies. Supranational agencies are those agencies
whose member nations determine to make capital contributions to
support the agencies' activities, and include such entities as the
International Bank of Reconstruction and Development (the World Bank),
the Asian Development Bank, the European Coal and Steel Community and
the Inter-American Development Bank.
In determining whether to invest in securities of foreign issuers, the
subadviser of each Fund will consider the likely effects of foreign
taxes on the net yield available to the Fund and its shareholders.
Compliance with foreign tax law may reduce the Fund's net income
available for distribution to shareholders.
[] Mortgage-Related Securities (All Funds)
Mortgage-related securities, such as GNMA or FNMA certificates, differ
from traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a
result, if a Fund purchases these assets at a premium, a faster-than-
expected prepayment rate will reduce yield to maturity, and a slower-
than- expected prepayment rate will have the opposite effect of
increasing yield to maturity. If a Fund purchases mortgage-related
securities at a discount, faster-than-expected prepayments will
increase, and slower-than-expected prepayments will reduce, yield to
maturity. Prepayments, and resulting amounts available for
reinvestment by the Fund, are likely to be greater during a period of
declining interest rates and, as a result, are likely to be reinvested
at lower interest rates. Accelerated prepayments on securities
purchased at a premium may result in a loss of principal if the
premium has not been fully amortized at the time of prepayment.
Although these securities will decrease in value as a result of
increases in interest rates generally, they are likely to appreciate
less than other fixed-income securities when interest rates decline
because of the risk of prepayments.
An ARM, like a traditional mortgage security, is an interest in a pool
of mortgage loans that provides investors with payments consisting of
both principal and interest as mortgage loans in the underlying
mortgage pool are paid off by the borrowers. ARMs have interest rates
that are reset at periodic intervals, usually by reference to some
interest rate index or market interest rate. Although the rate
adjustment feature may act as a buffer to reduce sharp changes in the
value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates
or changes in the issuer's creditworthiness. Because the interest
rates are reset only periodically, changes in the interest rate on
ARMs may lag changes in prevailing market interest rates. Also, some
ARMs (or the underlying mortgages) are subject to caps or floors that
limit the maximum change in interest rate during a specified period or
over the life of the security. As a result, changes in the interest
rate on an ARM may not fully reflect changes in prevailing market
interest rates during certain periods. Because of the resetting of
interest rates, ARMs are less likely than non-adjustable rate
securities of comparable quality and maturity to increase
significantly in value when market interest rates fall.
[] Asset-Backed Securities (Limited Term U.S. Government Fund)
The securitization techniques used to develop mortgage securities are
also being applied to a broad range of other assets. Through the use
of trusts and special purpose corporations, assets such as automobile
and credit card receivables are being securitized in pass-through
structures similar to mortgage pass-through structures or in a pay-
through structure similar to a CMO structure. Generally the issuers
of asset-backed bonds, notes or pass-through certificates are special
purpose entities and do not have any significant assets other than the
receivables securing such obligations. In general, the collateral
supporting asset-backed securities is of shorter maturity than
mortgage loans. Instruments backed by pools of receivables are
similar to mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the
obligations are prepaid, the Fund will ordinarily reinvest the prepaid
amounts in securities the yields of which reflect interest rates
prevailing at the time. Therefore, the Fund's ability to maintain a
portfolio which includes high-yielding asset-backed securities will be
adversely affected to the extent that prepayments of principal must be
reinvested in securities which have lower yields than the prepaid
obligations. Moreover, prepayments of securities purchased at a
premium could result in a realized loss.
[] Collateralized Mortgage Obligations (All Funds)
A CMO is a security backed by a portfolio of mortgages or mortgage
securities held under an indenture. The underlying mortgages or
mortgage securities are issued or guaranteed by the U.S. Government or
an agency or instrumentality thereof. The issuer's obligation to make
interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage securities. CMOs are issued with a number of
classes or series which have different maturities and which may
represent interests in some or all of the interest or principal on the
underlying collateral or a combination thereof. CMOs of different
classes are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of sufficient
early prepayments on such mortgages, the class or series of CMO first
to mature generally will be retired prior to its maturity. Thus, the
early retirement of a particular class or series of CMO held by the
Fund would have the same effect as the prepayment of mortgages
underlying a mortgage pass-through security. CMOs may be considered
derivative securities.
[] "Stripped" Securities (Government Securities and Strategic Income
Funds)
Stripped securities are usually structured with two or more classes
that receive different proportions of the interest and principal
distribution on a pool of U.S. or Foreign Government Securities or
mortgage assets. In some cases, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class).
Stripped securities commonly have greater market volatility than other
types of fixed-income securities. In the case of stripped mortgage
securities, if the underlying mortgage assets experience greater than
anticipated payments of principal, a Fund may fail to recoup fully its
investments in IOs. The staff of the SEC has indicated that it views
stripped mortgage securities as illiquid unless the securities are
issued by the U.S. Government or its agencies and are backed by fixed-
rate mortgages. The Funds intend to abide by the staff's position.
Stripped securities may be considered derivative securities.
[] Zero Coupon Securities (All Funds except Adjustable Rate Fund)
Pay-In-Kind Securities (Strategic Income Fund)
Zero coupon securities are issued at a significant discount from face
value and pay interest only at maturity, rather than at intervals
during the life of the security. Pay-in-kind securities pay dividends
or interest in the form of additional securities of the issuer, rather
than in cash. The prices of pay-in-kind or zero coupon securities may
react more strongly to changes in interest rates than the prices of
many other securities. The Funds are required to accrue and
distribute income from pay-in-kind and zero coupon securities on a
current basis, even though the Funds will not receive the income
currently in cash. Thus a Fund may have to sell other investments to
obtain cash needed to make income distributions.
[] When-Issued Securities (All Funds)
If the value of a "when-issued" security being purchased falls between
the time a Fund commits to buy it and the payment date, the Fund may
sustain a loss. The risk of this loss is in addition to the Fund's
risk of loss on the securities actually in its portfolio at the time.
In addition, when a Fund buys a security on a when-issued basis, it is
subject to the risk that market rates of interest will increase before
the time the security is delivered, with the result that the yield on
the security delivered to the Fund may be lower than the yield
available on other, comparable securities at the time of delivery.
Each Fund will maintain liquid high grade assets in a segregated
account in an amount sufficient to satisfy its outstanding obligations
to buy securities on a "when-issued" basis.
[] Options, Futures, Swap Contracts and Currency Transactions (All
Funds except Adjustable Rate Fund)
Except as otherwise noted, the following discussion applies to all
Funds except the Adjustable Rate Fund. The Funds may engage in a
variety of transactions involving the use of options and futures with
respect to U.S. or Foreign Government Securities or corporate fixed-
income securities (in the case of the Strategic Income Fund) for
purposes of hedging against changes in interest rates.
A Fund may buy, sell or write options on securities, securities
indexes, currencies or futures contracts. A Fund may buy and sell
futures contracts on securities, securities indexes or currencies. A
Fund may also enter into swap contracts. A Fund may engage in these
transactions either for the purpose of enhancing investment return, or
to hedge against changes in the value of other assets that a Fund owns
or intends to acquire. A Fund may also conduct foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. Options, futures
and swap contracts fall into the broad category of financial
instruments known as "derivatives" and involve special risks. Use of
options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than are
involved in hedging.
Options can generally be classified as either "call" or "put" options.
There are two parties to a typical options transaction: the "writer"
and the "buyer." A call option gives the buyer the right to buy a
security or other asset (such as an amount of currency or a futures
contract) from, and a put option the right to sell a security or other
asset to, the option writer at a specified price, on or before a
specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or
other asset if the option is exercised, and results in a loss if the
option expires unexercised. The writer of an option receives a
premium from writing an option, which may increase its return if the
option expires or is closed out at a profit. If a Fund as the writer
of an option is unable to close out an unexpired option, it must
continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and
the buyer to take delivery of the type of instrument or cash at the
time and in the amount specified in the contract. Although many
futures contracts call for the delivery (or acceptance) of the
specified instrument, futures are usually closed out before the
settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the
Fund exceeds (or is less than) the price of the offsetting purchase,
the Fund will realize a gain (or loss). A Fund may not purchase or
sell futures contracts or purchase related options if immediately
thereafter the sum of the amount of deposits for initial margin or
premiums on the existing futures and related options positions would
exceed 5% of the market value of the Fund's net assets. Transactions
in futures and related options involve the risks of (1) imperfect
correlation between the price movement of the contracts and the
underlying securities, (2) significant price movement in one but not
the other market because of different hours, (3) the possible absence
of a liquid secondary market at any point in time, and the risk that
if the subadviser's prediction on interest rates or other economic
factors is inaccurate, the Fund may be worse off than if it had not
hedged. Futures transactions involve potentially unlimited risk of
loss.
The Funds may enter into interest rate, currency and securities index
swaps. The Funds will enter into these transactions primarily to seek
to preserve a return or spread on a particular investment or portion
of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against an increase in the
price of securities a Fund anticipates purchasing at a later date.
Interest rate swaps involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal). A currency swap is
an agreement to exchange cash flows on a notional amount based on
changes in the relative values of the specified currencies. An index
swap is an agreement to make or receive payments based on the
different returns that would be achieved if a notional amount were
invested in a specified basket of securities (such as the Standard &
Poor's Composite Index of 500 Stocks [the "S&P 500"]) or in some other
investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a
Fund and a Fund's positions in swap contracts may fluctuate up or down
based on a variety of market and economic factors. In some cases, the
fluctuations may offset (or be offset by) changes in the value of
securities held in the Fund's portfolio. All transactions in options,
futures or swaps involve costs and the possible risk of loss to the
Fund of all or a significant part of the value of its investment. In
some cases, the risk of loss may exceed the amount of the Fund's
investment. The Fund will be required, however, to set aside with its
custodian bank certain assets in amounts sufficient at all times to
satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend
on a Fund's subadviser's ability to forecast bond market, currency or
other financial market movements correctly. The Fund's ability to
hedge against adverse changes in the value of securities held in its
portfolio through options, futures and swap transactions also depends
on the degree of correlation between the changes in the value of
futures, options or swap positions and changes in the values of the
portfolio securities. The successful use of futures and exchange
traded options also depends on the availability of a liquid secondary
market to enable the Fund to close its positions on a timely basis.
There can be no assurance that such a market will exist at any
particular time. Trading hours for options may differ from the trading
hours for the underlying securities. Thus, significant price
movements may occur in the securities markets that are not reflected
in the options market. This may limit the effectiveness of options as
hedging devices. In the case of swap contracts and of options that
are not traded on an exchange and not protected by the Options
Clearing Corporation ("over-the-counter" options), the Fund is at risk
that the other party to the transaction will default on its
obligations, or will not permit the Fund to terminate the transaction
before its scheduled maturity. As a result of these characteristics,
the Funds will treat most swap contracts and over-the-counter options
(and the assets they segregate to cover their obligations thereunder)
as illiquid. Certain provisions of the Internal Revenue Code (the
"Code") and certain regulatory requirements may limit the Funds'
ability to engage in futures, options and swap transactions.
The options and futures markets of foreign countries are small
compared to those of the United States and consequently are
characterized in most cases by less liquidity than are the U.S.
markets. In addition, foreign markets may be subject to less detailed
reporting requirements and regulatory controls than U.S. markets.
Furthermore, investments by the Strategic Income Fund in options and
futures in foreign markets are subject to many of the same risks as
are the Fund's other foreign investments. See "Foreign Securities"
above. For further information, see "Miscellaneous Investment
Practices -- Futures, Options and Swap Contracts" in Part II of the
Statement.
[] Rule 144A Securities (Strategic Income and Bond Income Funds)
Rule 144A securities are privately offered securities that can be
resold only to certain qualified institutional buyers. Rule 144A
securities are treated as illiquid, unless the subadviser has
determined, under guidelines established by the trustees of New
England Funds Trust I, that the particular issue of Rule 144A
securities is liquid. Investment in illiquid securities involves the
risk that the Fund may be unable to sell such a security at the
desired time.
[] Securities Lending (Limited Term U.S. Government Fund)
The Limited Term U.S. Government Fund may lend its portfolio
securities to broker-dealers or other parties under contracts calling
for the deposit by the borrower with the Fund's custodian of cash
collateral equal to at least the market value of the securities
loaned, marked to market on a daily basis. The Fund will continue to
benefit from interest or dividends on the securities loaned and will
also receive interest through investment of the cash collateral in
short-term liquid investments. No loans will be made if, as a result,
the aggregate amount of such loans outstanding at any time would
exceed 25% of the Fund's total assets (taken at current value). Any
voting rights, or rights to consent, relating to securities loaned
pass to the borrower. However, if a material event affecting the
investment occurs, such loans will be called so that the securities
may be voted by the Fund. The Fund pays various fees in connection
with such loans, including shipping fees and reasonable custodial or
placement fees.
Securities loans must be fully collateralized at all times, but
involve some credit risk to the Fund if the borrower defaults on its
obligation and the Fund is delayed or prevented from recovering the
collateral.
F u n d M a n a g e m e n t
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street,
Boston, Massachusetts 02116, serves as the adviser to each of the
Funds. NEFM oversees, evaluates and monitors the subadvisory services
provided to each Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments
will be purchased by the Funds.
Loomis Sayles is the subadviser of the Strategic Income Fund. Founded
in 1926, Loomis Sayles, One Financial Center, Boston, Massachusetts
02111, is one of the country's oldest and largest investment counsel
firms. Daniel Fuss, Managing Partner and Executive Vice President of
Loomis Sayles, has served as the Strategic Income Fund's lead
portfolio manager since the Fund's inception in May 1995. Mr. Fuss
joined Loomis Sayles in 1976. Kathleen C. Gaffney, Vice President of
Loomis Sayles, has been assisting Mr. Fuss as a portfolio manager of
the Fund since April 1996. Ms. Gaffney joined Loomis Sayles in 1984.
The subadviser of the other Funds is Back Bay Advisors, 399 Boylston
Street, Boston, Massachusetts 02116. Back Bay Advisors provides
discretionary investment management services to mutual funds and other
institutional investors. Formed in 1986, Back Bay Advisors now
manages 15 mutual fund portfolios and a total of over
$6 billion of securities. Eric N. Gutterson, Vice President of Back
Bay Advisors, has served as the portfolio manager of the Government
Securities Fund and Limited Term U.S. Government Fund since April
1994. J. Scott Nicholson, Senior Vice President of Back Bay Advisors,
has served as the Adjustable Rate Fund's portfolio manager since the
Fund's inception in October 1991. Catherine L. Bunting, Senior Vice
President of Back Bay Advisors, has served as the Bond Income Fund's
portfolio manager since 1989. Each of the foregoing persons has been
employed by Back Bay Advisors for at least five years.
Subject to the supervision of NEFM, each subadviser manages the
portfolio of each Fund to which it acts as subadviser in accordance
with the Fund's investment objective and policies, makes investment
decisions for the Fund, places orders to purchase and sell securities
for the Fund and employs professional advisers and securities analysts
who provide research services relating to the Fund. The Funds pay no
direct fees to any of the subadvisers.
Each of the Funds pays NEFM a management fee at the annual rate set
forth in the following table:
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net
assets of the Fund)
Adjustable Rate Fund 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of
$500 million
Bond Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of
$100 million
Government Securities Fund 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of
$500 million
Limited Term U.S. Government 0.650% of the first $200 million
Fund 0.625% of the next $300 million
0.600% of amounts in excess of
$500 million
Strategic Income Fund 0.65% of the first $200 million
0.60% of amounts in excess of
$200 million
NEFM pays each Fund's subadviser a subadvisory fee at the annual rate
set forth in the following table:
Subadvisory fee payable by NEFM to
Fund Subadviser subadviser
(as a percentage of average daily net
assets of the Fund)
Adjustable Rate Back Bay 0.275% of the first $200 million
Fund Advisors 0.255% of the next $300 million
0.235% of amounts in excess of
$500 million
Bond Income Fund Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of
$100 million
Government Back Bay 0.3250% of the first $200 million
Securities Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
Limited Term U.S. Back Bay 0.3250% of the first $200 million
Government Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
Strategic Income Loomis 0.35% of the first $200 million
Fund Sayles 0.30% of amounts in excess of
$200 million
Prior to January 2, 1996, Back Bay Advisors served as adviser to each
Fund other than the Strategic Income Fund.
Loomis Sayles has voluntarily agreed until further notice to the
Strategic Income Fund to waive its entire subadvisory fee (which is
paid by NEFM), and NEFM has agreed to reduce its management fee (which
is paid by the Fund) by an equal amount. These agreements may be
terminated by Loomis Sayles or NEFM at any time. In addition, under
an expense deferral arrangement, which NEFM may terminate at any time,
NEFM has agreed to defer its management fee (to the extent not waived
as provided in the preceding sentence) for the Strategic Income Fund
until further notice, to the extent necessary to limit the Fund's
expenses to the annual rate of 1.15% for the Class Y shares, subject
to the obligation of the Fund to pay NEFM such deferred fees in later
periods to the extent that the Fund's expenses fall below the annual
rate of 1.15% for the Fund's Class Y shares; provided, however, that
the Fund is not obligated to pay any such deferred fees more than two
years after the end of the fiscal year in which such fee was deferred.
NEFM and Back Bay Advisors have voluntarily agreed, until further
notice to the Adjustable Rate Fund, to reduce their fees and, if
necessary, to bear certain expenses associated with operating the Fund
in order to limit the Fund's expenses to the annual rate of 0.45% of
the Fund's average daily net assets attributable to its Class Y
shares.
If any of the voluntary fee reductions described above are terminated,
the prospectus of the affected Fund will be supplemented.
The general partners of Back Bay Advisors, Loomis Sayles, NEFM and the
Distributor are special purpose corporations that are indirect, wholly-
owned subsidiaries of New England Investment Companies, L.P. ("NEIC").
NEIC's sole general partner, New England Investment Companies, Inc.
("NEIC Inc."), is a wholly-owned subsidiary of New England Mutual Life
Insurance Company ("The New England"). The New England and
Metropolitan Life Insurance Company ("MetLife") have entered into an
agreement to merge, with MetLife to be the survivor of the merger.
The merger is conditioned upon, among other things, approval by the
policyholders of The New England and MetLife and receipt of certain
regulatory approvals. After such merger, NEIC Inc. will be a wholly-
owned subsidiary of MetLife.
In placing portfolio transactions for the Funds, Back Bay Advisors and
Loomis Sayles seek the most favorable price and execution available.
Subject to applicable regulatory restrictions and such policies as
each Trust's trustees may adopt, Back Bay Advisors and Loomis Sayles
may consider sales of shares of the Funds and other mutual funds they
manage as a factor in the selection of broker-dealers to effect
portfolio transactions for the Fund. Subject to procedures adopted by
the trustees of the Trusts, Fund brokerage transactions may be
executed by brokers that are affiliated with NEIC, NEFM or any
subadviser. See "Portfolio Transactions and Brokerage" in Part II of
the Statement.
NEFM provides executive and other personnel for the management of the
Trusts. Each Trust's Board of Trustees supervises the affairs of that
Trust as conducted by NEFM and the Funds' subadvisers.
In addition to the management fee paid to NEFM, each Fund pays all
expenses not borne by its adviser, subadviser or the Distributor,
including, but not limited to, the charges and expenses of the Fund's
custodian and transfer agent, independent auditors and legal counsel
for the Fund and the Trusts' independent trustees, all brokerage
commissions and transfer taxes in connection with portfolio
transactions, all taxes and filing fees, the fees and expenses for
registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to
shareholders and the compensation of trustees who are not directors,
officers or employees of The New England, NEFM, Back Bay Advisors,
Loomis Sayles or their affiliates, other than affiliated registered
investment companies. Certain expenses are allocated differently
between each Fund's Class A, Class B and (in the case of the Limited
Term U.S. Government, Strategic Income and Bond Income Funds) Class C
shares, on one hand, and its Class Y shares, on the other hand. (See
"Additional Facts About the Funds" below.)
B u y i n g F u n d S h a r e s
Minimum Investment
Class Y shares of the Funds may be purchased by endowments,
foundations, bank trust departments or trust companies. The minimum
initial investment is $1 million for these entities and $10,000 is the
minimum for each subsequent investment. Class Y shares may also be
purchased by plan sponsors of 401(a), 401(k), 457 or 403(b) plans
("Retirement Plans") that have total investment assets in these plans
of at least $10 million, and by The New England and any other
insurance company affiliated with The New England or any of their
successor entities ("Insurance Company Accounts"). Plan sponsors'
investment assets in multiple Retirement Plans can be aggregated for
purposes of meeting this minimum. Class Y shares may also be
purchased by any separate account of The New England or of any other
insurance company affiliated with The New England ("Separate
Accounts"). Class Y shares may also be purchased by wrap fee programs
of certain broker-dealers as to which no service or marketing fees are
paid to such broker-dealers by the Fund, NEFM or the Distributor
("Wrap Fee Programs"). There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Insurance
Company Accounts or Wrap Fee Programs. Investments in the Funds may
also be made by certain individual retirement accounts if the amounts
invested represent rollover distributions from investments by any of
the foregoing plans of amounts invested in the Funds. The Distributor
serves as the principal underwriter of the Fund's shares. Shares may
be purchased on any day when the New York Stock Exchange (the
"Exchange") is open for business (a "business day"). Investors should
contact New England Funds before attempting to place an order for Fund
shares. The Funds and the Distributor reserve the right at any time
to reject a purchase order.
Ways To Buy Fund Shares
A shareholder may purchase Class Y shares for cash on any business day
by the two methods described below:
BY WIRE TRANSFER: Prior to an initial investment, obtain an account
number and wire transfer instructions by calling 1-800-225-5478
between 8:00 a.m. and 7:00 p.m. (Eastern time). All funds should be
transmitted to State Street Bank and Trust Company, ABA #011000028,
DDA #99011538 Credit [Fund Name] Class Y shares, Shareholder Name, and
Shareholder Account Number.
BY MAIL: For an initial investment, simply complete the attached
application and return it, with a check payable to New England Funds,
L.P. and mailed to New England Funds, L.P., P.O. Box 8551, Boston, MA
02266-8551. All purchases made by check should be in U.S. dollars and
made payable to New England Funds, or, in the case of a retirement
account, the custodian or trustee. Third party checks will not be
accepted. When purchases are made by check, redemptions will not be
allowed until the investment being redeemed has been in the account
for 10 calendar days.
Class Y shares may also be purchased by exchanging securities on
deposit with a custodian acceptable to a Fund's subadviser or by a
combination of such securities and cash. Purchase of shares of the
Funds in exchange for securities is subject in each case to the
determination by a Fund's subadviser that the securities to be
exchanged are acceptable for purchase by the Fund. Securities
accepted by a Fund's subadviser in exchange for Fund shares will be
valued in the same manner as the Fund's assets (generally the last
quoted sales price), as described below under "Determination of Net
Asset Value," as of the time of the Fund's next determination of net
asset value after such acceptance. All dividends and subscription or
other rights which are reflected in the market price of accepted
securities at the time of valuation become the property of the Fund
and must be delivered to the Fund upon receipt by the investor from
the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal
income taxation, depending upon the investor's basis in the securities
tendered. A shareholder who wishes to purchase shares by exchanging
securities should obtain instructions by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities in
exchange for shares of a Fund it advises unless (1) the Fund's
subadviser, in its sole discretion, believes the securities are
appropriate investments for the Fund; (2) the investor represents and
agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of
1933, or otherwise; (3) the securities are eligible to be acquired
under the Fund's investment policies and restrictions; and (4) the
securities have a value which is readily ascertainable (not
established by evaluation procedures alone) as evidenced by a listing
on the New York Stock Exchange, the American Stock Exchange, NASDAQ or
the principal securities exchange of countries in which the Fund may
invest. No investor owning 5% or more of the Fund's shares may
purchase additional Fund shares by exchange of securities (other than
shares of other funds in the New England Funds).
General
The purchase price of shares of each Fund is the net asset value next
determined after a purchase order is received in good order by New
England Funds. For purposes of calculating the purchase price of Fund
shares, a purchase order is considered received by the Fund on the day
that it is "in good order" unless it is rejected by the Fund. For a
purchase order to be in "good order" on a particular day, in the case
of a purchase of Fund shares in exchange for securities, the
investor's securities must be placed on deposit at a depository
acceptable to a Fund's subadviser by 4:00 p.m. (Eastern time), and, in
the case of a cash investment, Federal funds must be wired to the Fund
between 9:00 a.m. and 4:00 p.m. (Eastern time) or a check for the
purchase price of the shares, accompanied by a completed application,
must have been received by New England Funds before 4:00 p.m. (Eastern
time) on that day. Orders received after 4:00 p.m. (Eastern time)
will receive the next day's price.
Purchases will be made in full and fractional Class Y shares
calculated to three decimal places. The shareholder will receive a
statement of Fund shares owned following each transaction. Investors
will not receive certificates representing Class Y shares. The Funds
and the Distributor reserve the right at any time to reject a purchase
order.
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
You may exchange Class Y shares of the Fund or any other series of the
Trusts for Class Y shares of any other series of the Trusts which
offers Class Y shares or for Class A shares of the New England Cash
Management Trust Money Market Series or U.S. Government Series or New
England Tax Exempt Money Market Trust (the "Money Market Funds").
To make an exchange, please call 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time) or, write to New England Funds. Exchange
requests after 4:00 p.m. (Eastern time), or after the Exchange closes
if it closes earlier than 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day
that the Exchange is open. All exchanges are subject to the minimum
investment and eligibility requirements of the series into which you
are exchanging. In connection with any exchange, you must receive a
current prospectus of the series into which you are exchanging. The
exchange privilege may be exercised only in those states where shares
of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by
telephone. New England Funds, L.P. will employ reasonable procedures
to confirm that telephone instructions are genuine, and, if it does
not, it may be liable for any losses due to unauthorized or fraudulent
instructions. New England Funds, L.P. will require a form of personal
identification prior to acting upon telephone instructions, will
provide shareholders with written confirmations of such transactions
and will record your instructions.
Except as otherwise permitted by SEC rule, shareholders will receive
at least 60 days' advance notice of any material change to the
exchange privilege.
Fund Dividend Payments
Each Fund declares dividends daily and pays them monthly. Each Fund
pays as dividends substantially all net investment income (tax-exempt
and taxable income other than long-term capital gains) each year and
distributes annually all net realized long-term capital gains (after
applying any available capital loss carryovers). Each Fund pays short-
term capital gains annually. The trustees of the Trusts may adopt a
different schedule as long as payments are made at least annually. If
you intend to purchase shares of a Fund shortly before it declares a
dividend you should be aware that a portion of the purchase price may
be returned to you as a taxable dividend.
You have the option to reinvest all distributions in additional Class
Y shares of the Fund or in Class Y shares of other series of the
Trusts, to receive distributions from ordinary income in cash while
reinvesting distributions from capital gains in additional Class Y
shares of the Fund or of other series of the Trusts, or to receive all
distributions in cash. Income distributions and capital gains
distributions will be reinvested in Class Y shares of the Fund at net
asset value unless you select another option. You may change your
distribution option by notifying New England Funds in writing or by
calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned "undeliverable"
to the Fund or remain uncashed for six months, your cash election will
automatically be changed and your future dividends will be reinvested.
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program that allows
you to have all dividends and any other distributions automatically
invested in Class Y shares of another New England Fund, subject to the
investor eligibility requirements of that other fund and to state
securities law requirements. Shares will be purchased at the selected
fund's net asset value on the dividend record date. A dividend
diversification account must be in the same registration (shareholder
name) as the distributing fund account and, if a new account in the
purchased fund is being established, the purchased fund's minimum
investment requirements must be met. Before establishing a dividend
diversification program into any other New England Fund, you must
obtain a copy of that fund's prospectus.
S e l l i n g F u n d S h a r e s
Ways to Sell Fund Shares
You may sell Class Y shares of the Funds in the following ways:
[] By telephone:
You may redeem (sell) shares by telephone for cash by the two methods
described below:
Wired to Your Bank Account _ If you have previously selected the
telephone redemption privilege on your account, shares may be redeemed
by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. The proceeds
generally will be wired on the next business day to the bank account
previously chosen by you on your application. A wire fee (currently
$5.00) will be deducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a
correspondent bank that is a member. If your account is with a
savings bank, it must have only one correspondent bank that is a
member of the System.
Mailed to Your Address of Record _ Shares may be redeemed by calling 1-
800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) and
requesting that a check for the proceeds be mailed to the address on
your account, provided that the address has not changed over the
previous month and that the proceeds are for $100,000 or less.
Generally, the check will be mailed to you on the business day after
your redemption request is received.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after
the Exchange closes if it closes before 4:00 p.m., will be processed
at the net asset value determined at the close of regular trading on
the next day that the Exchange is open.
[] By mail:
You may redeem your shares at their net asset value next determined
after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number,
the exact name(s) in which your shares are registered, the number of
shares or the dollar amount to be redeemed and whether you wish the
proceeds mailed to your address of record, wired to your bank account
or transmitted through ACH. All owners of the shares must sign the
request in the exact names in which the shares are registered (this
appears on your confirmation statement) and indicate any special
capacity in which they are signing (such as trustee, custodian or
under power of attorney or on behalf of a partnership, corporation or
other entity).
If you are redeeming shares worth less than $100,000 and the proceeds
check is made payable to the registered owner(s) and mailed to the
record address, no signature guarantee is required. Otherwise, you
generally must have your signature guaranteed by an eligible guarantor
institution in accordance with procedures established by New England
Funds, L.P. Signature guarantees by notaries public are not
acceptable.
Additional written information may be required for redemptions by
certain benefit plans and IRAs. Contact the Distributor for details.
General
Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper form by
State Street Bank and Trust Company ("State Street Bank"). Redemption
proceeds will normally be mailed to you within seven days after State
Street Bank or the Distributor receives your request in good order.
However, in those cases where you have recently purchased your shares
by check or an electronic funds transfer through the ACH system and
you make a redemption request within 10 days after such purchase or
transfer, the Fund may withhold redemption proceeds until the Fund
knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone
redemptions may be difficult to implement. If you are unable to
contact the Distributor by telephone, shares may be redeemed by
delivering the redemption request in person to the Distributor or by
mail as described above. Requests are processed at the net asset
value next determined after the request is received.
Special rules apply to redemptions under powers of attorney. Please
call the Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax qualified retirement
plans or for Fund shares in certificate form. If certificates have
been issued for your investment, you must send them to New England
Funds along with your request before a redemption request can be
honored. See the instructions for redemption by mail above.
The Funds may suspend the right of redemption and may postpone payment
for more than seven days when the Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when
trading on the Exchange is restricted or during an emergency that
makes it impracticable for the Funds to dispose of their securities or
to determine fairly the value of their net assets, or during any other
period permitted by the SEC for the protection of investors.
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic
Income Fund, determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the
Fund to make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by a distribution in kind of
readily marketable securities held by the Fund in lieu of cash.
Securities used to redeem Fund shares in kind will be valued in
accordance with the Funds' procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a Fund
in kind will be selected by Back Bay Advisors, or Loomis Sayles in the
case of the Strategic Income Fund, in light of the Fund's objective
and will not generally represent a pro rata distribution of each
security held in the Fund's portfolio. Investors may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. The Funds' right to pay redemptions in kind is limited
by an election made by the Funds under Rule 18f-1 under the Investment
Company Act of 1940. See "Redemptions" in Part II of the Statement.
F u n d D e t a i l s
How Fund Share Price Is Determined
Back Bay Advisors or, in the case of the Strategic Income Fund, Loomis
Sayles, under the supervision of each Trust's Board of Trustees,
determines the value of the total net assets of each Fund as of the
close of regular trading (ordinarily 4:00 p.m. Eastern time) each day
the Exchange is open. The Boards of Trustees have authorized Back Bay
Advisors or, in the case of the Strategic Income Fund, Loomis Sayles,
to delegate certain price determination functions to pricing services
or facilities selected by Back Bay Advisors or Loomis Sayles, as the
case may be. Securities for which market quotations are readily
available are generally valued at market value on the basis of market
quotations. Options and futures which are traded on exchanges are
valued at their last sale price as of the close of the Exchange. All
money market instruments with a maturity of more than 60 days are
valued at current market value. The value of debt securities with
remaining maturities of 60 days or less shall be their amortized cost
value, unless conditions indicate otherwise. In all other cases, the
value of a Fund's assets is determined in good faith by Back Bay
Advisors or, in the case of the Strategic Income Fund, Loomis Sayles,
or a pricing service selected by Back Bay Advisors or Loomis Sayles,
under the supervision of the Boards of Trustees.
The net asset value per share of each class is determined by dividing
the value of each class's securities (the current U.S. dollar value,
in the case of securities principally traded outside the United
States) plus any cash and other assets (including dividends and
interest receivable but not collected) less all liabilities (including
accrued expenses), by the number of shares of such class outstanding.
The public offering price of Class Y shares is the net asset value per
share.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary to
ensure that it qualifies as a regulated investment company and thus
does not expect to pay any federal income tax on investment income and
capital gains distributed to shareholders in cash or additional
shares. Unless you are a tax-exempt entity, your distributions
derived from a Fund's short-term capital gains and ordinary income are
taxable to you as ordinary income. Distributions derived from a
Fund's long-term capital gains ("capital gains distributions"), if
designated as such by a Fund, are taxable to you as long-term capital
gains, regardless of how long you have owned shares in the Fund. Both
dividends and capital gains distributions are taxable whether
distributed to you in cash or additional shares.
A Fund's transactions in foreign currency-denominated debt securities
and its hedging activities will likely produce a difference between
its book income and its taxable income. This difference may cause a
part or all of a Fund's income distributions to constitute returns of
capital for tax purposes or require the Fund to make distributions
exceeding book income to avoid federal income tax liability.
Dividends derived from interest on U.S. Government securities may be
exempt from state and local taxes. The Trusts intend to advise
shareholders of the proportion of each Fund's dividends that are
derived from such interest. Before investing in any of the Funds, you
should check the consequences of your local and state tax laws, which
may be different from the federal tax consequences, and the
consequences for any retirement plan offering tax benefits.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income earned
during that calendar year, and virtually all of the capital gain net
income the Fund realized in the 12-month period ending December 31 but
has not previously distributed. If declared in December to
shareholders of record in that month, and paid the following January,
these distributions will be considered for federal income tax purposes
to have been received by shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide a
correct, certified taxpayer identification number, if the Fund is
notified that you have underreported income in the past or if you fail
to certify to the Fund that you are not subject to such withholding.
In addition, each Fund will be required to withhold 31% of the gross
proceeds of Fund shares you redeem if you have not provided a correct,
certified taxpayer identification number. If you are a tax-exempt
institution, however, these back-up withholding rules will not apply
so long as you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you
will receive a Form 1099 to assist you in reporting the prior calendar
year's distributions on your federal income tax return. You should
consult your tax adviser about any state or local taxes that may apply
to such distributions. Be sure to keep the Form 1099 as a permanent
record. A fee may be charged for any duplicate information requested.
The foregoing is a summary of certain federal income tax consequences
of an investment in a Fund. You should consult a competent tax
adviser as to the effect of an investment in a Fund on your particular
federal, state and local tax situations.
[] Adjustable Rate Fund
While many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by a Fund
from direct obligations of the U.S. Government, none of the
distributions of the Adjustable Rate Fund during the current fiscal
year are expected to qualify for such tax-free treatment. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC
securities) and repurchase agreements collateralized by U.S.
Government securities do not qualify as direct federal obligations in
most states.
Performance Criteria
Each Fund may include total return information in advertisements or
other written sales material. Each Fund may show the average annual
total return for each class of shares for the one-, five- and ten-year
periods through the end of the most recent calendar quarter (or, if
shorter, the period since the commencement of the class's operations).
Total return is measured by comparing the value of a hypothetical
$1,000 investment in a class at the beginning of the relevant period
to the value of the investment at the end of the period (assuming
deduction of the current maximum sales charge on Class A shares,
automatic reinvestment of all dividends and capital gains
distributions and, in the case of the Class B shares, imposition of
the CDSC for the period of time quoted). Total return may be quoted
with or without giving effect to any voluntary expense limitations in
effect for the class in question during the relevant period. The
classes may also show total return over other periods, on an aggregate
basis for the period presented, or without deduction of a sales
charge. If a sales charge is not deducted in calculating total
return, the class's total return will be higher.
Each Fund may also include the yield, accompanied by the total return,
for each class of shares, in advertising and other written material.
Yield will be computed in accordance with the SEC's standardized
formula by dividing the adjusted net investment income per share
earned during a recent 30-day period by the maximum offering price of
a share of the relevant class (reduced by any earned income expected
to be declared shortly as a dividend) on the last day of the period.
Yield calculations will reflect any voluntary expense limitations in
effect for the Fund during the relevant period.
Each Fund may also present one or more distribution rates for each
class in its sales literature. These rates will be determined by
annualizing the class's distributions from net investment income and
net short-term capital gains over a recent 12-month, 3-month or 30-day
period and dividing that amount by the maximum offering price or the
net asset value on the last day of such period. If the net asset
value rather than the maximum offering price is used to calculate the
distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of the Funds
can be expected to achieve a higher investment return than the Funds'
Class A, Class B or Class C shares.
All performance information is based on past results and is not an
indication of likely future performance.
Additional Facts About the Funds
[] New England Funds Trust I was organized in 1985 as a
Massachusetts business trust and is authorized to issue an unlimited
number of full and fractional shares in multiple series. The
Government Securities Fund represents the original series of shares of
New England Funds Trust I. The Bond Income Fund was organized prior
to 1985 and conducted investment operations as a separate corporation
until its reorganization as a series of New England Funds Trust I in
January 1987. The Strategic Income Fund commenced investment
operations in 1995.
[] New England Funds Trust II was organized in 1931 as a
Massachusetts business trust and is authorized to issue an unlimited
number of full and fractional shares in multiple series. The Limited
Term U.S. Government Fund commenced investment operations in 1989.
The Adjustable Rate Fund commenced operations in 1991.
[] When you invest in a Fund, you acquire freely transferable shares
of beneficial interest that entitle you to receive dividends as
determined by the respective Trust's trustees and to cast a vote for
each share you own at shareholder meetings. Shares of each Fund vote
separately from shares of other series of the same Trust, except as
otherwise required by law. Shares of all classes of a Fund vote
together, except as to matters relating to a class's Rule 12b-1 plan,
for which only shares of that class are entitled to vote. No Rule 12b-
1 plan applies to the Class Y shares of any Fund.
[] Class A, Class B and Class C shares are identical to Class Y
shares, except that Class A and Class B shares are subject to a sales
load or contingent deferred sales charge, Class A, Class B and Class C
shares bear a service fee at the annual rate of 0.25% of average net
assets (and in the case of Class B and Class C shares a 0.75%
distribution fee; also, Class A shares of the Limited Term U.S.
Government Fund bear an additional 0.10% distribution fee) and have
separate voting rights in certain circumstances. Class Y bears its
own transfer agency and prospectus printing costs. The minimum
investment in Class A, Class B and Class C shares is $2,500 (but lower
minimums apply to purchases under certain special programs).
[] Except for matters that are explicitly identified as
"fundamental" in this prospectus or Part I of the Statement, the
investment policies of each Fund may be changed by the relevant
Trust's trustees without shareholder approval or prior notice. The
investment objectives of the Government Securities and Bond Income
Funds are fundamental. The investment objectives of the Adjustable
Rate Fund and Strategic Income Fund are not fundamental. The
investment objectives of the Limited Term U.S. Government Fund is not
fundamental but, as a matter of policy, the trustees would not change
that objective without shareholder approval. If there is a change in
the investment objective of the Adjustable Rate or Strategic Income
Fund, you should consider whether the Fund remains an appropriate
investment in light of your then current financial position and needs.
[] The Trusts do not generally hold regular shareholder meetings and
will do so only when required by law. Shareholders of a Trust may
remove the trustees of that Trust from office by votes cast at a
shareholder meeting or by written consent.
[] The transfer and dividend paying agent for the Funds is New
England Funds, L.P., 399 Boylston Street, Boston, MA 02116. New
England Funds, L.P. has subcontracted certain of its obligations as
such to State Street Bank, 225 Franklin Street, Boston, MA 02110.
[] The Trusts, together with the Money Market Funds, constitute the
New England Funds. Each Trust offers only its own funds' shares for
sale, but it is possible that a Trust might become liable for any
misstatements in this prospectus that relate to the other Trust. The
trustees of each Trust have considered this possible liability and
approved the use of this combined prospectus for Funds of both Trusts.
[] The Class A, Class B, Class C and Class Y structure could be
terminated should certain IRS rulings be rescinded.
[] Each Fund's annual report contains additional performance
information and is made available upon request and without charge.
Each Fund will send a single copy of its annual and semi-annual
reports to an address at which more than one shareholder of record
with the same last name has indicated that mail is to be delivered.
Shareholders may request additional copies of any annual or semi-
annual report in writing or by telephone.
[] The Distributor has entered into a selling agreement with
investment dealers, including a broker-dealer that is an affiliate of
the Distributor, for the sale of the Funds' Class Y Shares. The
Distributor may at its expense pay an amount not to exceed 0.50% of
the amount invested to dealers who have selling agreements with the
Distributor. Registered representatives of the affiliated broker-
dealer are also employees of New England Investment Associates, Inc.
("NEIA"), an indirect, wholly-owned subsidiary of NEIC. NEIA may
receive compensation with respect to certain sales of each Fund's
Class Y shares from the Fund's subadviser.
A p p e n d i x A : R a t i n g s O f S e c u r i t i e s
Description of Moody's Investors Service, Inc. bond ratings:
Aaa, Aa, A _ Bonds which are rated Aaa or Aa are judged to be of high
quality by all standards and are generally known as high grade bonds.
Bonds rated Aa are rated lower than Aaa securities because margins of
protection may not be as large as in the latter or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger
than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa _ Bonds which are rated Baa are considered 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 which are rated Ba are judged to have speculative elements;
their future cannot be considered as well secured. 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 which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa _ Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
Ca _ Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default or have
other marked shortcomings.
C _ Bonds which are rated C are the lowest rated class of bonds and
can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Description of Standard & Poor's Ratings Group bond ratings:
AAA, AA, A _ Bonds rated AAA have the highest rating assigned by S&P
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues
only in small degree. Bonds rated A have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in high 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 repay principal and pay interest for bonds in this category than
for bonds in higher rated categories.
BB-B-CCC-CC-C _ Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligation.
BB -- indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CI _ The rating CI is reserved for income bonds on which no income is
being paid.
D _ Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
A p p e n d i x B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Percentage
of Net
Security Assets
Preferred 4.6%
Stock......................................
Short-term Obligations and Other Assets .......... 0.2%
Common Stock....................................... 9.3%
Debt _ 17.1%
Unrated......................................
Debt _ Standard and Poor's Rating
AAA ....................................... 8.2%
AA......................................... 3.4%
A.......................................... 5.4%
BBB........................................ 11.1%
BB......................................... 15.9%
B.......................................... 16.1%
CCC........................................ 8.4%
CD......................................... 0.3%
The chart above indicates the composition of the Strategic Income Fund
for the fiscal year ended December 31, 1995, with the debt securities
rated by S&P separated into the indicated categories. The percentages
were calculated on a dollar-weighted average basis by determining
monthly the percentage of the Strategic Income Fund's net assets
invested in each category as of the end of each month during the year.
Loomis Sayles does not rely primarily on ratings designed by any
rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will
be in subsequent fiscal years.
