As filed with the Securities and Exchange Commission on May 15, 1996
Registration No. 333-2399
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. 2 |X|
Post-Effective Amendment No. |_|
(Check appropriate box or boxes)
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GMO TRUST
(Exact Name of Registrant as Specified in Charter)
40 Rowes Wharf, Boston, MA 02110
(Address of Principal Executive Offices)
(617) 330-7500
(Area Code and Telephone Number)
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WILLIAM R. ROYER, General Counsel
GMO TRUST
40 Rowes Wharf, Boston, MA 02110
(Name and address of Agent for Service)
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Copy to:
JOSEPH B. KITTREDGE, JR., Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
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Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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An indefinite amount of the Registrant's securities has been registered under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. In reliance upon such Rule, no filing fee is being paid at this
time. The Registrant filed a Rule 24f-2 Notice for its fiscal year ended
February 29, 1996 on April 26, 1996.
GMO TRUST
CROSS-REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
<TABLE>
<CAPTION>
FORM N-14 ITEM NO.
PART A CAPTION IN PROSPECTUS/PROXY STATEMENT
<S> <C>
1. Cross-Reference Sheet; Front Cover
2. Table of Contents
3. Synopsis; Expense Summary; Risk factors
4. Approval or disapproval of the transaction
5. Information about GMO Trust -- Incorporated by reference to specified documents
6. Information about The Common Fund
7. Approval or disapproval of the transaction: Required vote; Other
8. Other
9. Not Applicable
PART B CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page
11. Cover Page -- Incorporated by reference to specified documents
12. Cover Page -- Incorporated by reference to specified documents
13. Cover Page -- Incorporated by reference to specified documents
14. Financial Statements
</TABLE>
PART C
The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
Table of Contents
A Message from the Investment Manager ......................................
Notice of Unitholder Meeting ...............................................
Combined Prospectus/Proxy Statement.........................................
PROXY CARD ENCLOSED
Application form for GMO Foreign Fund enclosed
GRANTHAM, MAYO, VAN OTTERLOO & CO.
[LOGO]
A MESSAGE FROM THE INVESTMENT MANAGER
May ___, 1996
Dear Member:
Enclosed you will find several documents relating to the Special
Meeting of Members of The Common Fund for Nonprofit Organizations ("The Common
Fund") that own units in The Common Fund's GMO International Equities Pool (the
"GMO Pool") to be held May 24, 1996 at 450 Post Road East, Westport, Connecticut
06881 at 10:00 a.m. I hope you will give this material your immediate attention
and that, if you cannot attend the meeting in person, you will vote your proxy
promptly.
Based on the recommendation of the International Equity Committee of
the Board of Trustees of The Common Fund (the "Committee"), the Board of
Trustees of The Common Fund has recommended that the member institutions that
own units of the GMO Pool (the "Unitholders") vote to discontinue the GMO Pool.
Discontinuance of the GMO Pool is part of a transaction proposed by Grantham,
Mayo, Van Otterloo & Co. ("GMO"), the investment manager of the GMO Pool,
scheduled to take place on June 28, 1996 which involves, in essence, the
reorganization of the GMO Pool as GMO Foreign Fund (the "Mutual Fund"), a newly
formed series of GMO Trust, a registered, open-end management investment
company, through (i) the discontinuation of the GMO Pool and the distribution of
all the assets and liabilities of the GMO Pool to Unitholders and (ii) the
exchange, immediately thereafter, of the assets and liabilities distributed for
shares of the Mutual Fund.
After the distribution to Unitholders, the assets and liabilities
formerly held in the GMO Pool will remain in the custody of The Common Fund's
custodian, Mellon Bank, although title to such assets and liabilities will, at
that time, be in the hands of the respective Unitholders. At the time of the
exchange of such assets and liabilities for shares of the Mutual Fund, Mellon
Bank will transfer custody of such assets and liabilities to Brown Brothers
Harriman & Co., as custodian for the Mutual Fund. At the close of the
transaction the assets and liabilities of the Mutual Fund will consist entirely
of the assets and liabilities formerly held in the GMO Pool and the shareholders
of the Mutual Fund will consist entirely of the former Unitholders of the GMO
Pool. GMO will be the investment manager to the Mutual Fund, and will manage the
Mutual Fund in a manner substantially identical to the manner in which it
currently manages the GMO Pool.
GMO has informed the Committee that it intends to resign as manager of
the GMO Pool. GMO has, however, organized the Mutual Fund in order to conduct an
investment program substantially similar to that conducted by the GMO Pool. GMO
recommends that Unitholders wishing to continue their investment program with
GMO vote to approve the transaction described in the accompanying proxy
statement. The Board of Trustees of The
Common Fund has decided that the GMO Pool should be discontinued because they
would not be able to make GMO's services available after GMO resigns as the
manager. The Common Fund will accept redemption requests of those Unitholders
that do not wish to participate in the transaction.
A Notice of Special Meeting of Unitholders, a Prospectus/Proxy
Statement relating to the proposed reorganization, the current Prospectus of GMO
Trust, an application form for the Mutual Fund, and a form of proxy are
enclosed. Please read them carefully. Whether or not you plan to attend the
meeting in person, we urge you to complete, sign, date and return both the proxy
card and the application form for the Mutual Fund so that your units may be
voted in accordance with your instructions.
Your vote is important to us. We appreciate the time and consideration
I am sure you will give this important matter. If you have questions about the
proposal, please call 1-800- 447-3167.
Sincerely yours,
(signature of Eyk H.A. Van Otterloo)
Eyk H.A. Van Otterloo
THE COMMON FUND FOR NONPROFIT ORGANIZATIONS
NOTICE OF SPECIAL MEETING OF UNITHOLDERS
OF THE
GMO INTERNATIONAL EQUITIES POOL
To the Unitholders of the GMO International Equities Pool of The Common Fund for
Nonprofit Organizations:
NOTICE IS HEREBY GIVEN that a Special Meeting of Unitholders of the GMO
International Equities Pool of The Common Fund for Non-Profit Organizations (the
"GMO Pool") will be held on Friday, May 24, 1996 at 10:00 a.m. at 450 Post Road
East, Westport, Connecticut 06881 to consider the following:
1. To vote upon the approval of a transaction involving, in essence, the
reorganization of the GMO Pool as GMO Foreign Fund, a newly formed series
of GMO Trust, a registered, open-end management investment company (the
"Mutual Fund"), pursuant to an Agreement and Plan of Reorganization which
provides that (i) the GMO Pool will be discontinued and its assets and
liabilities will be distributed pro rata to the Unitholders as a
liquidating distribution, and (ii) such assets and liabilities will
immediately thereafter be transferred by the Unitholders to the Mutual Fund
in exchange for shares of the Mutual Fund.
2. To transact such other business as may properly come before the meeting.
The Board of Trustees of The Common Fund for Non-Profit Organizations has fixed
the close of business on May 10, 1996 as the record date for determination of
Unitholders entitled to notice of, and to vote at, the Special Meeting.
By order of the Trustees
[Name]
Secretary
WE URGE YOU TO MARK, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN THE POSTAGE-PAID
ENVELOPE PROVIDED SO THAT YOU WILL BE REPRESENTED AT THE SPECIAL MEETING.
May , 1996
PROSPECTUS/PROXY STATEMENT
May , 1996
TABLE OF CONTENTS
Synopsis......................................................................3
Expense Summary...............................................................4
Risk Factors..................................................................6
Approval or Disapproval of the Transaction....................................7
Additional Information about the Mutual Fund and the GMO Pool................10
Other........................................................................13
Agreement and Plan of Reorganization .................................Exhibit A
This document will give you the information you need to vote on the
proposed transaction involving the GMO International Equities Pool of The Common
Fund for Nonprofit Organizations (the "GMO Pool"), located at 450 Post Road
East, Westport, Connecticut 06881, having a phone number of 1-203-341-2000, and
GMO Foreign Fund, a series of GMO Trust (the "Mutual Fund"), located at 40 Rowes
Wharf, Boston, Massachusetts 02110, having a phone number of 1-800-447-3167.
Much of the information is required under rules of the Securities and Exchange
Commission (the "SEC"); some of it is technical. If there is anything you do not
understand, please contact Grantham, Mayo, Van Otterloo & Co. ("GMO") at 1-
800-447-3167.
This Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies by and on behalf of the Board of Trustees of The Common
Fund for Nonprofit Organizations ("The Common Fund") for use at the Special
Meeting (the "Meeting") of the Members of The Common Fund that own units in the
GMO Pool (the "Unitholders") to be held on May 24, 1996 at 10:00 a.m. at 450
Post Road East, Westport, Connecticut 06881, and at any adjournment or
adjournments thereof. This Prospectus/Proxy Statement and the enclosed form of
proxy are being mailed to Unitholders on or about May 15, 1996.
At the Meeting, Unitholders will vote to approve or disapprove the
reorganization of the GMO Pool as the Mutual Fund through the discontinuation of
the GMO Pool and the distribution of all its assets and liabilities to the
Unitholders, and the transfer immediately thereafter by Unitholders of the
assets and liabilities distributed in exchange for shares of the Mutual Fund.
Only Unitholders of record on May 10, 1996 (the "Record Date") will be entitled
to notice of and to vote at the Meeting. As of the Record Date, there were
outstanding 96,653 units of beneficial interest of the GMO Pool held by thirteen
Unitholders.
This Prospectus/Proxy Statement explains concisely what you should know
before investing in the Mutual Fund. Please read it and keep it for future
reference. This Prospectus/Proxy Statement is accompanied by the Prospectus of
GMO Trust dated February 29, 1996 (the "GMO Prospectus"). The GMO Prospectus
contains information about the Mutual Fund and is incorporated into this
Prospectus/Proxy Statement by reference.
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The following documents have been filed with the Securities and
Exchange Commission and are also incorporated into this Prospectus/Proxy
Statement by reference: (i) the Statement of Additional Information of GMO Trust
dated February 29, 1996 (the "GMO Statement of Additional Information"), and
(ii) a Statement of Additional Information dated May __, 1996 relating to the
transactions described in this Prospectus/Proxy Statement (the "Reorganization
Statement of Additional Information").
For a free copy of the GMO Prospectus, the GMO Statement of Additional
Information and/or the Reorganization Statement of Additional Information,
please contact GMO at 1-800- 447-3167.
The Trustees know of no matters other than those set forth herein to be
brought before the Meeting. If, however, any other matters properly come before
the Meeting, it is the Trustees' intention that proxies will be voted on such
matters in accordance with the judgment of the persons named in the enclosed
form of proxy.
Proxy materials, reports and proxy and information statements and other
information filed by GMO Trust can be inspected and copied at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT 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/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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I. SYNOPSIS
PROPOSED TRANSACTION. The GMO Pool is a fund of The Common Fund, a
nonprofit membership corporation operated by and for its member colleges,
universities, and independent schools. The Mutual Fund is a newly formed series
of GMO Trust, an open-end management investment company which is, unlike the GMO
Pool, registered under the Investment Company Act of 1940. The GMO Pool is
managed, and the Mutual Fund will be managed, by GMO.
The Board of Trustees of The Common Fund, acting upon the
recommendation of its International Equity Committee (the "Committee"), has
decided that the GMO Pool should be discontinued under Rule 17.3 of the Rules of
The Common Fund. This discontinuance is a step in a transaction (the
"Transaction") involving, in essence, the reorganization of the GMO Pool as the
Mutual Fund, whereby (i) the GMO Pool will be discontinued and its assets and
liabilities will be distributed pro rata to the Unitholders as a liquidating
distribution, and (ii) such assets and liabilities will immediately thereafter
be transferred by the Unitholders to the Mutual Fund in exchange for shares of
the Mutual Fund. At the completion of the Transaction the assets and liabilities
of the Mutual Fund will consist entirely of the assets and liabilities held in
the GMO Pool immediately prior to the Transaction, and the shareholders of the
Mutual Fund will consist entirely of the Unitholders of the GMO Pool immediately
prior to the Transaction, with identical respective ownership interests. GMO
intends to manage the Mutual Fund in a manner substantially identical to the way
in which it currently manages the GMO Pool.
THE BOARD OF TRUSTEES OF THE COMMON FUND RECOMMENDS THAT UNITHOLDERS
VOTE TO DISCONTINUE THE GMO POOL BECAUSE GMO HAS INFORMED THE COMMITTEE THAT IT
INTENDS TO RESIGN AS INVESTMENT MANAGER OF THE GMO POOL. GMO RECOMMENDS THAT
UNITHOLDERS APPROVE THE TRANSACTION BECAUSE IT OFFERS UNITHOLDERS THE
OPPORTUNITY TO CONTINUE TO BENEFIT FROM GMO'S MANAGEMENT IN A SUBSTANTIALLY
SIMILAR INVESTMENT PROGRAM. SEE "APPROVAL OR DISAPPROVAL OF THE TRANSACTION."
CERTAIN TAX CONSEQUENCES OF THE REORGANIZATION. None of the Unitholders
will incur any federal income tax liability in connection with the Transaction,
provided that neither their investment in The Common Fund nor the assets
received by the Unitholders in liquidation of the GMO Pool were debt-financed.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The
investment objectives, policies and restrictions of the GMO Pool and the Mutual
Fund are virtually identical. The GMO Pool invests, and the Mutual Fund will
invest, largely in a portfolio of common stocks and securities convertible into
stocks of companies domiciled outside the United States. The GMO Pool utilizes,
and the Mutual Fund will utilize, a fundamental analysis of companies and
countries to select securities in which to invest. See "Additional
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Information about the Mutual Fund and the GMO Pool -- Comparison of Investment
Objectives, Policies and Restrictions."
COMPARISON OF DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE
PROCEDURES. Shares of the Mutual Fund may be purchased or redeemed on any day
when the New York Stock Exchange is open for business (a "business day"), while
units of the GMO Pool may only be purchased or redeemed one day per month. See
"Additional Information about the Mutual Fund and the GMO Pool -- Comparison of
Distribution, Purchase, Redemption and Exchange Procedures."
II. EXPENSE SUMMARY
The following tables summarize expenses (i) that the GMO Pool has
incurred in its past fiscal year, and (ii) that the Mutual Fund expects to incur
in its current fiscal year after giving effect to the Transaction on a pro forma
combined basis as if the Transaction had occurred as of April 1, 1996. The
Examples show the estimated cumulative expenses attributable to a hypothetical
$1,000 investment over specified periods.
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<TABLE>
<CAPTION>
Current Expenses Pro Forma Expenses
GMO Pool Mutual Fund
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<S> <C> <C>
UNITHOLDER/SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases None None
Maximum Deferred Sales Charge None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
(after fee waiver and expense reduction
in the case of the Mutual Fund) .70% .57%1
Other Expenses .13% .18%
Total Fund Operating Expenses .83% .75%1
</TABLE>
The tables are provided to help you understand an investor's share of
the operating expenses which each fund incurs.
EXAMPLES
An investment of $1,000 would incur the following expenses, assuming
(1) 5% annual return and (2) no redemption at the end of each period:
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1 GMO has voluntarily undertaken to reduce its management fees and to
bear certain expenses with respect to the Mutual Fund until further notice to
the extent that the Mutual Fund's total annual operating expenses (excluding
brokerage commissions, extraordinary expenses (including taxes), securities
lending fees and expenses and transfer taxes) would otherwise exceed .75% of the
Mutual Fund's daily net assets. Therefore, so long as GMO agrees so to reduce
its fee and bear certain expenses, total annual operating expenses (subject to
such exclusions) of the Mutual Fund will not exceed .75% of the Mutual Fund's
daily net assets. Absent the waiver of fees, pro forma Management Fees for the
Mutual Fund would be .75% and pro forma Total Fund Operating Expenses for the
Mutual Fund would be .93%.
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1 3 5 10
year years years years
GMO POOL $8 $26 $46 $103
MUTUAL FUND $8 $24
(PRO FORMA COMBINED)
The Examples do not represent past or future expense levels. Actual
expenses may be greater or less than those shown. Federal regulations require
the Examples to assume a 5% annual return, but actual annual return will vary.
Federal regulations require that the Mutual Fund, as a newly formed fund,
display examples of expenses for one and three years only.
III. RISK FACTORS
Because the GMO Pool and the Mutual Fund share similar investment
objectives and policies, the risks of an investment in the Mutual Fund as
described below are similar to the risks of an investment in the GMO Pool. A
more detailed description of certain of the risks associated with an investment
in the Mutual Fund is contained in the GMO Prospectus.
FOREIGN INVESTMENTS--GENERAL. Investment in foreign issues or
securities principally traded overseas involves certain special risks due to the
economic, political and legal developments in foreign countries. These risks
include unfavorable changes in currency exchange rates, lack of information
about the issuer, and lack of liquidity of the securities of the issuer. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Investors should also be aware that, under certain circumstances,
markets which are perceived to have similar characteristics to troubled markets
may be adversely affected whether or not similarities actually exist. A complete
description of the risks associated with foreign securities is included in the
GMO Prospectus on page 31.
FOREIGN INVESTMENTS--EMERGING MARKETS. The risks described above apply
to an even greater extent to investments in emerging markets. The securities
markets of emerging countries are generally smaller, less developed, less
liquid, and more volatile than the securities markets of the United States and
developed foreign markets. Many emerging markets have experienced substantial
rates of inflation for many years. Inflation and rapid fluctuations in inflation
rates have had and may continue to have very negative effects on the securities
markets of certain emerging countries. The economies of emerging markets are
particularly susceptible to downturns because of (i) the risk of trade barriers
and other protectionist measures, (ii) their reliance on only a few industries
or commodities, and (iii) their dependence on the economic conditions of the
countries with which they trade. In addition, custodial services and other costs
relating to investment in foreign markets may be more expensive in emerging
markets than in many developed foreign markets. A complete
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description of the risks associated with emerging markets is included in the GMO
Prospectus on page 31.
OPTIONS AND FUTURES TRANSACTIONS. The Mutual Fund's use of options and
futures transactions involves certain risks, including the risks that the Mutual
Fund will be unable at times to close out such positions, that such transactions
may not accomplish their purpose because of imperfect market correlations, or
that GMO may not forecast market movements correctly. A complete description of
the risks associated with options and futures transactions is included in the
GMO Prospectus on pages 32-36.
OTHER INVESTMENT PRACTICES. To the extent that the Mutual Fund
exercises its ability to engage in certain investment practices, such as
repurchase agreements and securities lending, it may be delayed in recovering or
unable to recover its collateral in the event of default by the other party. In
the case of securities purchased for future delivery, the Mutual Fund runs the
risk of a decline in the value of such securities before the settlement date and
the risk that the other party should default on its obligation. A complete
description of the risks associated with other investment practices is included
in the GMO Prospectus on pages 31-42.
IV. APPROVAL OR DISAPPROVAL OF THE TRANSACTION
The Unitholders of the GMO Pool are being asked to approve or
disapprove the Transaction, which involves, in essence, the reorganization of
the GMO Pool as the Mutual Fund. The Transaction is proposed to be effected
pursuant to an Agreement and Plan of Reorganization between The Common Fund, on
behalf of the GMO Pool, and GMO Trust, on behalf of the Mutual Fund, dated as of
May __, 1996 (the "Agreement"), a copy of which is attached to this
Prospectus/Proxy Statement as Exhibit A. A vote by Unitholders is required under
Rule 17.3 of the Rules of The Common Fund, which authorizes the Board of
Trustees of The Common Fund to discontinue a fund with the consent of two-thirds
of the unitholders of the fund including unitholders representing two-thirds of
the units of participation in the fund.
AGREEMENT AND PLAN OF REORGANIZATION. The Agreement provides that the
GMO Pool will be discontinued and its assets and liabilities will be distributed
to Unitholders. Each Unitholder will receive a portion of such assets and
liabilities proportional to such Unitholder's ownership share of the GMO Pool.
Immediately following the distribution, each Unitholder will transfer the assets
and liabilities distributed to it to the Mutual Fund for shares of the Mutual
Fund representing an identical relative ownership interest in the Mutual Fund as
was previously held in the GMO Pool. Prior to this exchange, the Mutual Fund
will not hold any assets or liabilities. Following the exchange, therefore, the
assets and liabilities of the Mutual Fund will consist entirely of those assets
and liabilities formerly held by the GMO Pool.
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The consummation of the Transaction is subject to the conditions set
forth in the Agreement. The Agreement may be terminated and the Transaction
abandoned at any time before its consummation, before or after approval by the
Unitholders, by mutual consent of the GMO Pool and the Mutual Fund or, if any
condition set forth in the Agreement has not been fulfilled and has not been
waived by the party entitled to its benefits, by such party.
All fees and expenses, including legal and accounting expenses,
portfolio transfer taxes (if any) or other similar expenses incurred in
connection with the consummation of the Transactions, will be borne by GMO.
CUSTODY OF ASSETS AND LIABILITIES INVOLVED IN THE TRANSACTION. The
Agreement provides that the Transaction will consists of two steps: (i) the
distribution of the assets and liabilities of the GMO Pool to Unitholders,
followed by (ii) the transfer of such assets and liabilities by the Unitholders
to the Mutual Fund in exchange for shares of the Mutual Fund. At no point
throughout the Transaction, however, will the assets and liabilities be
physically delivered to the Unitholders. Instead, after the distribution to
Unitholders, while title to the assets and liabilities will be in the hands of
the respective Unitholders, the assets and liabilities themselves will remain in
the custody of The Common Fund's custodian, Mellon Bank. At the time the
Unitholders exchange the assets and liabilities for shares of the Mutual Fund,
Mellon Bank will transfer custody of such assets and liabilities to Brown
Brothers Harriman & Co., as custodian for the Mutual Fund, and title to such
assets and liabilities will pass to the Mutual Fund.
DESCRIPTION OF THE SHARES OF THE MUTUAL FUND. Full and fractional
shares of the Mutual Fund will be issued to the Unitholders of the GMO Pool in
accordance with the procedure under the Agreement as described above. Shares of
the Mutual Fund are freely transferrable, are entitled to dividends as declared
by the Trustees of GMO Trust, and, in liquidation of GMO Trust, are entitled to
receive the net assets of the Mutual Fund, but not of any other series of GMO
Trust. Unitholders receiving Mutual Fund shares in the Transaction will not pay
a sales charge on such shares. Shares of the Mutual Fund are not subject to
redemption fees or 12b-1 fees.
GMO Trust was organized in 1985 as a Massachusetts business trust,
pursuant to an Agreement and Declaration of Trust (the "Declaration of Trust"),
and has an unlimited authorized number of shares of beneficial interest which
GMO Trust's trustees may, without shareholder approval, divide into an unlimited
number of series of such shares, and which are presently divided into
twenty-four series of shares. Shares of the Mutual Fund represent one such
series. The shares of GMO Trust are entitled to vote at any meetings of
shareholders. GMO Trust does not generally hold annual meetings of shareholders
and will do so only when required by law. Matters submitted to shareholder vote
must be approved by each series separately except (i) when the Investment
Company Act of 1940 requires that shares shall be voted together as a single
class, and (ii) when the Trustees determine that only shareholders of the series
affected shall be entitled to vote on the matter. Shareholders who hold a
majority
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of the outstanding shares may remove the Trustees of GMO Trust from office by
votes cast in person or by proxy at a meeting of shareholders or by written
consent.
Under Massachusetts law, shareholders of the Mutual Fund could, under
certain circumstances, be held personally liable for the obligations of GMO
Trust. However, the Declaration of Trust disclaims shareholder liability for
acts or obligations of GMO Trust and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
GMO Trust. The Declaration of Trust provides for indemnification out of all the
property of the relevant fund for all loss and expense of any shareholder of
that fund held personally liable for the obligations of GMO Trust. Thus, the
risk of a shareholder of the Mutual Fund incurring financial loss on account of
shareholders' liability is considered remote since it may arise only in the very
limited circumstances in which the disclaimer is inoperative and the Mutual Fund
would be unable to meet its obligations.
FEDERAL INCOME TAX CONSEQUENCES. Membership in The Common Fund is
limited to organizations which are exempt from federal income tax under Section
501(a) or 115(a) of the Internal Revenue Code (the "Code"), and only Members of
The Common Fund may invest in the various funds of The Common Fund, including
the GMO Pool. Consequently, assuming that all of the Unitholders are so exempt,
none of the Unitholders will incur any federal income tax liability in
connection with the Transaction, provided that neither their investment in The
Common Fund nor the assets received by the Unitholders in liquidation of the GMO
Pool constitutes "debt-financed property" within the meaning of the Code. If a
Unitholder's investment in The Common Fund or the assets to be received by such
Unitholder in liquidation of the GMO Pool are debt-financed property, such
Unitholder should consult a tax professional.
TRUSTEES' RECOMMENDATION. GMO has informed the Board of Trustees of The
Common Fund and the Committee that it intends to resign as manager of the GMO
Pool. GMO recommends that Unitholders wishing to continue their investment
program with GMO approve the Transaction. The Trustees, based on the
recommendation of the Committee, concur in that recommendation because The
Common Fund would not be able to offer the GMO Pool after GMO resigns as manager
thereof. The Mutual Fund will allow Unitholders the opportunity to continue to
benefit from GMO's management in a substantially similar investment program.
REQUIRED VOTE. Approval of the proposal requires the affirmative vote
of both (A) two-thirds of the Members that own units in the GMO Pool and (B)
Members holding two-thirds of all the outstanding units in the GMO Pool, in each
case as of the Record Date. Unless revoked, all valid proxies will be voted in
accordance with the specification thereon or, in the absence of specifications,
FOR approval of the Transaction.
A Unitholder of the GMO Pool objecting to the proposed Transaction is
not entitled under New York law or the Constitution, By-laws or Rules of The
Common Fund to demand payment for and an appraisal of its GMO Pool units if the
Transaction is consummated over
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the objection of such Unitholder. The Common Fund, however, will accept
redemption requests of those Unitholders that do not wish to participate in the
Transaction. If the required vote is obtained, the GMO Pool will be discontinued
as of June 28, 1996, and all Unitholders that have not redeemed their units will
receive a pro rata distribution of the GMO Pool's assets and liabilities,
whether or not such Unitholders have voted to approve the Transaction.
In the event that this proposal is not approved by the Unitholders of
the GMO Pool, the GMO Pool will continue to be managed as a separate fund of The
Common Fund--by GMO initially--in accordance with its current investment
objective and policies, and the Trustees and the Committee may consider such
alternatives as may be in the best interests of the Unitholders.
VI. ADDITIONAL INFORMATION ABOUT THE MUTUAL FUND AND THE GMO POOL
INFORMATION ABOUT THE MUTUAL FUND. For information about the Mutual
Fund, please consult the GMO Prospectus, particularly at pages 20-21.
INFORMATION ABOUT THE COMMON FUND. The Common Fund is a non-profit
organization that was organized in 1969 pursuant to a Special Act of the New
York State Legislature in 1955 that authorized the creation of The Common Fund.
The Common Fund began operations in 1971. The Common Fund is governed by a Board
of Trustees who, except for the President, are elected for three-year staggered
terms.
Membership in The Common Fund is limited to educational institutions
and educational support organizations. There were as of December 31, 1995
approximately 1,400 Members, of which approximately 920 were participating in
the long term equity and bond investment funds of The Common Fund and more than
1,100 were participating in the intermediate and short term cash funds.
The Common Fund offers a series of pooled investment funds, each of
which has its own investment objectives, policies and strategies. For each
investment fund, The Common Fund identifies investment strategies, allocates
assets among those strategies, selects investment managers within each strategic
category and allocates fund assets among them. The Common Fund then monitors
manager performance, increasing and decreasing allocations and terminating and
replacing managers as appropriate.
Each Member selects the specific investment funds in which to invest
its money. A Member may invest in more than one fund and may, if it chooses,
have more than one account in any fund. Only after a Member chooses in which
investment funds to invest does the Common Fund allocate the money within each
investment fund as described above.
-10-
The GMO Pool is an investment fund that invests in international
equities. The GMO Pool is distinct from other investment funds of The Common
Fund in that the GMO Pool has only one investment manager, GMO. The Common Fund,
therefore, does not perform its usual function of allocating money between
investment managers for the GMO Pool. The effect of this difference is that each
Member has the option of choosing one investment Manager, GMO, to manage its
investment.
CAPITALIZATION. The following tables show the capitalization of the
Mutual Fund and the GMO Pool as of April 1, 1996 and on a pro forma basis as of
that date, giving effect to the proposed Transaction:
(UNAUDITED)
Mutual
GMO Fund Mutual Fund
Pool (actual) (Pro Forma)*
---- -------- ------------
Net assets $537,347 $ 0 $537,347
(000's omitted)
Shares or units 96,653 0 53,734,694
outstanding
Net asset value $5,560 $ 0 $10
per share or unit
* Pro Forma net assets reflect completion of the Transaction and legal and
accounting costs related to the Transaction.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The
Mutual Fund's investment objectives, policies and restrictions are virtually
identical to those of the GMO Pool. The investment objective of the Mutual Fund
is to maximize total return through investment primarily in equity securities of
non-U.S. issuers. The GMO Pool has no stated investment objective; however, its
stated investment program is to focus on equity investments outside the United
States. The GMO Pool invests, and the Mutual Fund will invest, primarily in a
diversified portfolio of common stocks, securities convertible into common
stocks and warrants to acquire common stocks of companies domiciled outside the
United States. There are no prescribed limits on geographic asset distribution
for either the GMO Pool or the Mutual Fund, and both have the authority to
invest in securities of foreign issuers traded on U.S. exchanges and securities
traded abroad, American Depository Receipts, European Depository Receipts and
other similar securities convertible into securities of foreign issuers. Neither
the GMO Pool nor the Mutual Fund targets its performance against a particular
benchmark.
-11-
Both funds base their investment strategy on a fundamental analysis of
issuers and country economics. Both funds may emphasize capital appreciation or
income depending on the views of the investment manager. In so doing, either
fund may hold various amounts of growth stocks or value stocks.
Both funds may hold cash, short-term obligations, and foreign government
bonds (denominated in U.S. or foreign currencies). Both funds may also invest in
corporate bonds of foreign issuers and in preferred stock of foreign issuers.
The GMO Pool may invest in The Common Fund for Short Term Investments, a money
market type instrument available only to investment funds in The Common Fund.
Both funds may engage in foreign currency, stock index futures and
options strategies for hedging the currency exposure of their portfolio
securities. Neither fund is required to hedge its currency risk.
The GMO Pool may engage in short sales and firm commitment agreements
if it receives the consent of The Common Fund.2 The Mutual Fund may not engage
in short sales and may only engage in firm commitment agreements with banks and
broker-dealers if (i) GMO determines that the particular bank or broker-dealer
presents a minimal credit risk, and (ii) the Mutual Fund maintains in a
segregated account with its custodian cash, U.S. Government securities or other
liquid high grade debt obligations in an amount equal to the Mutual Fund's
obligations under all of its firm commitment agreements. Also, the Mutual Fund
may not concentrate more than 25% of its total assets in any one industry, while
the GMO Pool has no restrictions regarding industry concentration.
COMPARISON OF DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE
PROCEDURES. The Mutual Fund will declare and pay the distributions of its
dividends, interest and foreign currency gains semi-annually. The GMO Pool
distributes all dividends, interest and other ordinary income of the fund
quarterly, on an accrual basis. The Mutual Fund intends to distribute net
short-term capital gains and net long-term gains at least annually. The GMO Pool
does not distribute net short-term and long-term capital gains; instead, this
appreciation or depreciation is reflected in the value of the units of the fund.
For a further description of the distribution policies of the Mutual Fund,
please consult the GMO Prospectus at page 44.
Investments in the GMO Pool may only be made on the first day of each
calendar month and the funds must be received by the GMO Pool not later than the
last business day preceding the respective entry date (or as the Trustees may
otherwise decide). At least six business days' advance notice must be given for
an investment in the GMO Pool. Shares of the Mutual Fund
- --------
2 A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date.
-12-
may be purchased directly from GMO Trust on any business day. For a further
description of the procedures for purchasing shares of the Mutual Fund, please
consult the GMO Prospectus at pages 42-43.
A Unitholder in the GMO Pool may withdraw its investment in the fund by
giving six business days' advance written notice of withdrawal to the GMO Pool
or such shorter notice as The Common Fund may permit. Such withdrawal will only
be effected on, or as of, a monthly valuation date (the last business day of the
month). Shares of the Mutual Fund may be redeemed on any business day. The
redemption price is the net asset value per share next determined after receipt
of the redemption request. There is no separate redemption fee. For a further
description of the procedures for redeeming shares of the Mutual Fund, please
consult the GMO Prospectus at pages 43-44.
A Unitholder may transfer the amount it has invested in the GMO Pool to
any other fund of The Common Fund, by giving fourteen days' advance written
notice to The Common Fund. A shareholder of the Mutual Fund wishing to exchange
its shares for shares of another fund of GMO Trust must separately redeem its
Mutual Fund shares and purchase the shares of the other fund. GMO Trust provides
no special exchange procedures between its funds. A complete description of the
distribution, purchase, redemption and exchange procedures of the Mutual Fund is
included in the GMO Prospectus on pages 42-45.
OTHER INFORMATION. Other information relating to the Mutual Fund,
including information in respect of its investment objectives and policies and
financial history, may be found in the enclosed GMO Prospectus and in the GMO
Statement of Additional Information.
VI. OTHER
RECORD DATE, QUORUM AND METHOD OF TABULATION. Unitholders of record of
the GMO Pool at the close of business on the Record Date will be entitled to
vote at the Meeting or any adjournment thereof. The holders of [ ] of the Units
of the GMO Pool outstanding at the close of business on the Record Date present
in person or represented by proxy will constitute a quorum for the Meeting;
however, as noted earlier, the affirmative vote of (A) two-thirds of all Members
owning units in the GMO Pool and (B) of Members owning two-thirds of all the
units in the GMO Pool is necessary to approve the Transaction. Unitholders are
entitled to one vote each, in the case of (A), and to one vote for each unit
held, with fractional units voting proportionally, in the case of (B).
Votes cast by proxy or in person at the meeting will be counted by
persons appointed by The Common Fund as tellers for the Meeting. The tellers
will count the total number of votes cast "for" approval of the Transaction for
purposes of determining whether sufficient affirmative votes have been cast. The
tellers will count units represented by proxies that reflect abstentions as
units that are present and entitled to vote on the matter for purposes of
determining the
-13-
presence of a quorum. Abstentions have the effect of a negative vote on the
proposal.
-14-
OWNERSHIP OF THE GMO POOL AND THE MUTUAL FUND. The Common Fund permits
only Members to own units in the various funds of The Common Fund. The officers
and Trustees of
-15-
The Common Fund, therefore, did not, as of the Record Date, own beneficially any
units of the GMO Pool. As of the Record Date, to the best of the knowledge of
The Common Fund, the following institutions owned beneficially 5% or more of the
outstanding units of the GMO Pool:
% of the
GMO Pool (%)
------------
Harvard University Presidents & Fellows 19.65
University of Pennsylvania 14.53
Wellesley College 10.82
University of Minnesota Foundation 9.82
Swarthmore College 8.65
University of Virginia 8.30
Princeton University 7.81
Amherst College Consolidated 5.58
As of May __, 1996, there were no shares of the Mutual Fund issued or
outstanding.
SOLICITATION OF PROXIES. Solicitation of proxies by personal interview,
mail, telephone, and telegraph may be made by employees and partners of GMO.
REVOCATION OF PROXIES. Proxies may be revoked at any time before they
are voted by a written revocation received by the Secretary of The Common Fund,
by properly executing a later-dated proxy or by attending the Meeting and voting
in person.
ADJOURNMENT. If sufficient votes in favor of the proposal are not
received by the time scheduled for the Meeting, the persons named as proxies may
propose one or more adjournments of the Meeting for a period or periods of not
more than 60 days in the aggregate to permit further solicitation of proxies.
Any adjournment will require the affirmative vote of a majority of the units
cast on the question in person or by proxy at the session of the Meeting to be
adjourned. The persons named as proxies will vote in favor of such adjournment
those proxies which they are entitled to vote in favor of the proposal. They
will vote against any such adjournment those proxies required to be voted
against the proposal. GMO will pay the costs of any additional solicitation and
of any adjourned session.
-16-
THE GMO INTERNATIONAL EQUITIES POOL OF THE COMMON FUND
FOR NONPROFIT ORGANIZATIONS
PROXY SOLICITED BY THE TRUSTEES
PROXY FOR SPECIAL MEETING OF UNITHOLDERS -- May 24, 1996
The undersigned hereby appoints Curt Tobey and Susan T. Reiley, and each of
them, proxies, with power of substitution to each, and hereby authorizes them to
represent and to vote, as designated below, at the Special Meeting of
Unitholders of the GMO International Equities Pool of The Common Fund for
Nonprofit Organizations (the "GMO Pool"), on Friday, May 24, 1996 at 450 Post
Road East, Westport, Connecticut 06881 at 10:00 a.m. Eastern time, and at any
adjournments thereof, all of the units of the GMO Pool which the undersigned
would be entitled to vote if personally present.
THIS PROXY PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED UNITHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE PROPOSAL.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES RECOMMEND A VOTE FOR THE
PROPOSAL BELOW.
<TABLE>
<S> <C> <C> <C>
1. To approve a transaction involving, in essence, the |_| FOR |_| AGAINST |_| ABSTAIN
reorganization of the GMO Pool as GMO Foreign
Fund, a series of GMO Trust, pursuant to the
Agreement and Plan of Reorganization attached as
Exhibit A to the Prospectus/Proxy Statement of the
GMO Pool and GMO Foreign Fund dated May __,
1996, which provides that (i) the GMO Pool will be
discontinued and its assets and liabilities will be
distributed pro rata to the Members of The Common
Fund holding units therein as a liquidating
distribution, and (ii) such assets and liabilities will
immediately thereafter be transferred by the such
Members to GMO Foreign Fund in exchange for
shares thereof.
</TABLE>
NOTE: Please sign in full corporate name and indicate the signer's office.
Name of Institution ___________________________________________________
Name of Signer ________________________________________________________
Signer's Office _______________________________________________________
Date___________________________________________________________________
-1-
Exhibit A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as
of May , 1996 by and between The Common Fund for Nonprofit Organizations, a New
York non-profit corporation ("The Common Fund"), on behalf of its GMO
International Equities Pool (the "GMO Pool"), and GMO Trust, a Massachusetts
business trust, on behalf of its GMO Foreign Fund series (the "Mutual Fund").
The Common Fund and GMO Trust agree as follows:
1. Plan of Reorganization.
(a) The GMO Pool will, in accordance with the Constitution, By-laws and
Rules of The Common Fund, be discontinued and its assets and liabilities
existing on the Exchange Date (as defined in Section 6 hereof) will be
distributed pro rata to the Members of The Common Fund that own units in the GMO
Pool (the "Unitholders") as of the Exchange Date (the "Distribution"). The
discontinuance of the GMO Pool and the Distribution will occur pursuant to Rule
17.3 of the Rules of The Common Fund. It is intended that such Distribution
shall be treated for federal income tax purposes as a sale or exchange pursuant
to Section 302 of the Internal Revenue Code of 1986, as amended (the "Code").
(b) On and as of the Exchange Date, immediately following the
consummation of the Distribution described in the foregoing paragraph (a), each
Unitholder shall sell, assign, convey, transfer and deliver to the Mutual Fund
all of the assets and liabilities received by such Unitholder in the
Distribution. In consideration therefor, the Mutual Fund shall, on and as of the
Exchange Date, deliver to each Unitholder a number of full and fractional shares
of beneficial interest of the Mutual Fund having a net asset value equal to the
fair market value of the assets and liabilities transferred by each Unitholder
to the Mutual Fund on the Exchange Date (the "Exchange").
(c) The GMO Pool will pay or cause to be paid to the Mutual Fund any
interest, cash or such dividends, rights and other payments received by it on or
after the Exchange Date with respect to the assets of the GMO Pool contributed
to the Mutual Fund as contemplated in Section 1(b) hereof, whether accrued or
contingent, received by it on or after the Exchange Date. Any such distribution
shall be deemed included in the assets transferred to the Mutual Fund at the
Exchange Date and shall not be separately valued unless the securities in
respect of which such distribution is made shall have gone "ex" such
distribution prior to the Exchange Date, in which case any such distribution
which remains unpaid at the Exchange Date shall be included in the determination
of the value of the assets of the GMO Pool acquired by the Mutual Fund.
(d) As promptly as practicable after the Exchange Date, the GMO Pool
shall, to the extent not already done, be discontinued pursuant to the
Constitution, By-laws and Rules of The Common Fund, and applicable law, and its
legal existence terminated.
-1-
2. Representations and Warranties of the Mutual Fund. GMO Trust, on
behalf of the Mutual Fund, represents and warrants to and agrees with The Common
Fund that:
(a) The Mutual Fund is a series of shares of the GMO Trust, a
Massachusetts business trust duly established and validly existing under the
laws of The Commonwealth of Massachusetts, and has power to own all of its
properties and assets and to carry out its obligations under this Agreement. GMO
Trust is not required to qualify as a foreign association in any jurisdiction.
Each of GMO Trust and the Mutual Fund has all necessary federal, state and local
authorizations to carry on its business as now being conducted and to carry out
this Agreement.
(b) GMO Trust is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company, and
such registration has not been revoked or rescinded and is in full force and
effect.
(c) The prospectus and statement of additional information of GMO
Trust, each dated February 29, 1996 (collectively the "GMO Prospectus"), did not
as of such date and does not contain, with respect to GMO Trust or the Mutual
Fund, any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(d) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Mutual Fund of
the transactions contemplated by this Agreement, except such as may be required
under the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act, or state
securities or blue sky laws (which term as used herein shall include the laws of
the District of Columbia and of Puerto Rico).
(e) The registration statement (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") by GMO Trust on
Form N-14 on behalf of the Mutual Fund and relating to the shares issuable
thereunder, and the proxy statement of the GMO Pool included therein (the "Proxy
Statement"), on the effective date of the Registration Statement, at the time of
the Unitholders' meeting referred to in Section 7 and at the Exchange Date will
not, with respect to GMO Trust or the Mutual Fund, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(f) There are no material contracts outstanding to which the Mutual
Fund is a party, other than as are disclosed in the Registration Statement, the
GMO Prospectus, or the Proxy Statement.
(g) The issuance of shares of the Mutual Fund pursuant to the Exchange
will be in compliance with all applicable federal and state securities laws.
(h) The shares of the Mutual Fund to be transferred to the Unitholders
of the GMO Pool have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued and will be fully
paid and nonassessable by the Mutual Fund,
-2-
and no shareholder of the Mutual Fund will have any preemptive right of
subscription or purchase in respect thereof.
3. Representations and Warranties of the GMO Pool. The Common Fund, on
behalf of the GMO Pool, represents and warrants to and agrees with the Mutual
Fund that:
(a) The GMO Pool is an investment fund of The Common Fund, a non-profit
corporation duly established and validly existing under the laws of the State of
New York, and has power to carry on its business as it is now being conducted
and to carry out its obligations under this Agreement. Neither, The Common Fund
nor the GMO Pool is required to qualify as a foreign association in any
jurisdiction. Each of The Common Fund and the GMO Pool has all necessary
federal, state and local authorizations to own all of its properties and assets
and to carry on its business as now being conducted and to carry out this
Agreement.
(b) There are no material contracts outstanding to the knowledge of the
Common Fund to which the GMO Pool is a party, other than as is disclosed in the
Registration Statement, The Common Fund Prospectus, or Proxy Statement.
(c) The Registration Statement and the Proxy Statement, on the
effective date of the Registration Statement, at the time of the Unitholders'
meeting referred to in Section 7 and at the Exchange Date, insofar as they
relate to The Common Fund and the GMO Pool will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
4. Exchange Date. The net asset value of the shares of the Mutual Fund
to be delivered in exchange for assets and liabilities of the GMO Pool and the
value of the assets and liabilities distributed by the GMO Pool and transferred
to the Mutual Fund on the Exchange Date (the "GMO Pool Net Assets") shall in
each case be determined as of the Exchange Date.
(a) The net asset value of the shares of the Mutual Fund shall be
computed in the manner set forth in the GMO Prospectus. The value of the assets
and liabilities in the GMO Pool before this reorganization shall be determined
by the Mutual Fund, in cooperation with the GMO Pool, pursuant to procedures
which the Mutual Fund would use in determining the fair market value of the
Mutual Fund's assets and liabilities.
(b) As the transactions contemplated hereby are intended to result in a
step-up (or stepdown) in the tax basis of the GMO Pool Net Assets, no adjustment
shall be made in the net asset value of either the GMO Pool or the Mutual Fund
to take into account differences in realized and unrealized gains and losses.
5. Expenses, Fees, etc. All fees and expenses, including legal and
accounting expenses or other similar expenses incurred in connection with the
consummation by the GMO Pool and the Mutual Fund of the transactions
contemplated by this Agreement, will be paid by Grantham, Mayo, Van Otterloo and
Co. ("GMO").
(a) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not consummated, no
party shall be liable to
-3-
the other party for any damages resulting therefrom, including, without
limitation, consequential damages.
6. Exchange Date. Delivery of the GMO Pool Net Assets and the delivery
of the shares of the Mutual Fund to be issued shall be made at June 28, 1996, or
at such other date agreed to by the Mutual Fund and the GMO Pool, the date upon
which such delivery is to take place being referred to herein as the "Exchange
Date."
7. Meeting of Unitholders; Discontinuance. The Common Fund agrees to
call a meeting of the GMO Pool's Unitholders as soon as is practicable after the
effective date of the Registration Statement for the purpose of considering
authorizing the liquidation and discontinuance of the GMO Pool, the distribution
of all of its assets and liabilities to the Unitholders as contemplated herein,
the subsequent transfer of the GMO Pool Net Assets to the Mutual Fund, and the
adoption of this Agreement.
(a) The Common Fund, on behalf of the GMO Pool, agrees that the
liquidation and discontinuance of the GMO Pool will be effected in the manner
provided in the Rules of The Common Fund in accordance with applicable law, and
that on and after the Exchange Date, the GMO Pool shall not conduct any business
except in connection with its liquidation and discontinuance.
(b) GMO Trust has filed the Registration Statement with the Commission
on behalf of the Mutual Fund. Each of the GMO Pool and the Mutual Fund will
cooperate with the other, and each will furnish to the other the information
relating to itself required by the 1933 Act and the rules and regulations
thereunder to be set forth in the Registration Statement.
8. Conditions to the GMO Pool's and the Mutual Fund's Obligations. The
obligations of the GMO Pool and the Mutual Fund hereunder to consummate the
Distribution and the Exchange shall be subject to the satisfaction of each of
the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote of (A)
two-thirds of all Members owning units in the GMO Pool and (B) of Members owning
two-thirds of all the units in the GMO Pool, in each case as of the record date
set for such voting by the board of trustees of The Common Fund.
(b) That the Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge
-4-
of The Common Fund, the GMO Pool, GMO Trust or the Mutual Fund, threatened by
the Commission.
(c) That the GMO Pool and the Mutual Fund shall have received from the
Commission, any relevant state securities administrator or any other
governmental department or agency such order or orders as Ropes & Gray deems
reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940
Act, or any applicable state securities or blue sky laws in connection with the
transactions contemplated hereby, and that all such orders shall be in full
force and effect.
9. Conditions to the Mutual Fund's Obligations. The obligations of the
Mutual Fund hereunder to consummate the Distribution and the Exchange shall be
subject to the satisfaction of each of the following conditions:
(a) That all representations and warranties in Section 3 hereof shall
be true and correct in all material respects at the Exchange Date with the same
effect as if made at that time.
(b) That the GMO Pool shall have furnished to the Mutual Fund a
statement, dated the Exchange Date, signed by The Common Fund's President (or
any Vice President) certifying that as of the Exchange Date all representations
and warranties of the GMO Pool made in this Agreement are true and correct in
all material respects as if made at and as of the Exchange Date and the GMO Pool
has complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Exchange Date.
(c) That there shall not be any material litigation pending against the
GMO Pool with respect to the matters contemplated by this Agreement.
(d) That the GMO Pool's custodian shall have delivered to the Mutual
Fund a certificate identifying all of the GMO Pool Net Assets held by such
custodian as of the Exchange Date.
10. Conditions to the GMO Pool's Obligations. The obligations of the
GMO Pool hereunder to consummate the Distribution and the Exchange shall be
subject to the satisfaction of each of the following conditions:
(a) That all representations and warranties in Section 2 hereof shall
be true and correct in all material respects at the Exchange Date with the same
effect as if made at that time.
(b) That the Mutual Fund shall have furnished to the GMO Pool a
statement, dated the Exchange Date, signed by GMO Trust's President (or any Vice
President) certifying that as of the Exchange Date all representations and
warranties of the Mutual Fund made in this Agreement are true and correct in all
material respects as if made at and as of the Exchange Date, and that the Mutual
Fund has complied with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to the Exchange Date.
(c) That there shall not be any material litigation pending against the
Mutual Fund with respect to the matters contemplated by this Agreement.
-5-
11. Indemnification.
(a) The Common Fund agrees, on behalf of the GMO Pool, that the GMO
Pool will indemnify and hold harmless, out of the assets of the GMO Pool but no
other assets, the Mutual Fund and the GMO Trust (and its trustees and its
officers) (for purposes of this subparagraph, the "Indemnified Parties") against
any and all expenses, losses, claims, damages and liabilities (including
reasonable attorneys' fees and expenses) at any time imposed upon or reasonably
incurred by any one or more of the Indemnified Parties in connection with,
arising out of, or resulting from any claim, action, suit or proceeding in which
any one or more of the Indemnified Parties may be involved or with which any one
or more of the Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact relating to The Common
Fund or the GMO Pool contained in the Registration Statement, or the Proxy
Statement or any amendment or supplement to any of the foregoing, or arising out
of or based upon the omission or alleged omission to state in any of the
foregoing a material fact relating to The Common Fund or the GMO Pool required
to be stated therein or necessary to make the statements relating to The Common
Fund or the GMO Pool therein not misleading, including, without limitation, any
amounts paid by any one or more of the Indemnified Parties in a reasonable
compromise or settlement of any such claim, action, suit or proceeding, or
threatened claim, action, suit or proceeding made with the consent of The Common
Fund or the GMO Pool. The Indemnified Parties will notify The Common Fund and
the GMO Pool in writing within ten days after the receipt by any one or more of
the Indemnified Parties of any notice of legal process or any suit brought
against or claim made against such Indemnified Party as to any matters covered
by this Section 11(a). The Common Fund and the GMO Pool shall be entitled to
participate at its own expense in the defense of any claim, action, suit or
proceeding covered by this Section 11(a), or, if it so elects, to assume at its
expense by counsel satisfactory to the Indemnified Parties the defense of any
such claim, action, suit or proceeding, and if The Common Fund or the GMO Pool
elects to assume such defense, the Indemnified Parties shall be entitled to
participate in the defense of any such claim, action, suit or proceeding at
their expense. The GMO Pool's obligation under this Section 11(a) to indemnify
and hold harmless the Indemnified Parties shall constitute a guarantee of
payment, so that the GMO Pool will pay in the first instance any expenses,
losses, claims, damages and liabilities required to be paid by it under this
Section 11(a) without the necessity of the Indemnified Parties' first paying the
same. In no event will The Common Fund or any other investment fund of The
Common Fund besides the GMO Pool be responsible for any indemnification under
this Section 11(a).
(b) The Mutual Fund will indemnify and hold harmless, out of the assets
of the Mutual Fund but no other assets, the GMO Pool and The Common Fund (and
its trustees and its officers) (for purposes of this subparagraph, the
"Indemnified Parties") against any and all expenses, losses, claims, damages and
liabilities (including reasonable attorneys' fees and expenses) at any time
imposed upon or reasonably incurred by any one or more of the Indemnified
Parties in connection with, arising out of, or resulting from any claim, action,
suit or proceeding in which any one or more of the Indemnified Parties may be
involved or with which any one or more of the Indemnified Parties may be
threatened by reason of any untrue statement or alleged untrue statement of a
material fact relating to the Mutual Fund contained in the Registration
Statement or the Proxy Statement, or any amendment or supplement to any of the
foregoing, or arising out of or based upon the omission or alleged omission to
state in any of the foregoing a material fact relating to GMO Trust or the
Mutual Fund required to be
-6-
stated therein or necessary to make the statements relating to GMO Trust or the
Mutual Fund therein not misleading, including without limitation any amounts
paid by any one or more of the Indemnified Parties in a reasonable compromise or
settlement of any such claim, action, suit or proceeding, or threatened claim,
action, suit or proceeding made with the consent of GMO Trust or the Mutual
Fund. The Indemnified Parties will notify GMO Trust and the Mutual Fund in
writing within ten days after the receipt by any one or more of the Indemnified
Parties of any notice of legal process or any suit brought against or claim made
against such Indemnified Party as to any matters covered by this Section 11(b).
GMO Trust and the Mutual Fund shall be entitled to participate at its own
expense in the defense of any claim, action, suit or proceeding covered by this
Section 11(b), or, if it so elects, to assume at its expense by counsel
satisfactory to the Indemnified Parties the defense of any such claim, action,
suit or proceeding, and, if the GMO Trust or the Mutual Fund elects to assume
such defense, the Indemnified Parties shall be entitled to participate in the
defense of any such claim, action, suit or proceeding at their own expense. The
Mutual Fund's obligation under this Section 11(b) to indemnify and hold harmless
the Indemnified Parties shall constitute a guarantee of payment so that the
Mutual Fund will pay in the first instance any expenses, losses, claims, damages
and liabilities required to be paid by it under this Section 11(b) without the
necessity of the Indemnified Parties' first paying the same.
12. Termination. The Common Fund and GMO Trust may, by mutual consent
of their respective trustees, terminate this Agreement, and The Common Fund or
GMO Trust may waive any condition to the other party's obligations hereunder.
13. Covenants, etc. Deemed Material. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any investigation made by
them or on their behalf.
14. Sole Agreement; Amendments. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the subject
matter hereof, constitutes the only understanding with respect to such subject
matter, may not be changed except by a letter of agreement signed by each party
hereto, and shall be construed in accordance with and governed by the laws of
The Commonwealth of Massachusetts.
15. Agreement and Declaration of Trust. A copy of the Agreement and
Declaration of Trust of GMO Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the trustees of GMO Trust on behalf of the GMO Foreign
Fund series, as trustees and not individually, and that the obligations of this
instrument are not binding upon any of the trustees, officers or shareholders of
GMO Trust individually but are binding only upon the assets and property of the
GMO Foreign Fund.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original.
-7-
IN WITNESS WHEREOF, the parties have executed this Agreement and Plan
of Reorganization as of the date first above written.
GMO Trust, on behalf of its GMO Foreign Fund
By:___________________________
name:
title:
The Common Fund for Nonprofit Organizations,
on behalf of its GMO International Equities Pool
By:____________________________
name:
title:
-8-
GMO TRUST APPLICATION
PART I: INVESTOR INFORMATION
Please complete and return to: Domestic Phone: 617-330-7500
Grantham, Mayo, Van Otterloo & Co. Domestic Fax: 617-261-0134
40 Rowes Wharf International Phone: 617-346-7610
Boston, Massachusetts 02110 International Fax: 617-439-0457
1. ACCOUNT REGISTRATION
Please provide exact name in which shares are to be owned. Unless
otherwise indicated, Co-Owners will be registered as joint tenants with
right of survivorship.
Owner:
----------------------------------------------------------------
Co-Owner (if applicable):
---------------------------------------------
Joint Tenants? Yes No
------- --------
Mailing Address:
------------------------------------------------------
Street Address (if different):
----------------------------------------
City/State/Zip:
-------------------------------------------------------
Main Phone:
-----------------------------------------------------------
Fax:
------------------------------------------------------------------
2. SOCIAL SECURITY OR TAXPAYER I.D. NUMBER
If the account is registered in more than one name, please indicate the
name of the individual whose social security number is being provided.
For gift to minor or guardianship accounts, please provide the Social
Security number and name of the minor or person under guardianship.
Social Security or
Taxpayer I.D. Number:
-------------------------------------------------
Name:
-----------------------------------------------------------------
Tax Status (check one): Taxable
----
Tax-Exempt Endowment
----
Tax-Exempt Foundation
----
Tax-Exempt ERISA
----
Tax-Exempt Other (please specify)
----
---------------------------------
Withholding Status (check one): Exempt from back-up withholding.
----
Subject to back-up withholding.
----
GMO Trust Application Investor Information (continued)
3. KEY CONTACT
Please list the individual to whom policy questions regarding the
Account should be directed:
Name Title Phone
---------------------------- ------------------------ -----------------
4. AUTHORIZED PERSONS
Please list the individuals authorized to give the Trust orders,
directions, and instructions with respect to the Account's investment
in the Trust. IF YOUR CUSTODIAN IS AUTHORIZED TO ACT ON BEHALF OF THE
ACCOUNT, PLEASE BE SURE TO INCLUDE SIGNATURE INFORMATION AS WELL,
EITHER BELOW OR AS A SEPARATE ATTACHMENT.
Name Title Phone
---------------------------- ------------------------ -----------------
---------------------------- ------------------------ -----------------
---------------------------- ------------------------ -----------------
5. CERTIFICATION AND SIGNATURE
PLEASE READ CAREFULLY BEFORE SIGNING
Under penalties of perjury, the undersigned Owner(s) certifies that (1)
the social security or taxpayer identification number shown on this
form is the Owner's(s') correct number and (2) the undersigned Owner(s)
is not subject to back-up withholding either because the Owner(s) has
not been notified by the Internal Revenue Service that the Owner(s) is
subject to back-up withholding as a result of failure to report all
interest or dividends, or that Internal Revenue Service has notified
the undersigned Owner(s) that the Owner(s) is no longer subject to
back-up withholding. If you have been notified by the Internal Revenue
Service that you are currently subject to back-up withholding, strike
out phrase (2) above. IF YOU ARE ONE OF THE ENTITIES LISTED BELOW, YOU
ARE EXEMPT FROM BACK-UP WITHHOLDING AND SHOULD CHECK THE SPACE
PROVIDED: corporation, financial institution, 501 (a) exempt
organization or an IRA, HR10, U.S. or foreign government or agency,
state or political subdivision, international organization, U.S.
registered securities or commodities dealer, real estate investment
trust, entity registered under the Investment Company Act of 1940,
middleman (e.g., nominee or custodian, common trust fund, or a trust).
The undersigned Owner(s) has received a copy of the Trust's prospectus
and has selected the investment(s) and options indicated in Part II of
this application. The undersigned Owner(s) understands the investment
objectives of the Trust and that the Owner's(s') account will be
administered in accordance with the terms of the prospectus.
GMO Trust Application Investor Information (continued)
The undersigned Owner(s) understands that in order to add to the list
of authorized persons or authorized accounts set forth in sections (4)
and (5) of Part II of this application or to change either list, the
Owner(s) must submit a written request.
SIGN EXACTLY AS NAME(S) OF REGISTERED OWNER(S) APPEARS ABOVE IN PART I.
(Include legal title if signing for corporation, trust, custodian
account, etc.)
Signed:
-------------------- ------------------------ -------------
Owner Title Date
Signed:
-------------------- ------------------------ -------------
Co-Owner Title Date
GMO TRUST APPLICATION
PART II: GMO FOREIGN FUND SPECIAL ACCOUNT APPLICATION
Please complete and return to: Domestic Phone: 617-330-7500
Grantham, Mayo, Van Otterloo & Co. Domestic Fax: 617-261-0134
40 Rowes Wharf International Phone: 617 346-7610
Boston, Massachusetts 02110 International Fax: 617-439-0457
Owner(s):
1. FUNDS TO BE INCLUDED
Please INITIAL Fund(s) which are to be included in your account. Only
those Funds for which you give express permission (by initialing after the
Fund name) will be used for your account.
<TABLE>
<CAPTION>
U.S. Equities International Equities Fixed Income
<S> <C> <C> <C> <C> <C>
US Core International Core Emerging Country Debt
-------- -------- --------
Growth Allocation Curr Hedged Intl Core International Bond
-------- -------- --------
Value Allocation Intl Small Companies Curr Hedged Intl Bond
-------- -------- --------
Fundamental Value Emerging Markets Domestic Bond
-------- -------- --------
Core II Secondaries Japan Short-Term Income
-------- -------- --------
US Sector Allocation Foreign X Global Bond
-------- -------- --------
Tobacco-Free Core
-------- Global Hedged Equity
--------
</TABLE>
2. INITIAL INVESTMENT
The undersigned Owner, being a unitholder of the GMO International
Equities Pool of The Common Fund for Nonprofit Organizations ("The Common
Fund"), acknowledges receipt of a copy of the Agreement and Plan of
Reorganization dated _________, 1996 (the "Plan") by and between The
Common Fund and the Trust, and agrees, pursuant to and in accordance with
the terms of the Plan, (i) to accept from the GMO Pool a pro rata share of
the GMO Pool's assets and liabilities as a liquidating distribution upon
the discontinuance of the GMO Pool in accordance with the Plan, and (ii)
to immediately thereafter transfer all such assets and liabilities to GMO
Foreign Fund as its initial investment in GMO Foreign Fund, in exchange
for shares of GMO Foreign Fund representing a pro rata share of the assets
and liabilities contributed by all unitholders to the Fund pursuant to the
Plan. The undersigned Owner hereby appoints [Investors Bank & Trust
Company, the Trust's custodian,] as its true and lawful attorney-in-fact,
with full power to accept delivery and effect the transfer of the assets
and liabilities of the GMO Pool, to execute such documents or certificates
as may be necessary to effect such delivery or transfer, and generally to
do all such things in such Owner's name and behalf to enable the Plan to
be carried out in accordance with its terms, hereby ratifying and
confirming all such actions as may be taken in such Owner's behalf in
carrying out the Plan.
For additional investments, funds should be wired to:
Investors Bank & Trust Please call prior to wiring to confirm
Boston, Massachusetts date and amount of wire.
ABA# 011001438
Attn: Transfer Agent
GMO Deposit Account # 55555-4444
Further Credit: GMO Fund Name, Shareholder Name
GMO Trust Application GMO Fund Account Application
3. DISTRIBUTIONS
All distributions will be reinvested if no item is checked. Please note
below special distribution instructions for individual funds (e.g., For
all funds, reinvest dividends and capital gains except for U.S. Core
Fund, whose dividends should be paid in cash).
Dividends: Reinvested
-----
Paid in Cash
-----
Capital Gains: Reinvested
-----
Paid in Cash
-----
Special instructions:
-------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
4. WIRE INSTRUCTIONS
Please list full wire instructions for the transfer of redemption
proceeds and distributions:
Bank:
-----------------------------------------------
Location:
-------------------------------------------
ABA #:
----------------------------------------------
Attention:
------------------------------------------
Account #:
------------------------------------------
Further Credit:
-------------------------------------
5. TRANSACTION CONFIRMATIONS
A transaction confirmation (typically mailed by the Fund's custodian on
the day following the activity) is sent to the Registration Address
noted in Block 1 of Part I. Please indicate to whom this confirmation
should be addressed.
Attn.:
----------------------------------
If you would like an additional confirmation sent, please indicate the
individual who should receive the confirmation below.
Name: Phone:
-------------------------------------- -------------------
Title: Fax:
------------------------------------- ---------------------
Address:
-----------------------------------
-----------------------------------
-----------------------------------
GMO Trust Application GMO Fund Account Application
6. MONTHLY STATEMENTS AND QUARTERLY QUANTITATIVE COMMENTARIES
Please list the individuals who should receive monthly statements of
shares held and Fund performance and/or quarterly GMO market and Fund
commentaries (attach additional pages if necessary):
Name: Phone:
----------------------------------- -----------------------
Title: Fax:
---------------------------------- -------------------------
Address:
-------------------------------- Send Monthly Statements?
-------------------------------- -----
-------------------------------- Send Quant Commentaries?
-----
Name: Phone:
----------------------------------- -----------------------
Title: Fax:
---------------------------------- -------------------------
Address:
-------------------------------- Send Monthly Statements?
-------------------------------- -----
-------------------------------- Send Quant Commentaries?
-----
Name: Phone:
----------------------------------- -----------------------
Title: Fax:
---------------------------------- -------------------------
Address:
-------------------------------- Send Monthly Statements?
-------------------------------- -----
-------------------------------- Send Quant Commentaries?
-----
Name: Phone:
----------------------------------- -----------------------
Title: Fax:
---------------------------------- -------------------------
Address:
-------------------------------- Send Monthly Statements?
-------------------------------- -----
-------------------------------- Send Quant Commentaries?
-----
Name: Phone:
----------------------------------- -----------------------
Title: Fax:
---------------------------------- -------------------------
Address:
-------------------------------- Send Monthly Statements?
-------------------------------- -----
-------------------------------- Send Quant Commentaries?
-----
7. AUTHORIZED SIGNATURE
Please sign exactly as name of registered individual appears in (1) of
Part I. Include legal title if signing for a corporation, trust,
custodian account, etc.
--------------------------------- ----------------------- -------------
Authorized Signature Title Date
GMO TRUST
PART B. STATEMENT OF ADDITIONAL INFORMATION
MAY __, 1996
This Statement of Additional Information contains material which may be of
interest to investors but which is not included in the Prospectus/Proxy
Statement (the "Prospectus") of GMO Trust's GMO Foreign Fund and The Common Fund
for Nonprofit Organization's GMO International Equities Pool dated May __, 1996.
The Statement of Additional Information of GMO Trust (the "Trust") dated
February 29, 1996, has been filed with the Securities and Exchange Commission
and is incorporated herein by reference (File No. 2-98772). This Statement of
Additional Information is not a prospectus and is authorized for distribution
only when it accompanies or follows delivery of a prospectus, and should be read
in conjunction with the Prospectus. Investors may obtain a free copy of the
Prospectus or the Statement of Additional Information by writing the Trust, 40
Rowes Wharf, Boston, MA 02110 or by calling 1-800-447-3167.
-1-
FINANCIAL STATEMENTS
The financial statements and schedules of GMO Foreign Fund have been previously
filed electronically with the Securities and Exchange Commission and are
incorporated herein by reference to the registrant's registration statement on
Form N-1A (File No. 2-98772). The financial statements and schedules of the GMO
International Equities Pool of The Common Fund for Nonprofit Organizations are
set forth below.
-2-
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
<S> <C> <C>
ATS AUSTRIA - 0.4%
36142 BANK AUSTRIA AG AUSH100 PTG CERTS 1,370,693
3230 OST BRAU-BETEILIGU AUSH100 171,747
1096 UNIVERSALE-BAU AG AUSH100 (VAR) 50,662
2937 VA TECHNOLOGY AG AUSH100(BR) 362,218
2090 WIENERBERGER BAUST AUSH100 (VAR) 435,648
--------------
2,390,968
==============
AUD AUSTRALIA - 4.3%
224756 ADELAIDE STEAMSHIP ORD $A0.50 4,040
426000 AUSTRALIAN & NEW ZEALAND BANK GROUP ORD A$1 2,037,334
524000 BORAL ORD STK A$0.50 1,371,757
345000 BURSWOOD PROPERTY TRUST UNITS A$0.50 461,016
69500 CALTEX AUSTRALIA ORD$1 260,692
88800 CSL LIMITED ORD A$1 324,758
418000 DOMINION MINING LIMITED ORD AUD 0.50 218,853
364934 EMAIL LIMITED ORD STK A $0.50 1,000,974
335000 FOODLAND ASSOCIATED LIMITED ORD A$0.50 1,230,393
1062248 GOODMAN FIELDER LTD A$0.50 SYDNEY LISTING 1,112,326
2220912 M.I.M. HOLDINGS ORD A$0.50 3,210,734
294000 OIL SEARCH LTD ORD PGK 0.10 291,778
1657335 PASMINCO LIMITED ORD A$1 2,279,419
426001 PIONEER INTERNATIONAL LIMITED ORD A$0.50 1,271,672
327996 ROTHMANS HOLDINGS LIMITED ORD A$0.50 1,530,185
1446000 SYDNEY HARBOR CASINO HLDGS LIMITED AUDI PREF STK 2,169,555
13200 TABCORP HLDGS LTD SPONSORED ADR 144A 535,828
452735 TNT 8% CUM CNV NON RED PREF SHS A$0.50 640,359
1228200 TNT ORD A$0.50 1,516,447
349000 WESTPAC BANKING CORP A$1 1,641,811
260206 WILLS (WD & HO) ORD A$1 449,377
--------------
23,559,308
==============
BEF BELGIUM - 2.8%
1271 BEKAERT SA NPV 1,044,241
18578 CFE NPV 4,862,277
14729 ELECTRABEL COM NPV 3,282,012
12973 G.I.B.HLDGS NPV 584,132
1260 GENERALE BANQUE NPV 448,554
3145 KREDIETBANK NPV 868,730
1 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
1742 PETROFINA SA ORD NPV(BR)-BRU LISTING 490,373
5949 POWERFIN NPV 766,727
2287 SOLVAY NPV 1,309,819
2873 TRACTABEL INVESTMENT INTER BV CAP NPV 1,108,005
382 UCB CAP NPV 640,916
--------------
15,405,786
==============
CAD CANADA - 1.2%
46981 ABITIBI PRICE INC COM STK NPV 633,341
205528 AIR CANADA COM NPV 731,309
29693 ALLIANCE FOREST PRODUCTS COM 465,638
62249 CAMBRIDGE SHOPPING CENTRES NPV 399,603
15831 CANADIAN OCCIDENTAL PETROLEUM COM NPV - TORONTO LISTING 534,262
22700 CANFOR CORP COM NPV 212,336
58711 ELAN ENERGY INC COM NPV 522,263
76000 IAM GOLD CORP COM NPV 320,605
155100 KAP RESOURCES COM STK NPV 341,367
77600 KAP RESOURCES SPC WTS 3-AUG-2000(1 COM & 1/2 PUR 74,010
307411 MARKBOROUGH PPTYS INC COM NPV 160,128
78100 SEMI-TECH CORP CLASS'A'SUB VTGNPV 415,410
27000 ST LAURENT PAPERBOARD INC COM NPV 354,077
61100 STONE CONSOLIDATED CORP COM NPV 694,802
43000 SUZY SHIER SUB VTG SHS NPV 130,920
42000 TRIZEC CORP COM NPV 273,468
--------------
6,263,539
==============
CHF SWITZERLAND - 2.7%
2306 ADIA I SZF 10(BR) 492,474
406 ASCOM HOLDING AG SZF500 (BR) 454,013
660 BANQUE CANTONALE VAUDOISE CHF 125(BR) 204,212
2100 BELIMO AUTOMATION AGCHF20 (REGD) 418,464
5765 BIBER HLD65 AG SZF20(REGD) 75,131
310 BOBST AG SZF100 (BR) 510,867
2816 CIBA-GEIGY AG SZF20(REGD) 3,525,475
180 COMPAGNIE FINANCIERE RICH AG 'A'SZF100(BR)PAIRED W/PTG 260,310
25330 CS HLDG SZF20(REGD) 2,326,735
2670 ELEKTROWATT AG SZF50 1,050,624
265 FISCHER(GEORG)AG SZF500(BR) 322,853
1504 FORBO HLDGS AG CHF50 (REGD) 614,574
2 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
770 HERO AG SZF40(BR) 326,943
350 HOLDERBANK FINANCIERE GLARIS SZF50(BR) 264,262
520 HURLIMANN HLDG AG PTG CERTS SZF50 194,560
3145 JELMOLI HOLDING AG SZF10(REGD) 356,981
340 LIECHTENSTEIN GLOBAL TRUST AG PTG CERTS SZF100 187,531
260 LINDT & SPRUNGLI AG DTG CERT CHF50(RFD 1-JAN-95) 415,134
1048 MERKUR HLDG AG SZF25(REGD) 207,071
210 NESTLE SA SZF10(REGD)-ZUR LISTING 236,953
66 ROCHE HLDG AG GENUSCHEINE NPV1 548,266
3062 SCHWEIZERISCHER BANKSVEREIN SZF100(BR) 1,125,063
3931 SCHWEIZERISCHER BANKVEREIN SZF50(REGD) 720,526
--------------
14,839,025
==============
CHI CHILE - 0.1%
17821 FIVE ARROWS CHILE INVESTMENT TR WTS TO SUB FOR PTG SHS 8,376
91751 FIVE ARROWS CHILE INVESTMENT TRUST LTD 266,078
--------------
274,454
==============
DEM GERMANY - 5.3%
1085 AACHENER&MUNCH. VER DM50(REGD)VINKULIERT 277,112
303 ASKO DEUTSCHE KAUFHAUS AG DM50 189,260
1300 ASKO DEUTSCHE KAUFHAUS AG NON VTG PRF DM50 FRA LISTING 658,763
5000 BANKGESELLSCHAFT BERLIN AG DM50 1,155,071
3500 BASF AG DM50(VAR) 944,889
2979 BAYER AG DM50 1,014,931
26200 BAYERISCHE HYPOTH-UND WECHSEL-DEM 5 648,743
10300 COMMERZBANK AG DM50 2,372,468
89310 CONTINENTAL AG DEM5 1,576,130
2600 DAIMLER BENZ AG DM50(VAR) 1,414,403
66100 DRESDNER BANK DEM5 1,766,577
2650 DYCKERHOFF AG NON VTG PRF DM50 626,550
3800 HOLZMANN (PHILIPP)AG DM50 1,449,360
2500 KOELNISCHE RUCKVER PREF DEM50 1,473,477
7095 KOLNISCHE RUCKVERSICHERUNGS-G DM50 5,167,079
1200 RHEINMETALL BERLIN DM50 184,540
150160 RWE-AG NON VTG PREF DEM5 4,547,220
5100 THYSSEN AG DM50 924,917
4100 VILLEROY & BOCH AG DM50(NON VTG PRF) 583,294
1600 VOLKSWAGEN AG DM50 560,938
3 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
2600 VOLKSWAGEN AG NON VTG PRF DM50 662,286
3700 VOLKSWAGEN AG WTS 27-OCT-98(TOPURCH PRF) 358,445
--------------
28,556,451
==============
ESP SPAIN - 4.6%
3391 ACERINOX SA SPPT1000(REGD) 382,593
26595 AGUAS DE BARCELONA SPPT500 855,172
68354 BANCO BILBAO VIZCAYA S.A SPPT600(REGD) 2,550,502
2767 BANCO CENTRL HISPANO AMERICANOSPPT500(REGD) 58,424
7820 BANCO INTERCONTINENTAL ESPANOLSPPT1500(REGD) 787,766
8400 BANCO POPULAR ESPANOL SPPT (R) 1,451,392
40000 BANCO SANTANDER SA SPPT750-REG 1,905,146
35476 EMPRESA NACIONAL DE ELEC (ENDESA)SPPT800 2,032,755
35600 HIDROEL CANTABRICO SPPT1000 1,151,904
391526 IBERDROLA SA ORD SPPT500 3,612,824
8103 INMOBILIARIA METROPOLITANA VASCO SA SPPT500 262,514
72200 REPSOL SA SPPT500 2,723,101
218000 SEVILLANA DE ELECTRICIDAD SPPT500 1,572,390
266500 TELEFONICA DE ESPANA ORD SPPT500 4,231,011
210684 UNION ELECTRICA FENOSA SPPT500 1,151,177
23719 VALLEHERMOSO S A SPPT500 426,267
--------------
25,154,938
==============
FRF FRANCE - 6.4%
17034 ALCATEL ALSTHOM CG FF40 1,578,794
5685 ALCATEL CABLE FF10 511,340
25767 BANQUE NATIONALE DE PARIS FF25 1,007,662
16490 BIC FRF50 1,816,764
290 BONGRAIN SA FF50 154,283
7500 BOUYGUES FF50 763,772
4668 C.G.I.P. FF100 1,116,613
20624 C.S.F.(THOMPSON-CSF) FF20 517,903
7860 CASINO GUICH-PERR FF10 280,854
16073 CERUS(CIE EUROPENNE REUNIS FF100 275,355
2958 CHARGEURS FF100 756,896
6028 CHRISTIAN DIOR FF52 802,936
35403 CIE DE SUEZ FF75 1,373,953
8327 CLUB MEDITERRANEE FF25 809,971
3895 COMPAGNIE DE ST-GOBAIN FF100 505,673
4 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
13417 COMPAGNIE FINANCIERE DE PARIBAS 'A' SHS FF50(BR) 815,008
4936 CPR-CIE PAR REESCO N V FF50 426,235
4193 CREDIT LOCAL DE FRANCE FF100 328,282
11402 CREDIT LYON CRT D'INVST FF180 479,846
5208 DANONE (EX BSN) FF10 798,129
5479 DOLLFUS-MEIG & CIE FF75 294,642
1652 ELF GABON XAF5000 282,029
1928 ERIDANIA BEGHIN-SAY FF65 PAR LISTING 327,234
790 FIN IND GAZ & EAUX FF50 342,660
7649 GAN GRP FF10 235,354
2744 GROUPE ANDRE SA FF50 265,712
1035 GUYENNE & GASCOGNE FF100 353,390
3208 LABINAL FF100 459,787
2590 LAFARGE FF25(BR) 171,416
21475 LAGARDERE GROUPE FF40(REGD) 569,114
14876 LYONNAISE DES EAUX FF60 1,390,888
14686 MICHELIN(CIE GLE DES ETABL.) CLASS'B' FF12(REGD) 699,680
11300 PECHINEY ORD 'A' SHS FRF 100 472,189
4510 PERNOD-RICARD FF20 287,297
12645 PEUGEOT SA FF35 1,927,813
3065 PINAULT-PRINTEMPS REDOUTE 845,727
27684 RHONE-POULENC SA ORD 'A'SHS FF25 713,876
47958 SEITA ORD FRF50 1,989,721
5425 SLIGOS FF25 493,231
8810 SOCIETE GENERALE ORD FF30 979,375
67784 SOCIETE NATIONALE ELF EQUITAINE FF50 4,595,183
260 ST LOUIS FF100 72,981
3159 STRAFOR FACOM FRF 25 228,138
20035 TOTAL 'B' SHS FF50 1,352,238
2620 VALLOUREC FF100 (USIN A TUB DE LOR ESCAUT) 124,356
5305 WORMS & CIE FF12 (REGD) 283,179
--------------
34,877,477
==============
FSR FORMER SOVIET REPUBLIC - 0.3%
73378 AAO MOSENERGO SPONORED ADR 144 531,991
117000 FIRST RUSSIAN FRONTIERS TRUST ORD US!1 1,169,680
25400 FIRST RUSSIAN FRONTIERS TRUST WTS TO SUB FOR ORD 91,105
--------------
1,792,775
==============
5 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
GBP UNITED KINGDOM - 15.2%
81552 ALLIED DOMECQ ORD 25P 611,162
391640 ALLIED IRISH BANKS ORD IL0.25 LON LISTING 1,990,541
231030 AMSTRAD ORD 25P 662,928
239936 ANGLIAN WATER I ORD $1 2,197,286
133244 ARGYLL GROUP ORD 25P 624,347
1760531 ASDA GROUP PLC 2,855,042
288469 BAA ORD L1 2,355,553
71614 BARCLAYS ORD STK 1 794,643
734651 BERKELEY GROUP ORD 25P 6,167,138
296953 BPB INDUSTRIES ORD 50P 1,405,042
373564 BRITISH AIRWAYS ORD 25P 3,056,115
391727 BRITISH GAS ORD 25P 1,366,185
770018 BRITISH PETROLEUM CO ORD 25P 6,740,222
760750 BRITISH STEEL ORD 50P 2,206,152
803230 BRITISH TELECOMMUNICATIONS ORD25P 4,529,959
562529 CAPITAL SHOPPING CENTERS ORD 50P 2,343,945
138895 COMMERCIAL UNION ORD 25P 1,206,254
1201990 CORDIANT ORD 25P 2,293,247
281517 COSTAIN GROUP ORD 10P 360,931
104826 DE BEERS CONS/CENTENARY UNITS (1 CONSD DFD & 1 CENT DEP 3,279,916
96964 ENTERPRISE OIL ORD 25P 648,223
74427 FLEXTECH ORD 10P 571,398
67613 GENERAL ACCIDENT ORD 25P 633,634
125267 GLAXO WELLCOME ORD 25P 1,569,711
320800 GRAND METROPOLITAN ORD 25P 2,066,268
129040 GREAT PORTLAND EST ORD 50P 328,913
174279 GREAT UNIVERSAL STORES ORD STK 25P 1,790,194
141515 GUARDIAN ROYAL EXCHANGE 5P 475,188
985933 HANSON ORD 25P 2,889,273
230801 HANSON PLC WT 1991 EXP 9/30/97 14,540
603430 HILLSDOWN HLDGS ORD 10P 1,703,878
63158 HSBC HLDGS ORD 75P 967,836
147539 HYDER CUM RED PRF #1 7.875% 31-JUL-2013 227,441
71601 HYDER ORD #1.20 824,006
107971 IMPERIAL CHEMICAL INDUSTRIES ORD #1 1,521,068
362488 LADBROKE GROUP ORD 10P 1,076,101
2047 LLOYDS TSB GROUP ORD 25P 9,764
6 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
427359 LUCAS INDUSTRIES ORD 25P 1,402,398
674411 MARLEY ORD 25P 1,266,105
338140 MIRROR GROUP NEWSPAPERS ORD 25P 1,125,105
166412 NATIONAL WESTMINSTER BANK ORD L1 (POST CAP) 1,615,406
168246 PENIN&ORIENT STEAM NAV DFD STK 1,376,415
2148935 RAGLAN PROPERTIES PLC ORD 25P 819,980
73378 ROYAL INSURANCE HLDGS 25P 396,469
830747 SEARS ORD 25P 1,261,629
189995 SEVERN TRENT ORD #1 1,722,537
147832 STANDARD CHARTERED 25P 1,374,123
289733 SUN ALLIANCE GROUP 25P 1,596,412
675666 T & N PLC ORD L1 1,784,095
188228 TAKARE ORD 25P 432,375
333598 TAYLOR WOODROW ORD 25P 779,031
150925 THAMES WATER I ORD $1 1,323,400
--------------
82,639,524
==============
GRD GREECE - 0.0%
25760 GREEK PROGRESS FUND SA UNITS (COMPR 10 ORD GKDR2000) 230,621
--------------
230,621
==============
HKD HONG KONG - 3.8%
953400 AMOY PROPERTIES HK $1 1,115,628
649277 CATHAY PACIFIC AIRWAYS HK$0.20 1,141,734
183400 CHEUNG KONG(HLDGS) HK$0.50 1,292,384
539000 DICKSON CONCEPTS INTL HK$0.10 592,384
245300 GREAT EAGLE HLDGS HK0.50 724,736
1056800 HANG LUNG DEVELOPMENT CO HK$1 2,015,490
46128 HANG LUNG DEVELOPMENT CO WTS 31-OCT-97(TO PURCHASE ORD) 12,078
517900 HYSAN DEVELOPMENT HK$5 1,670,753
209000 JARDINE INTL MOTOR HLDGS US$0.025 278,342
271000 LAI-SUN GARMET INTL HK$0.50 310,105
855266 LIU CHONG HING BANK HK$0.50 1,249,613
863000 NATIONAL MUTUAL ASIA LTD HK$0.05 786,676
4896728 REGAL HOTELS(HDS.)HK$1 1,209,303
1046000 SEMI TECH (GLOBAL) HK$1 1,575,627
650000 SINO LD LTD BD CONV 144A 5.000% 02/26/2001 DD 02/26 637,000
138000 SWIRE PACIFIC A HK $0.60 1,213,344
647000 SWIRE PACIFIC 'B'HK$0.12 886,760
7 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
564500 WHARF HOLDINGS HK$1 2,131,290
570000 WHEELOCK & CO LTD HK$.50 1,142,358
169912 WING ON CO HK$2 183,445
683486 WINSOR INDUSTRIAL CORP 640,713
--------------
20,809,763
==============
HUF HUNGARY - 0.0%
133921 FOTEX HUFO100 (REDG) 149,322
--------------
149,322
==============
IA INDIA - 0.2%
21000 ALLIANCE CAPITAL GROWTH INDIA LIBERALISATION'A' 149,100
52400 INDIA FUND 'A' SHARES 241,534
59008.907 MAHINDRA & MAHINDRA LTD GLOBALDEPOSITARY REPT 144A 445,281
11000 MORGAN STANLEY INDIA INVT FD INC 122,375
--------------
958,290
==============
IDR INDONESIA - 0.1%
271485 BANK DAGANG NASNL INDONESIA ORD IDRH1000 (A.MKT) 235,140
190637 DHARMALA INTILAND IDRH1000 (ALIEN MARKET) 124,346
274000 DHARMALA SAKTI SEJAHTENA IDRH1000 (ALIEN MARKET) 146,493
--------------
505,979
==============
ITL ITALY - 2.5%
19393 ASSICURAZIONI GENERALI ITL2000 433,527
307362 BANCA COMMERCIALE ITALIANA-SPAITL1000 642,014
26210 BANCA POPULARE DI BRESCIA ITL5 152,791
170080 BANCA TOSCANA ITL1000 340,074
547521 BCO AMBROS VENETO DI RISP ITL1000 (NON CNV) 796,194
419304 CIR-COMPAGNIE INDUST ITL1000 234,002
163791 COFIDE ITL1000 56,411
157240 COMAU FINANCIERE ITL500 210,603
820790 CREDITO ITALIANO SPA ITL 500 879,477
73064 DANIELI & C DI RISP ITL2000(- NON CV) 288,920
16772 ERICSSON SPA ITL1000 213,943
68711 FALCK,ACC FERR LOMB ITL2500" 201,589
154620 FIAT SPA ORD ITL1000 485,685
242610 FIAT SPA PRIV ITL1000 444,093
105159 FIDIS ORD ITL1000 291,085
93885 I.F.I.L.DI RISP ITL1000(NON CV 158,681
8 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
22660 IFI(ISTIT FIN IND)PRIV ITL1000 213,680
39570 IMI SPA ORD ITL5000 271,053
148330 ITALGAS (SOC ITAL) ITL1000 430,451
104830 MAGNETI MARELLI ITL1000 141,744
269800370 MEDIOBANCA SPA BDS ITL1000-RAS4.000% 31-DEC-97 157,882
594180 MONTEDISON S.P.A. ITL1000 367,598
419304 MONTEFIBRE ITL1000 294,174
465166 OLIVETTI C SPA ORD ITL1000 238,829
30957 R.A.S. WTS 31-DEC-97(TO PURCH DI RIP) 53,211
15669 R.A.S. WTS 31-DEC-97(TO PURCHASE ORD) 57,963
59385 RAS ITL1000 579,497
83770 S A I DI RISP ITL100 NON CNV 318,967
72445 SIRTI SPA ITL 1000 413,537
310368 STET ITL1000 862,081
490983 STET ITL1000 DI RISP(NON CNV) 977,022
1044364 TELECOM ITALIA MOBILE ITL50 DIRISP 1,151,009
85205 TELECOM ITALIA SPA DI RISP ITL1000 (NON CONV) 120,371
18870 TORO ASSICURAZION DI RISP ITL1000 101,999
28998 TORO ASSICURAZIONI SPA ITL1000 361,760
93295 UNICEM(UNION CEM) DI RISP ITL1000 (NON CNV) 268,360
35120 UNICHEM(UNION-CEM-MARCH EMIL) SPA ITL1000 221,755
--------------
13,432,033
==============
JPY JAPAN - 25.8%
7200 ACOM CO Y50 278,036
10000 AIDA ENGINEERING Y50 84,806
39100 AJL PEPS TR PREMIUM EXCHANGEABLE PART SHS 869,975
29300 AKITA BANK Y50 213,689
18500 AMWAY JAPAN NPV 934,081
23000 AOYAMA TRADING Y50 703,226
149000 ASAHI BANK Y50 1,783,263
118000 ASAHI CHEMICAL INDUSTRY 873,829
1900 AUTOBACS SEVEN Y50 165,217
29000 BANYU PHARMACEUTICAL CO Y50 376,905
149000 BRIDGESTONE CO Y50 2,493,782
30000 CALSONIC CORP Y50 235,624
133000 CANON INC Y50 2,536,886
75000 CASIO COMPUTER CO Y50 715,288
59324 CHUBU ELECTRIC PWR Y500 1,364,535
9 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
4000 CHUDENKO CORP Y50 135,390
28858 CHUGOKU ELECTRIC POWER CO INC Y500 647,585
20400 CIRCLE K JAPAN CO JPY 50 816,382
87000 DAI NIPPON PRINTING CO Y50 1,586,255
45000 DAI-TOKYO FIRE & MARINE INS CO 332,398
26000 DAIICHI PHARMACEUTICAL CO Y50 408,415
68000 DAIWA HOUSE INDUSTRY CO Y50 1,068,163
529 EAST JAPAN RAILWAY CO Y50000 2,720,430
12800 EXEDY CORPORATION Y50 204,656
48000 FUJI PHOTO FILM LTD ORD Y50 1,373,352
52000 FUKUOKA BANK OF Y50 432,726
37000 GENERAL SEKIYU KK Y50 339,037
35000 GUMMA BANK Y50 366,526
22000 HIGO BANK Y50 176,905
33000 HITACHI CREDIT CORP Y50 610,940
697000 HITACHI LTD Y50 6,777,747
216000 HITACHI ZOSEN CORP Y50 1,163,310
29612 HOKKAIDO ELE POWER CO INC Y500 672,811
137000 HONDA MOTOR CO Y50 2,984,666
21000 HOUSE FOOD INDUSTRIAL CO 380,926
73000 HOYA CORP Y50 2,511,828
223000 ISUZU MOTORS LTD Y50 1,290,669
20000 ITO-YOKADO CO Y50 1,187,471
400 JGC CORP Y50 4,825
53000 JUSCO CO Y50 1,382,609
67750 KANSAI ELEC POWER Y500 1,571,015
148000 KAO CORP Y50 1,840,486
13000 KIRIN BEVERAGE CORP Y50 166,526
37400 KURITA WATER INDUSTRIES Y50 867,246
16000 KYUDENKO CORP Y50 209,444
52933 KYUSHU ELECTRIC POWER CO INC Y500 1,202,685
5800 MABUCHI MOTOR Y50 330,266
20000 MAEDA ROAD CONSTRUCTION Y50 364,656
43000 MAKINO MILLING MACHINE CO Y50 474,427
276000 MARUBENI CORP Y50 1,545,807
74000 MARUI CO Y50 1,612,155
35000 MARUICHI STEEL TUBE Y50 683,964
305000 MATSUSHITA ELECTRIC INDUSTRIALCO Y50 4,962,132
10 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
97000 MATSUSHITA ELECTRIC WORKS Y50 1,043,011
490000 MBL INTL FIN BER 3.000% 11/30/2002 DD 10/11 542,063
114000 MINEBEA CO Y50 975,316
452000 MITSUBISHI ELECTRIC CORP Y50 3,364,114
459000 MITSUBISHI HEAVY IND Y50 3,965,554
28000 MITSUBISHI OIL CO Y50 235,886
287000 MITSUI & CO Y50 2,600,309
63000 MITSUI PETROCHEMICAL INDS LTD 518,962
101000 MITSUI TRUST & BANKING Y50 1,133,240
12000 MURATA MANUFACTURING CO Y50 412,903
9700 NAMCO Y50 299,299
9000 NATIONAL HOUSE INDUSTRIAL CO Y50 153,156
12000 NICHICON CORP Y50 157,083
28350 NICHIDO FIRE Y50 213,387
17700 NINTENDO CO 1,132,006
37700 NIPPON ELECTRIC GLASS Y50 690,902
132000 NIPPON EXPRESS CO Y50 1,295,933
57000 NIPPON LIGHT METAL CO Y50 346,424
84000 NIPPON MEAT PACKERS Y50 1,240,954
17000 NIPPON SHARYO Y50 166,900
45000 NIPPON SHOKUBAI CO Y50 Y50 458,626
316000 NIPPON STEEL 1,087,312
112 NIPPON TEL & TEL CORP Y50000 818,925
40000 NISHIMATSU CONSTRUCTION CO Y50 456,288
277000 NISSAN MOTOR CO Y50 2,144,516
660000 NKK CORP Y50 1,906,872
137000 OBAYASHI CORP Y50 1,175,933
72000 OKUMURA CORP Y50 665,133
74000 OLYMPUS OPTICAL CO Y50 719,589
77000 OMRON CORP Y50 1,706,311
44000 ONWARD KASHIYAMA CO Y50 666,480
24100 ORIX CORP Y50 912,623
15800 PARIS MIKI INC JPY50 605,704
4900 PROMISE CO Y50 217,625
140000 RICOH Y50 1,505,376
28000 RINNAI CORP Y50 638,803
21000 ROHM CO Y50 1,197,756
159000 SAKURA BANK Y50 1,813,745
11 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
46900 SANKYO CO Y50 1,074,381
75000 SANWA BK Y50 1,507,714
93000 SANYO ELECTRIC CO Y50 556,522
5300 SANYO SHINPAN FINANCE CO Y50 391,491
132000 SEKISUI CHEMICAL Y50 1,727,910
106000 SEKISUI HOUSE Y50 1,328,097
8200 SHIKOKU ELECTRIC POWER CO,INC Y500" 185,545
12000 SHIMACHU CO Y50 384,853
78750 SHIN-ETSU CHEMICALS CO Y50 1,516,830
7875 SHINKAWA Y50 201,017
49000 SHISEIDO Y50 577,279
13900 SHO-BOND CONSTRUCTION CO Y50 505,573
45000 SHOWA CORP 382,889
25000 SMC Y50 1,769,519
38000 SONY CORP Y50 2,270,407
59000 SUMITOMO BAKELITE CO Y50 441,328
141000 SUMITOMO CORP Y50 1,489,762
108000 SUMITOMO MARINE & FIRE 927,013
87000 SUMITOMO TRUST & BANK 1,195,792
44000 TAISHO PHARMACEUTICAL CO Y50 905,096
115000 TAKEDA CHEMICAL INDUSTRIES Y50 1,795,699
29000 TDK CORP 1,494,063
103000 TEIJIN Y50 568,209
27450 TOAGOSEI CO LTD 148,864
54000 TODA CONSTRUCTION CO Y50 492,286
22414 TOHOKU ELEC PWR Y500 519,745
20000 TOKYO BROADCASTING SYS INC Y50 310,425
22860 TOKYO ELECTRIC PWR CO Y500 585,661
13000 TOKYO ELECTRON Y50 443,665
54000 TOPPAN PRINTING Y50 701,823
158000 TORAY INDUSTRIES INC Y50 1,022,310
22000 TOSTEM CORP Y50 687,050
324000 TOYOTA MOTOR CO Y50 7,149,509
9900 TRANS COSMOS INC Y50 520,224
58000 UNY CO Y50 1,057,504
35000 WACOAL CORP Y50 431,978
7300 XEBIO CO Y50 249,135
10000 YAHAGI CONSTRUCTION CO Y50 81,440
12 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
9000 YAKULT HONSHA Y50 122,020
29000 YAMAHA CORP Y50 528,752
85000 YAMANOUCHI PHARMACEUTICAL CO Y50 1,891,538
23000 YAMATAKE HONEYWELL Y50 400,000
20000 YAMAZAKI BAKING CO Y50 362,786
5000 YORK-BENIMARU Y50 179,991
16800 YOSHITOMI PHARM Y50 150,799
--------------
139,455,486
==============
KRW KOREA - 1.2%
390 DAEHAN FLOUR MILL CO KSWN 5000 16,453
58000 DAEWOO CORP KSWN5000 641,355
22000 DAEWOO SECURITIES CO PREF KSWN5000 351,550
127523.33 HAN WHA KSWN5000 2,070,370
35180 HANSHIN SECURITIES CO PREF KSWN5000 385,867
59 KOREA 1990 TRUST IDR 324,500
69000 KOREA FIRST BANK KSWN5000 609,511
9280 KYUNG NAM BANK KSWN5000 118,632
16000 KYUNGKI BANK KSWN5000 156,472
30000 L G SECURITIES PREF KSWN5000 318,696
36050 PUSAN BANK KSWN5000 453,937
21000 SAMSUNG HEAVY KSWN5000 405,369
72000 SEOUL BANK KRW5000 589,070
6300 SSANGYONG INVESTMENT & SECURITIES PFD KSWN5000 65,235
--------------
6,507,018
==============
MXN MEXICO - 0.3%
170000 CIFRA SA DE CV ORD SHS NPV'C' 222,004
2049 GPO FINANCIERO BANCOMER SER'L'NPV 674
10000 GRUPO FINANCIERO BANAMEX ACCIVL SER'B'NPV 21,340
485 GRUPO FINANCIERO BANAMEX ACCIVSER 'L' NPV 927
55562 GRUPO FINANCIERO BANCOMER SA SER'B'NPV 22,417
630000 GRUPO FINANCIERO INVERMEXICO 7.500% 16/JUN/2001 157,500
26000 GRUPO TELEVISA SA DE CV PTG CERTS REPR 1 'A',L,D, SHS" 315,250
52000 MEXICO FD INC 799,500
--------------
1,539,612
==============
NLG NETHERLAND - 6.5%
36378 ABN AMRO HOLDINGS NTFL5 1,809,982
540013 ADVANCED SEMICONDUCTOR MATLS INTL NV 4,995,120
13 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
40647 AEGON NV NLG1 1,919,052
4429 AKZO NOBEL NV NTFL20 -AMS LISTING 492,469
1979284 ASMI NEW LN 12.500% 30-NOV-1999 1,198,041
10735 BAM GROEP NTFL4 597,147
33544 BOLS WESSANEN (KONINKLIJKE) CVA NTFL2 651,754
11531 DE BOER WINKELBEDRIJVEN CVA NTFL 2.50 579,307
11129 DORDTSCHE PETROLEUM INDUSTRIE MIJ NTFL2.5 1,658,471
5032 DSM NV ORD NTFL20 477,585
144660 ELSEVIER NV NLG0.10-AMS LISTING 2,215,301
22515 FUGRO NV 269,837
22998 GIST BROCADES NV 737,785
60733 HAL TRUST 100 CLASS'B'UNITS NPV 687,432
51655 HAL TRUST CERTS(1 UNITS) 581,553
14369 HUNTER DOUGLAS NV NTFL1 974,111
6924 ING GROEP NV CVA NLG2.50 GROEP NV CVA NTFL2.50 502,924
10326 INTERNATIONAL NEDERLANDEN GRP CVA PRF NTFL2.50 53,814
11793 KONDOR WESSELS GROEP NV NTFL5 371,186
15326 KONINKLIJKE NEDLLOYD NV NLG10 320,045
19014 KONINKLIJKE PTT NEDERLAND NLG10 748,084
11721 KONINKLIJKE VAN OMMEREN CETECOCVA (NON-EXCH) NTFL10 405,812
13100 KONINKLINKE KNP BT NTFL2.5-AMSLISTING 328,273
79 MOEARA ENIM PETROL 1-4 PROFIT SHS NPV 1,329,338
7542 NKF HLDGS NV NTFL1 1,451,701
26430 NORIT NV NTFL1 327,955
8858 NUTRICIA(VERINGDE BEDRIJVEN) NV CVA(PART-EXCH)NLG2.50 887,355
6290 OCE-VD GRINTEN NV NTFL4 586,320
17558 PHILIPS ELECTRONICS N.V 638,672
81479 PHILIPS ELECTRONICS NV NTFL10 (DUTCH SHARES) 2,964,038
26207 PIRELLI TYRE HLDGS NV NTFL10 234,770
19917 ROTO SMEETS DG BOER NTFL10 555,762
10273 ROYAL DUTCH PETROLEUM CO NTFL5(BR)-AMS LISTING 1,455,046
15200 VENDEX INTERNATIONAL N.V. BDR-EACH REPR1ORD CVA NLG0.05 435,179
8637 VOLKER STEVIN CVA NTFL20 584,478
21048 WERELDHAVE NV NTFL20 1,131,325
321264 WERELDHAVE NV STK DIV CPNS 171,123
--------------
35,328,148
==============
NOK NORWAY - 1.0%
44500 AKER NORCEM NWKR20 822,397
14 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
7907 BOLIG-OG NAERINGSBANKEN NWKR50 191,754
112700 DEN NORSKE BANK NWKR10 349,768
17700 DYNO INDUSTRY NWKR20 386,460
6400 ELKEM A/S NWKR20 82,844
17800 FOKUS BANK A/S NOK 11 (REGD) 97,716
7070 HAFSLUND NYCOMED AS 'B'NWKR5 192,957
4000 KVAERNER INDUSTRIER NWKR 12.50SER'A' 144,728
10895 LEIF HOEGH & CO NWKR10 156,321
30000 NORSK DATA A S ADR B 8,445
26000 NORSK HYDRO AS NWKR20 1,133,335
4700 NORSKE SKOGSINDUSTRIER NWKR20 'A' 142,934
3900 ORKLA A/S NWKR25 179,428
7900 ORKLA A/S NWKR25'B' 345,592
11200 SAGA PETROLEUM NWKR15 143,230
23700 SCHIBSTED A/S NWKR1 325,263
11500 STORLI NWKR100 186,524
126300 UNI STOREBRAND 'A' NWKR20 600,767
10000 UNITOR AS NWKR12.5 148,159
--------------
5,638,621
==============
NZD NEW ZEALAND - 2.5%
324 AIR NEW ZEALAND LIMITED 'B'ORDNZ$1(NZ RESIDENTS) 1,070
155000 BD GROUP LIMITED 7.000% 30-JUN-96 92,909
1002000 BRIERLEY INVEST LTD ORD NZ .50 955,517
753000 BRIERLEY INVMT CNV UNS SUB NTS9.000% 30-JUN-1998 651,391
712651 CARTER HOLT HARVEY LIMITED ORDNZ$0.50 1,572,768
218000 FISHER & PAYKEL NZ$0.50 697,906
245800 FLETCHER CHALLANGE LIMITED BUILDING SHARES NZD0.40 585,992
245836 FLETCHER CHALLENGE LIMITED ENERGY SHARES NZD0.4 509,774
461672 FLETCHER CHALLENGE LIMITED PAPER SHARES NZD0.40 889,602
1008388 FLETCHER CHALLENGE LTD FORESTSDIV SHS NZ$0.40 (NZ REG) 1,346,252
268000 LION NATHAN LIMITED NZ$0.25 AUC LISTING 660,824
1335285 PROGRESSIVE ENTERPRISES LTD ORD NZ$0.500 973,196
1693000 SOVEREIGN ASSURANCE ORD NZD 1,729,780
4504000 TASMAN PROPERTIES 2,546,357
270051 WRIGHTSON LIMITED ORD NZ$0.07 198,661
--------------
13,412,001
==============
15 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
SHARES DESCRIPTION VALUE ($)
SGD SINGAPORE - 1.5%
805979 DAIRY FARM INTERNATIONAL HLDGSUS$0.05 761,650
1607171 HONG KONG LAND HLDG ORD US$0.1SIN LISTING 3,857,210
277000 JARDINE STRATEGIC HLDGS IDR REPR 1, 7 1/2% CNV PREF SH 309,894
1039000 JARDINE STRATEGIC HLDGS ORD US$0.05 3,283,240
123000 JARDINE STRATEGIC HLDGS WTS TOSUB FOR ORD(SING REG) 2-MA 46,125
--------------
8,258,119
==============
TWN TAIWAN - 0.4%
21638 BARING TAIWAN FUND REG ORD US$0.01 179,163
200000 FORMOSA FUND IDR(REGD) 1,460,000
15700 R O C TAIWAN FD SH BEN INT 162,888
16000 TUNTEX DISTINCT CORP GLOBAL DEPOSITARY RCPT 102,000
--------------
1,904,050
==============
USD UNITED STATES - 0.1%
20500 STILLWATER MINING CO 435,625
--------------
435,625
==============
ZAR SOUTH AFRICA - 0.6%
4562 ANGLO AMERICAN CORP OF S.AFRICORD R0.10 296,007
61000 BARLOW LIMITED R0.05 782,395
71755 MALBAK ORD NPV(144A) 430,889
106900 NSA INVESTMENT LTD OPTIONS 154,587
534200 NSA INVESTMENTS ORD R0.04 1,612,172
--------------
3,276,050
==============
CASH EQUIVALENT - 8.4%
5058979 CGF CLIENT CASH INVT TR ACCOUNT 5,058,979
40341635.6 PHILADELPHIA NATIONAL BANK RESERVE FUND 40,341,636
--------------
45,400,615
==============
TOTAL INVESTMENTS - 98.2% 532,995,599
==============
</TABLE>
16 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
<TABLE>
<S> <C>
TOTAL INVESTMENTS - CONTINUED - 98.2% $532,995,599
--------------------
Other Assets and Liabilities (Net) - 1.0% $9,710,768
--------------------
TOTAL NET ASSETS - 100% (COST $478,915,518) $542,706,367
====================
</TABLE>
17 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
SCHEDULE OF INVESTMENTS
MARCH 31, 1996
UNAUDITED
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
NET UNREALIZED
SETTLEMENT UNITS OF IN EXCHANGE FOR APPRECIATION
DATE DELIVER CURRENCY (IN U.S. DOLLARS) (DEPRECIATION)
SALES
<S> <C> <C> <C> <C>
1-Jul-96 DEM 22,100,000 15,052,763 $258,449
1-Jul-96 DEM 22,100,000 15,052,763 258,449
1-Jul-96 NLG 16,500,000 10,047,827 172,372
1-Jul-96 CHF 10,200,000 8,656,465 64,838
1-Jul-96 CHF 10,200,000 8,656,465 64,838
-------------------
$818,946
===================
</TABLE>
CURRENCY ABBREVIATIONS
DEM German Deutsche Mark
NLG Netherlands Guilder
CHF Swiss Franc
NOTES TO THE SCHEDULE OF INVESTMENTS
ADR American Depositary Receipt
GDR Global Depositary Receipt
IDR International Depositary Receipt
18 See accompanying notes to the financial statements
GMO COMMON FUND INTERNATIONAL POOL
STATEMENT OF ASSETS AND LIABILITIES - MARCH 31, 1996
UNAUDITED
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $478,915,158) $ 532,995,599
Foreign currency, at value (cost $5,880,852) 5,803,670
Cash 236,750
Receivable for investments sold 4,544,638
Dividends and interest receivable 4,000,790
Receivable for open forward foreign currency contracts 818,946
---------------
Total assets 548,400,393
---------------
LIABILITIES:
Payable for investments purchased 5,694,026
---------------
Total liabilities 5,694,026
---------------
NET ASSETS $ 542,706,367
(equivalent to $5,941.21 per unit based on 91,346 units outstanding) ===============
</TABLE>
19 See accompanying notes to the financial statements.
GMO COMMON FUND INTERNATIONAL POOL
STATEMENT OF OPERATIONS - PERIOD ENDED MARCH 31, 1996
UNAUDITED
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 12,663,932
Interest 3,521,146
--------------------
Total income 16,185,078
--------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 51,996,497
Foreign currency, forward contracts and foreign
currency related transactions 10,125,323
--------------------
Net realized gain 62,121,820
--------------------
Change in net unrealized appreciation (depreciation) on:
Investments 44,597,325
Foreign currency, forward contracts and foreign
currency related transactions (27,692,293)
--------------------
Net unrealized gain 16,905,033
--------------------
Net realized and unrealized gain 79,026,852
--------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 95,211,931
====================
</TABLE>
20 See accompanying notes to the financial statements.
GMO COMMON FUND INTERNATIONAL POOL
STATEMENT OF CHANGES IN NET ASSETS
UNAUDITED
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
MARCH 31, 1996 JUNE 30, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 16,185,078 $ 19,038,727
Net realized gain 62,121,820 43,330,735
Change in net unrealized appreciation (depreciation) 16,905,033 (57,708,909)
-------------------- --------------------
Net increase (decrease) in net assets resulting from
operations 95,211,931 4,660,552
-------------------- --------------------
Distributions to shareholders from:
Net investment income (18,715,335) (8,936,985)
-------------------- --------------------
Fund share transactions:
Proceeds from sale of shares 116,562,339 3,329,049
Cost of shares repurchased (475,443,209) (10,286,660)
-------------------- --------------------
Net decrease in net assets resulting
from principal transactions (358,880,870) (6,957,612)
-------------------- --------------------
Total decrease in net assets (282,384,274) (11,234,044)
NET ASSETS:
Beginning of period 825,090,641 836,324,685
-------------------- --------------------
End of period $ 542,706,367 $ 825,090,641
==================== ====================
</TABLE>
21 See accompanying notes to the financial statements.
GMO COMMON FUND INTERNATIONAL POOL
FINANCIAL HIGHLIGHTS
(FOR A UNIT OUTSTANDING THROUGHOUT EACH PERIOD)
UNAUDITED
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED JUNE 30,
------------- --------------------------------------------------------------------
3/31/96 1995 1994 1993 1992 1991
------------- ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $5,362.04 $5,128.96 $4,145.16 $4,047.89 $3,575.10 $4,238.06
------------- ------------ ------------- ------------ ------------- -------------
Income (loss) from investment operations:
Net investment income (a) 105.62 161.11 87.70 140.35 126.74 177.96
Net realized and unrealized gain (loss)
on investments 558.43 225.66 995.43 88.19 475.66 -657.60
------------- ------------ ------------- ------------ ------------- -------------
Total from investment operations 664.05 386.77 1,083.13 228.54 602.40 -479.64
------------- ------------ ------------- ------------ ------------- -------------
Less distributions to unitholders:
From net investment income -84.88 -153.69 -99.33 -131.28 -129.60 -183.32
------------- ------------ ------------- ------------ ------------- -------------
NET ASSET VALUE, END OF PERIOD $5,941.21 $5,362.04 $5,128.96 $4,145.16 $4,047.89 $3,575.10
============= ============ ============= ============ ============= =============
</TABLE>
22 See accompanying notes to the financial statements.
GMO COMMON FUND INTERNATIONAL POOL
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1996
SIGNIFICANT ACCOUNTING POLICIES
The GMO Common Fund International Pool (the "Fund") is a sub-fund of the
International Equity Fund (less hedged) of The Common Fund, which is a
non-profit corporation created by Special Act of the Legislature of the State of
New York. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co.
(the "Manager"). The Fund was established on September 1, 1984.
The Fund seeks maximum total return through investment in a portfolio of common
stocks of non-U.S. issuers. The Fund is valued monthly and income is distributed
quarterly to participants. Each participant of the Fund is an endowment fund.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
PORTFOLIO VALUATION
Equity securities traded on a national securities exchange are valued at a
composite close price or, in the absence of a recorded trade, at a mean of the
current bid and asked prices. Equity securities not listed on the National
Association of Securities Dealers Automatic Quotation System are valued at the
current bid price. If there is no current bid, the current asked price is used.
Fixed income securities are valued at quoted market prices. Short term
investments are valued at cost which approximates market. Securities listed or
admitted to trading on an international securities exchange are valued at the
last sale price at the close of the primary international exchange.
Securities not readily marketable, including certain investments in limited
partnerships, are valued at fair value deemed appropriate by management, with
consideration given to the financial condition and operating results of the
issuer, meaningful third-party transactions in the private market, and other
factors deemed relevant.
23
GMO COMMON FUND INTERNATIONAL POOL
NOTES TO FINANCIAL STATEMENTS - CONTINUED
UNAUDITED
MARCH 31, 1996
FOREIGN CURRENCY TRANSLATION
The net assets of the Fund are maintained in U.S. Dollars. The net assets of the
Fund are translated at prevailing foreign exchange rates in effect at each
monthly valuation date. During the year, transactions in foreign securities are
translated from foreign currencies into dollars at exchange rates in effect at
the transaction date. Income on investments is translated at prevailing exchange
rates in effect on the remittance dates.
FORWARD CURRENCY CONTRACTS
The Fund purchases and sells foreign currency and forward contracts. A forward
contract obligates one party to purchase and the other party to sell a specific
currency at a set price on a future date and entails the risk that the
counterparty may not have the credit to perform. The contracts are valued daily
at current future exchange rates and an unrealized gain or loss is recorded. The
Fund realizes a gain or loss on settlement of the contracts. (See Schedule of
Investments for open positions in forward foreign currency contracts at March
31, 1996).
TAXES
The Fund is exempt from Federal income tax under section 501(c)(3) of the
Internal Revenue Service.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS
Security transactions are accounted for on a trade date basis. Realized gains
and losses on sales of securities are determined on an average cost basis. Long
term capital gains distributions received on investments in mutual funds are
reinvested. Dividend income is recognized on the ex-dividend date and interest
income is recognized on an accrual basis. Distributions of all net investment
income to participants are made quarterly in arrears. Accrued net investment
income on cross fund investments is included in other income.
EXPENSES
Expenses, including a management charge of 0.75% if average monthly net assets
paid to The Common Fund, are paid outside of the Fund in the form of a reduction
in the amount of income distributed to each participant or in the form of a
quarterly invoice sent to participants.
24
GMO COMMON FUND INTERNATIONAL POOL
NOTES TO FINANCIAL STATEMENTS - CONTINUED
UNAUDITED
MARCH 31, 1996
Investment risk
There are certain additional risks involved in investing in foreign securities
that are not inherent in investments of domestic securities. These risks may
involve adverse political and economic development and the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions. In addition, the securities of some foreign companies and
securities markets are less liquid and at times more volatile than securities of
comparable U.S. companies and U.S. securities markets.
25
GMO COMMON FUND INTERNATIONAL POOL
NOTES TO FINANCIAL STATEMENTS - CONTINUED
UNAUDITED
MARCH 31, 1996
UNIT TRANSACTIONS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
MARCH 31, 1996 JUNE 30, 1995
------------------- -----------------
<S> <C> <C>
Units sold 20,651 12,631
Units issued in reinvestment of distributions 112 165
Units repurchased (83,373) (8,955)
------- ------
Net increase (decrease) (62,610) 3,841
Unit shares:
Beginning of period 153,956 150,115
------- -------
End of period 91,346 153,956
====== =======
</TABLE>
26
GMO TRUST
PART C. OTHER INFORMATION
ITEM 15. INDEMNIFICATION
See Item 27 of Pre-Effective Amendment No. 1 which is hereby incorporated by
reference to the registrant's registration statement on Form N-1A (File No.
2-98772).
Item 16. EXHIBITS
1. Agreement and Declaration of Trust of the GMO Trust (the
"Trust")1;
Amendment No. 1 to the Agreement and Declaration of Trust1;
Amendment No. 2 to the Agreement and Declaration of Trust1;
Amendment No. 3 to the Agreement and Declaration of Trust1;
Amendment No. 4 to the Agreement and Declaration of Trust1;
Amendment No. 5 to the Agreement and Declaration of Trust1;
Amendment No. 6 to the Agreement and Declaration of Trust1;
Amendment No. 7 to the Agreement and Declaration of Trust1;
Amendment No. 8 to the Agreement and Declaration of Trust1;
Amendment No. 9 to the Agreement and Declaration of Trust1;
Amendment No. 10 to the Agreement and Declaration of Trust1;
Amendment No. 11 to the Agreement and Declaration of Trust1;
Amendment No. 12 to the Agreement and Declaration of Trust1;
Amendment No. 13 to the Agreement and Declaration of Trust1;
Amendment No. 14 to the Agreement and Declaration of Trust1;
Amendment No. 15 to the Agreement and Declaration of Trust1;
Amendment No. 16 to the Agreement and Declaration of Trust1;
Amendment No. 17 to the Agreement and Declaration of Trust1;
Amendment No. 18 to the Agreement and Declaration of Trust1;
Amendment No. 19 to the Agreement and Declaration of Trust1;
Form of Amendment No. 20 to the Agreement and Declaration
of Trust1;
Amendment No. 21 to the Agreement and Declaration of Trust1;
Amendment No. 22 to the Agreement and Declaration of Trust1;
Amendment No. 23 to the Agreement and Declaration of Trust2;
Amendment No. 24 to the Agreement and Declaration of Trust2;
Amendment No. 25 to the Agreement and Declaration of Trust2;
and Form of Amendment No. 26 to the Agreement and Declaration
of Trust2.
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-1-
2. By-laws of the Trust2.
3. None.
4. Agreement and Plan of Reorganization - constitutes Exhibit A
included in Part A hereof.
5. Not Applicable.
6. (a) Form of Management Contract between the Trust, on behalf of
its GMO Core Fund (formerly Domestic Equity Series), and
Grantham, Mayo, Van Otterloo & Co. ("GMO")1;
(b) Form of Management Contract between the Trust, on behalf of
its GMO Currency Hedged International Bond Fund (formerly
Domestic Equity (South Africa Free) Series), and GMO1;
(c) Form of Management Contract between the Trust, on behalf of
its GMO International Core Fund (formerly International
Series), and GMO1;
(d) Form of Management Contract between the Trust, on behalf of
its GMO Growth Allocation Fund (formerly Domestic Equity
Growth Series), and GMO1;
(e) Form of Management Contract between the Trust, on behalf of
its Pelican Fund, and GMO1;
(f) Form of Management Contract between the Trust, on behalf of
its GMO Value Allocation Fund (formerly Blue Chip Series),
and GMO1;
(g) Form of Management Contract between the Trust, on behalf of
its GMO International Small Companies Fund (formerly
International Small Capitalization Series), and GMO1;
(h) Form of Management Contract between the Trust, on behalf of
its GMO Japan Fund (formerly Japan Series), and GMO1;
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-2-
(i) Form of Management Contract between the Trust, on behalf of
its GMO Short-Term Income Fund (formerly Money Market
Series), and GMO1;
(j) Form of Management Contract between the Trust, on behalf of
its GMO Core II Secondaries Fund (formerly GMO Second Tier
Fund), and GMO1;
(k) Form of Management Contract between the Trust, on behalf of
its GMO Fundamental Value Fund, and GMO1;
(l) Form of Management Contract between the Trust, on behalf of
its GMO Tobacco-Free Core Fund, and GMO1;
(m) Form of Management Contract between the Trust, on behalf of
its GMO U.S. Sector Allocation Fund, and GMO1;
(n) Management Contract between the Trust, on behalf of its GMO
Conservative Equity Fund, and GMO1;
(o) Management Contract between the Trust, on behalf of its GMO
International Bond Fund (formerly GMO World Bond Fund), and
GMO1;
(p) Management Contract between the Trust, on behalf of its GMO
Emerging Country Debt Fund (formerly GMO International SAF
Fund), and GMO1;
(q) Management Contract between the Trust, on behalf of its GMO
Emerging Markets Fund, and GMO1;
(r) Sub-Advisory Contract between GMO, on behalf of its GMO
Emerging Markets Fund, and Dancing Elephant, Ltd.1;
(s) Form of Management Contract between the Trust, on behalf of
its GMO Domestic Bond Fund (formerly GMO Domestic T & A
Fund), and GMO1;
(t) Form of Management Contract between the Trust, on behalf of
its GMO Global Hedged Equity Fund (formerly GMO Global T & A
Fund), and GMO1;
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-3-
(u) Form of Management Contract between the Trust, on behalf of
its GMO Currency Hedged International Core Fund (formerly
GMO Domestic Long Bond Fund), and GMO1;
(v) Form of Management Contract between the Trust, on behalf of
its GMO Core Emerging Country Debt Fund (formerly GMO Bond
Allocation Fund), and GMO1;
(w) Form of Management Contract between the Trust, on behalf of
the GMO REIT Fund, and GMO2;
(x) Form of Management Contract between the Trust, on behalf of
the GMO Global Bond Fund, and GMO2;
(y) Form of Management Contract between the Trust, on behalf of
the GMO Foreign Fund (formerly GMO Global Core Fund), and
GMO2
(z) Form of Management Contract between the Trust, on behalf of
the GMO International Equity Allocation Fund, and GMO2.
(aa) Form of Management Contract between the Trust, on behalf of
the GMO Traditional International Equity Allocation Fund,
and GMO2.
(bb) Form of Management Contract between the Trust, on behalf of
the GMO World Equity Allocation Fund, and GMO2.
(cc) Form of Management Contract between the Trust, on behalf of
the GMO Traditional World Equity Allocation Fund, and GMO2.
(dd) Form of Management Contract between the Trust, on behalf of
the GMO Global Equity Allocation Fund, and GMO2.
(ee) Form of Management Contract between the Trust, on behalf of
the GMO Traditional Global Equity Allocation Fund, and GMO2.
(ff) Form of Management Contract between the Trust, on behalf of
the GMO Global Balanced Allocation Fund, and GMO2.
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-4-
(gg) Form of Management Contract between the Trust, on behalf of
the GMO Traditional Global Balanced Allocation Fund, and
GMO2.
7. None.
8. None.
9. (a) Custodian Agreement among the Trust, on behalf of its
GMO Core Fund, GMO Currency Hedged International Bond Fund
(formerly GMO SAF Core Fund), GMO Value Allocation Fund,
GMO Growth Allocation Fund (formerly GMO Growth Fund), and
GMO Short-Term Income Fund, GMO and Investors Bank & Trust
Company ("IBT")1;
(b) Form of Letter Agreement among the Trust, on behalf of its
GMO Tobacco- Free Core Fund and GMO Fundamental Value Fund,
GMO and IBT1;
(c) Form of Letter Agreement among the Trust, on behalf of its
GMO U.S. Sector Allocation Fund, GMO and IBT1;
(d) Letter Agreement among the Trust, on behalf of its GMO
Conservative Equity Fund, GMO and IBT1;
(e) Letter Agreement among the Trust, on behalf of its GMO
International Bond Fund (formerly GMO World Bond Fund), GMO
and IBT1;
(f) Form of Letter Agreement among the Trust, on behalf of its
GMO Core II Secondaries Fund, GMO and IBT1;
(g) Form of Custodian Agreement among the Trust, on behalf of
its GMO International Core Fund and GMO Japan Fund, GMO and
Brown Brothers Harriman & Co. ("BBH")1;
(h) Form of Letter Agreement among the Trust, on behalf of its
GMO Emerging Markets Fund, GMO and BBH1;
(i) Letter Agreement among the Trust, on behalf of its GMO
Emerging Country Debt Fund, GMO and IBT1;
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-5-
(j) Form of Letter Agreement among the Trust, on behalf of its
GMO Core Emerging Country Debt Fund, GMO and IBT1;
(k) Custodian Agreement among the Trust, on behalf of its
Pelican Fund, GMO and State Street Bank and Trust Company1;
(l) Form of Letter Agreement among the Trust, on behalf of its
GMO Domestic Bond Fund (formerly GMO Domestic T & A Fund),
GMO and IBT1;
(m) Form of Letter Agreement among the Trust, on behalf of its
GMO Global Hedged Equity Fund (formerly GMO Global T & A
Fund), GMO and BBH1;
(n) Form of Letter Agreement among the Trust, on behalf of its
GMO International Small Companies Fund, GMO and BBH1;
(o) Form of Letter Agreement among the Trust, on behalf of its
GMO Currency Hedged International Core Fund, GMO and IBT1;
(p) Form of Letter Agreement among the Trust, on behalf of its
GMO REIT Fund and GMO Global Bond Fund, GMO and IBT2;
(q) Form of Letter Agreement among the Trust, on behalf of its
GMO Foreign Fund (formerly GMO Global Core Fund), GMO and
BBH2;
(r) Form of Letter Agreement among the Trust, on behalf of its
GMO International Equity Allocation Fund, GMO Traditional
International Equity Allocation Fund, GMO World Equity
Allocation Fund, GMO Traditional World Equity Allocation
Fund, GMO Global Equity Allocation Fund, GMO Traditional
Global Equity Allocation Fund, GMO Global Balanced
Allocation Fund, GMO Traditional Global Balanced Allocation
Fund, GMO and IBT2.
10. None.
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-6-
11. Opinion and consent of Ropes & Gray with respect to GMO Foreign
Fund (previously filed).
-----------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-7-
12. Opinion and consent of Ropes & Gray supporting the tax matters
and consequences to shareholders discussed in the prospectus
(previously filed).
13. (a) Transfer Agency Agreement among the Trust, on behalf of its
GMO Core Fund, GMO Currency Hedged International Bond Fund
(formerly GMO SAF Core Fund), GMO Growth Allocation Fund
(formerly GMO Growth Fund), GMO Value Allocation Fund,
GMO Short-Term Income Fund, GMO International Core Fund and
GMO Japan Fund, GMO and IBT1;
(b) Form of Letter Agreement among the Trust, on behalf of its
GMO Fundamental Value Fund, and GMO Tobacco-Free Core Fund
(formerly GMO Global Bond Fund), GMO and IBT1;
(c) Form of Letter Agreement among the Trust, on behalf of its
GMO U.S. Sector Allocation Fund, GMO and IBT1;
(d) Letter Agreement among the Trust, on behalf of its GMO
Conservative Equity Fund and GMO International Bond Fund
(formerly GMO World Bond Fund), GMO and IBT1;
(e) Letter Agreement among the Trust, on behalf of its GMO
Emerging Markets Fund, GMO and IBT1;
(f) Letter Agreement among the Trust, on behalf of its GMO
Emerging Country Debt Fund, GMO and IBT1;
(g) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO Domestic Bond Fund (formerly GMO Domestic
Hedged Equity Fund), GMO Global Hedged Equity Fund, GMO and
IBT1 ;
(h) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO Core II Secondaries Fund, GMO and IBT1;
(i) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO International Small Companies Fund, GMO
and IBT1;
(j) Form of Transfer Agency Agreement among the Trust, on
behalf of its Pelican Fund, GMO and IBT1;
(k) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO Currency Hedged International Core Fund,
GMO and IBT1;
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-8-
(l) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO Core Emerging Country Debt Fund, GMO and
IBT1;
(m) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO REIT Fund, GMO Global Core Fund and GMO
Global Bond Fund, GMO and IBT2;
(n) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO Foreign Fund, GMO and IBT2;
(o) Form of Transfer Agency Agreement among the Trust, on
behalf of its GMO International Equity Allocation Fund, GMO
Traditional International Equity Allocation Fund, GMO World
Equity Allocation Fund, GMO Traditional World Equity
Allocation Fund, GMO Global Equity Allocation Fund, GMO
Traditional Global Equity Allocation Fund, GMO Global
Balanced Allocation Fund, GMO Traditional Global Balanced
Allocation Fund, GMO and IBT2.
(p) Form of Notification of Fee Waiver and Expense Limitation
by GMO to the Trust relating to all Funds of the Trust2.
14. Consent of Price Waterhouse LLP (Filed herewith).
15. Not Applicable.
16. Manually signed copies of any power of attorney2.
------------------------------------
1 Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference to the Registrant's registration
statement on Form N-1A (File No. 2-98772).
2 Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference to the Registrant's
registration statement on Form N-1A (File No. 2-98772).
-9-
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a
part of this Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) under the
Securities Act of 1933, the reoffering prospectus will contain the
information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (a) above will be filed as a part of an amendment to
this Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Act, each
post-effective amendment shall be deemed to be a new Registration
Statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.
-10-
SIGNATURES
As required by the Securities Act of 1933, this registration statement
has been signed on behalf of the registrant, in the City of Boston and The
Commonwealth of Massachusetts, on the 14th day of May, 1996.
GMO Trust
By: R. JEREMY GRANTHAM*
_____________________
R. Jeremy Grantham
President - Domestic Quantitative;
Principal Executive Officer;
Trustee
As required by the Securities Act of 1933, this registration statement has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
R. JEREMY GRANTHAM* President - Domestic Quantitative; May 14, 1996
- -------------------
R. Jeremy Grantham Principal Executive Officer; Trustee
KINGSLEY DURANT* Treasurer; Principal Financial and May 14, 1996
- ----------------
Kingsley Durant Accounting Officer
HARVEY R. MARGOLIS* Trustee May 14, 1996
- -------------------
Harvey R. Margolis
EYK H.A. VAN OTTERLOO* President - International; Trustee May 14, 1996
- ---------------------
Eyk H.A. Van Otterloo
</TABLE>
* By: /s/ WILLIAM R. ROYER
____________________
William R. Royer
Attorney-in-Fact
-11-
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
14 Consent of Price Waterhouse LLP
GMO TRUST
GMO TRUST (the "Trust"), 40 Rowes Wharf, Boston, Massachusetts 02110,
is an open-end management investment company offering seven diversified
portfolios and fifteen non-diversified portfolios (the portfolios, other than
the Pelican Fund whose shares are offered pursuant to a separate prospectus, are
referred to herein as the "Funds"). Each Fund has its own investment objectives
and strategies. Grantham, Mayo, Van Otterloo & Co. (the "Manager") is the
manager of each Fund. The Manager has entered into a Consulting Agreement with
Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the
Emerging Markets Fund. Unless otherwise noted, each of the Funds referred to
below is a diversified portfolio. For a discussion of the significance and/or
risks associated with "non-diversified" portfolios, see "Descriptions and Risks
of Fund Investment Practices -- Diversified and Non-Diversified Portfolios." A
Table of Contents appears on page 3 of this Prospectus.
- --------------------------------------------------------------------------------
DOMESTIC EQUITY FUNDS
The Trust offers the following seven domestic equity portfolios which are
collectively referred to as the "Domestic Equity Funds."
GMO CORE FUND (the "Core Fund") seeks a total return greater than that of
the Standard & Poor's 500 Stock Index (the "S&P 500") through investment in
common stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange (the "Large Cap 1200").
GMO TOBACCO-FREE CORE FUND (the "Tobacco-Free Core Fund") seeks a total
return greater than that of the S&P 500 through investment in common stocks
chosen from the Large Cap 1200 which are not Tobacco Producing Issuers. A
"Tobacco Producing Issuer" is an issuer which derives more than 10% of its gross
revenues from the production of tobacco-related products.
GMO VALUE ALLOCATION FUND (the "Value Allocation Fund") is a non-diversified
portfolio that seeks a total return greater than that of the S&P 500 through
investment in common stocks chosen from the Large Cap 1200. Strong consideration
is given to common stocks whose current prices, in the opinion of the Manager,
do not adequately reflect the on-going business value of the underlying company.
GMO GROWTH ALLOCATION FUND (the "Growth Allocation Fund") is a
non-diversified portfolio that seeks long-term growth of capital through
investment in the equity securities of companies chosen from the Large Cap 1200.
Current income is only an incidental consideration.
GMO U.S. SECTOR ALLOCATION FUND (the "U.S. Sector Allocation Fund") is a
non-diversified portfolio that seeks a total return greater than that of the S&P
500 through investment in common stocks chosen from among the 1,800 companies
with the largest equity capitalization whose securities are listed on a United
States national securities exchange.
GMO CORE II SECONDARIES FUND (the "Core II Secondaries Fund") seeks
long-term growth of capital through investment primarily in companies whose
equity capitalization ranks in the lower two-thirds of the 1800 companies with
the largest equity capitalization whose securities are listed on a United States
national securities exchange. Current income is only an incidental
consideration.
GMO FUNDAMENTAL VALUE FUND (the "Fundamental Value Fund") seeks long-term
capital growth through investment primarily in equity securities. Consideration
of current income is secondary to this principal objective.
INTERNATIONAL EQUITY FUNDS
The Trust offers the following seven international equity portfolios which
are collectively referred to as the "International Equity Funds."
GMO INTERNATIONAL CORE FUND (the "International Core Fund") seeks maximum
total return through investment in a portfolio of common stocks of non-U.S.
issuers.
- --------------------------------------------------------------------------------
This Prospectus concisely describes the information which investors ought
to know before investing. Please read this Prospectus carefully and keep it for
further reference. A Statement of Additional Information dated February 29,
1996, as revised from time to time, is available free of charge by writing to
Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, Massachusetts 02110
or by calling (617) 330-7500. The Statement, which contains more detailed
information about each Fund, has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated by reference in this Prospectus.
THE EMERGING COUNTRY DEBT AND THE CORE EMERGING COUNTRY DEBT FUNDS MAY
INVEST WITHOUT LIMIT, THE INTERNATIONAL BOND AND CURRENCY HEDGED INTERNATIONAL
BOND FUNDS MAY INVEST UP TO 25% OF THEIR NET ASSETS AND THE DOMESTIC BOND AND
FOREIGN FUNDS MAY INVEST UP TO 5% OF THEIR NET ASSETS IN LOWER-RATED BONDS,
COMMONLY KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A
GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. INVESTORS SHOULD
CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS. PLEASE
SEE "DESCRIPTION AND RISKS OF FUND INVESTMENT PRACTICES -- LOWER RATED
SECURITIES."
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 ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS FEBRUARY 29, 1996
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (the "Currency Hedged
International Core Fund") is a non-diversified portfolio that seeks maximum
total return through investment in a portfolio of common stocks of non-U.S.
issuers and through management of the Fund's foreign currency positions. The
Fund has similar policies to the International Core Fund, except that the
Currency Hedged International Core Fund will maintain currency hedges with
respect to a substantial portion of the foreign currency exposure represented in
the Fund's benchmark while the International Core Fund will generally hedge only
a limited portion of the currency exposure of that benchmark.
GMO FOREIGN FUND (the "Foreign Fund") is a non-diversified portfolio that
seeks maximum total return through investment in a portfolio of equity
securities of non-U.S. issuers.
GMO INTERNATIONAL SMALL COMPANIES FUND (the "International Small Companies
Fund") seeks maximum total return through investment primarily in equity
securities of foreign issuers whose equity securities are traded on a major
stock exchange of a foreign country ("foreign stock exchange companies") and
whose equity capitalization at the time of investment, when aggregated with the
equity capitalizations of all foreign stock exchange companies in that country
whose equity capitalizations are smaller than that of such company, is less than
50% of the aggregate equity capitalization of all foreign stock exchange
companies in such country.
GMO JAPAN FUND (the "Japan Fund") is a non-diversified portfolio that seeks
maximum total return through investment in Japanese securities, primarily in
common stocks of Japanese companies.
GMO EMERGING MARKETS FUND (the "Emerging Markets Fund") is a non-diversified
portfolio that seeks long term capital appreciation consistent with what the
Manager believes to be a prudent level of risk through investment in equity and
equity-related securities traded in the securities markets of newly
industrializing countries in Asia, Latin America, the Middle East, Southern
Europe, Eastern Europe and Africa.
GMO GLOBAL HEDGED EQUITY FUND (the "Global Hedged Equity Fund") is a
non-diversified portfolio that seeks total return consistent with minimal
exposure to general equity market risk.
FIXED INCOME FUNDS
The Trust offers the following six domestic and international fixed income
portfolios which are collectively referred to as the "Fixed Income Funds."
GMO DOMESTIC BOND FUND (the "Domestic Bond Fund") is a non-diversified
portfolio that seeks high total return through investment primarily in U.S.
Government Securities. The Fund may also invest a significant portion of its
assets in other investment grade bonds (including convertible bonds) denominated
in U.S. dollars. The Fund's portfolio will generally have a duration of
approximately four to six years (excluding short-term investments).
GMO SHORT-TERM INCOME FUND (the "Short-Term Income Fund") is a
non-diversified portfolio that seeks current income to the extent consistent
with the preservation of capital and liquidity through investment in a portfolio
of high quality short-term instruments. The Short-Term Income Fund intends to
invest in short-term securities, but it is not a "money market fund."
GMO INTERNATIONAL BOND FUND (the "International Bond Fund") is a
non-diversified portfolio that seeks high total return by investing primarily in
investment grade bonds (including convertible bonds) denominated in various
currencies including U.S. dollars or in multicurrency units. The Fund seeks to
provide a total return greater than that provided by the international fixed
income securities market generally.
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (the "Currency Hedged
International Bond Fund") is a non-diversified portfolio with the same
investment objectives and policies as the International Bond Fund except that
the Currency Hedged International Bond Fund will generally attempt to hedge
substantially all of its foreign currency risk while the International Bond Fund
will generally not hedge any of its foreign currency risk. Despite the otherwise
identical objectives and policies, the composition of the two portfolios may
differ substantially at any given time.
GMO GLOBAL BOND FUND (the "Global Bond Fund") is a non-diversified portfolio
that seeks high total return by investing primarily in investment grade bonds
(including convertible bonds) denominated in various currencies including U.S.
dollars or in multicurrency units. The Fund seeks to provide a total return
greater than that provided by the global fixed income securities market
generally.
GMO EMERGING COUNTRY DEBT FUND (the "Emerging Country Debt Fund") is a
non-diversified portfolio that seeks high total return by investing primarily in
sovereign debt (bonds and loans) of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa.
GMO CORE EMERGING COUNTRY DEBT FUND (the "Core Emerging Country Debt Fund")
is a non-diversified portfolio that seeks high total return by investing
primarily in the most marketable sovereign debt (bonds and loans) of countries
in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa. The Core Emerging Country Debt Fund has not yet commenced operations.
- --------------------------------------------------------------------------------
Shares of each Fund are sold to investors by the Trust. The minimum initial
investment in the Trust (which minimum investment may be allocated among one or
more Funds) is $10,000,000 and the minimum for each subsequent investment is
$250,000. For more information, see "Purchase of Shares." For information
concerning share redemption procedures, see "Redemption of Shares."
Investors should consider the risks associated with an investment in the
Funds. For information concerning the types of investment practices in which a
particular Fund may engage, see "Investment Objectives and Policies". For more
information concerning such investment practices and their associated risks, see
"Descriptions and Risks of Fund Investment Practices."
TABLE OF CONTENTS
SCHEDULE OF FEES AND EXPENSES................................................. 4
FINANCIAL HIGHLIGHTS.......................................................... 6
INVESTMENT OBJECTIVES AND POLICIES............................................15
DOMESTIC EQUITY FUNDS.....................................................15
Core Fund.............................................................15
Tobacco-Free Core Fund................................................15
Value Allocation Fund.................................................16
Growth Allocation Fund................................................16
U.S. Sector Allocation Fund...........................................17
Core II Secondaries Fund..............................................17
Fundamental Value Fund................................................18
INTERNATIONAL EQUITY FUNDS................................................19
International Core Fund...............................................19
Currency Hedged International Core Fund...............................19
Foreign Fund..........................................................20
International Small Companies Fund ...................................21
Japan Fund............................................................21
Emerging Markets Fund.................................................22
Global Hedged Equity Fund.............................................23
FIXED INCOME FUNDS........................................................26
Domestic Bond Fund....................................................26
Short-Term Income Fund................................................26
International Bond Fund...............................................27
Currency Hedged International Bond Fund...............................28
Global Bond Fund......................................................28
Emerging Country Debt Fund............................................29
Core Emerging Country Debt Fund.......................................30
DESCRIPTIONS AND RISKS OF FUND
INVESTMENT PRACTICES......................................................30
Portfolio Turnover........................................................30
Diversified and Non-Diversified Portfolios................................31
Certain Risks of Foreign Investments......................................31
General...............................................................31
Emerging Markets......................................................31
Securities Lending........................................................31
Depository Receipts...................................................32
Convertible Securities....................................................32
Futures and Options.......................................................32
Options...............................................................32
Writing Covered Options...............................................32
Futures...............................................................33
Index Futures.........................................................34
Interest Rate Futures.................................................34
Options on Futures Contracts..........................................34
Uses of Options, Futures and Options on Futures...........................34
Risk Management.......................................................34
Hedging...............................................................35
Investment Purposes...................................................35
Synthetic Sales and Purchases.........................................35
Swap Contracts and Other Two-Party Contracts..............................36
Swap Contracts........................................................36
Interest Rate and Currency Swap Contracts.............................36
Equity Swap Contracts and Contracts for
Differences......................................................36
Interest Rate Caps, Floors and Collars................................37
Foreign Currency Transactions ............................................37
Repurchase Agreements.....................................................38
Debt and Other Fixed Income Securities Generally..........................38
Temporary High Quality Cash Items.........................................38
U.S. Government Securities and Foreign
Government Securities...................................................38
Mortgage-Backed and Other Asset-Backed
Securities..............................................................39
Collateralized Mortgage Obligations
("CMOs"); Strips and Residuals......................................39
Adjustable Rate Securities................................................39
Lower Rated Securities....................................................40
Brady Bonds...............................................................40
Zero Coupon Securities....................................................40
Indexed Securities........................................................40
Firm Commitments..........................................................41
Loans, Loan Participations and Assignments................................41
Reverse Repurchase Agreements and Dollar
Roll Agreements.........................................................41
Illiquid Securities.......................................................42
PURCHASE OF SHARES............................................................42
Purchase Procedures.......................................................43
REDEMPTION OF SHARES..........................................................43
DETERMINATION OF NET ASSET VALUE..............................................44
DISTRIBUTIONS.................................................................44
TAXES.........................................................................45
Withholding on Distributions to Foreign Investors.........................45
Foreign Tax Credits.......................................................45
Loss of Regulated Investment Company Status...............................45
MANAGEMENT OF THE TRUST.......................................................46
ORGANIZATION AND CAPITALIZATION
OF THE TRUST..............................................................47
Appendix A....................................................................48
RISKS AND LIMITATIONS OF OPTIONS, FUTURES
AND SWAPS.................................................................48
Limitations on the Use of Options and Futures
Portfolio Strategies..................................................48
Risk Factors in Options Transactions......................................48
Risk Factors in Futures Transactions......................................48
Risk Factors in Swap Contracts, OTC Options and
other Two-Party Contracts.............................................49
Additional Regulatory Limitations on the Use of
Futures and Related Options, Interest Rate
Floors, Caps and Collars and Interest Rate and
Currency Swap Contracts...............................................49
Appendix B....................................................................50
COMMERCIAL PAPER AND CORPORATE DEBT
RATINGS...................................................................50
Commercial Paper Ratings .................................................50
Corporate Debt Ratings....................................................50
Standard & Poor's Corporation.............................................50
Moody's Investors Service, Inc............................................50
SCHEDULE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
GMO FUND NAME SHAREHOLDER TRANSACTION EXPENSES ANNUAL FUND OPERATING EXPENSES
Cash Purchase
Premium (as a Redemption Fees Management Total Fund
percentage of (as a percentage of Fees after Fee Other Operating
amount invested)1 amount redeemed)2 Waiver3 Expenses3 Expenses3
<S> <C> <C> <C> <C> <C>
Core Fund .17% None .45% .03% .48%
Tobacco-Free Core Fund .17% None .23% .25% .48%
Value Allocation Fund .15% None .56% .05% .61%
Growth Allocation Fund .17% None .42% .06% .48%
U.S. Sector Allocation Fund .17% None .40% .08% .48%
Core II Secondaries Fund .75% .75% .39% .09% .48%
Fundamental Value Fund .15% None .68% .07% .75%
International Core Fund .75% None .59%7 .10%7 .69%
Currency Hedged
International Core Fund .75% None .43% .26%12 .69%
Foreign Fund None None .57% .18%12 .75%
International Small
Companies Fund 1.25% .75% .47% .29% .76%
Japan Fund .40% .70% .58%11 .30%9 .88%
Emerging Markets Fund 1.60% .40%6 .98%7 .58%7 1.56%
Global Hedged
Equity Fund .60% 1.40%5 .61% .19%4 .80%
Domestic Bond Fund None None .21% .04%4 .25%
Short-Term Income Fund None None .01%13 .19% .20%13
International Bond Fund .15% None .19% .21% .40%
Currency Hedged
International Bond Fund .15% None .28% .12%4 .40%
Global Bond Fund .15% None .05% .29%12 .34%
Emerging Country
Debt Fund .50% .25%8 .45% .17%10 .62%
Core Emerging Country
Debt Fund .40% None .00% .45%12 .45%
</TABLE>
SCHEDULE OF FEES AND EXPENSES (Continued)
<TABLE>
<CAPTION>
EXAMPLES
You would pay the following
expenses on a $1,000 invest- You would pay the following
ment assuming 5% annual expenses on the same
return with redemption at the investment assuming no
end of each time period: redemption:
1Yr. 3 Yr. 5 Yr. 10 Yr. 1 Yr. 3 Yr. 5 Yr. 10 Yr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Core Fund $7 $17 $29 $62 $7 $17 $29 $62
Tobacco-Free Core Fund $7 $17 $29 $62 $7 $17 $29 $62
Value Allocation Fund $8 $21 $35 $78 $8 $21 $35 $78
Growth Allocation Fund $7 $17 $29 $62 $7 $17 $29 $62
U.S. Sector Allocation Fund $7 $17 $29 $62 $7 $17 $29 $62
Core II Secondaries Fund $20 $31 $43 $79 $12 $23 $34 $67
Fundamental Value Fund $9 $25 $43 $94 $9 $25 $43 $94
International Core Fund $15 $29 $46 $93 $15 $29 $46 $93
Currency Hedged
International Core Fund $15 $29 $15 $29
Foreign Fund $8 $24 $8 $24
International Small
Companies Fund $28 $45 $63 $117 $20 $36 $54 $106
Japan Fund $20 $40 $61 $122 $13 $32 $53 $112
Emerging Markets Fund $36 $69 $104 $204 $32 $65 $100 $199
Global Hedged
Equity Fund $29 $47 $67 $125 $14 $31 $50 $104
Domestic Bond Fund $3 $8 $14 $32 $3 $8 $14 $32
Short-Term Income Fund $2 $6 $11 $26 $2 $6 $11 $26
International Bond Fund $6 $14 $24 $52 $6 $14 $24 $52
Currency Hedged
International Bond Fund $6 $14 $24 $52 $6 $14 $24 $52
Global Bond Fund $5 $12 $5 $12
Emerging Country
Debt Fund $14 $28 $42 $86 $11 $25 $38 $86
Core Emerging Country
Debt Fund $9 $18 $9 $18
</TABLE>
SCHEDULE OF FEES AND EXPENSES
Footnotes
1 Applies only with respect to certain cash transactions as set forth under
the heading "Purchase of Shares". The Manager may waive purchase premiums if
there are minimal brokerage and transaction costs incurred in connection
with the purchase. Normally, no purchase premium is charged with respect to
in-kind purchases of Fund shares. However, in the case of in-kind purchases
involving transfers of large positions in markets where the costs of
re-registration and/or other transfer expenses are high, the International
Core Fund, Currency Hedged International Core Fund, International Small
Companies Fund, Japan Fund and Global Hedged Equity Fund may each charge a
premium of 0.10% and the Emerging Markets Fund may charge a premium of
0.20%.
2 The Manager may waive redemption fees as set forth under the heading
"Redemption of Shares" if there are minimal brokerage and transaction costs
incurred in connection with the redemption.
3 The Manager has voluntarily undertaken to reduce its management fees and to
bear certain expenses with respect to each Fund until further notice to the
extent that a Fund's total annual operating expenses (excluding brokerage
commissions, extraordinary expenses (including taxes), securities lending
fees and expenses and transfer taxes; and, in the case of the Japan Fund,
Emerging Markets Fund, Emerging Country Debt Fund and Global Hedged Equity
Fund, excluding custodial fees; and, in the case of the Global Hedged Equity
Fund only, also excluding hedging transaction fees) would otherwise exceed
the percentage of that Fund's daily net assets specified below. Therefore so
long as the Manager agrees so to reduce its fee and bear certain expenses,
total annual operating expenses (subject to such exclusions) of the Fund
will not exceed these stated limitations. The Manager has also voluntarily
undertaken, until further notice, to limit its management fee for the
Emerging Markets Fund to 0.98% regardless of the total operating expenses of
the Fund. Absent such undertakings, management fees for each Fund and the
annual operating expenses for each Fund would be as shown below.
<TABLE>
<CAPTION>
Total Fund
Voluntary Management Operating
Expense Fee (Absent Expenses
Fund Limit Waiver) (Absent Waiver)
<S> <C> <C> <C>
Core Fund .48% .525% .553%
Tobacco-Free Core Fund .48% .50% .75%
Value Allocation Fund .61% .70% .75%
Growth Allocation Fund .48% .50% .56%
U.S. Sector Allocation Fund .48% .49% .57%
Core II Secondaries Fund .48% .50% .59%
Fundamental Value Fund .75% .75% .82%
International Core Fund .69% .75% .84%
Currency Hedged
International Core Fund .69% .75% 1.01%
Foreign Fund .75% .75% .93%
International Small Companies Fund .75% 1.25% 1.54%
Japan Fund .69% .75% 1.05%
Emerging Markets Fund 1.20% 1.00% 1.58%
Global Hedged Equity Fund .65% .65% .84%
Domestic Bond Fund .25% .25% .29%
Short-Term Income Fund .20% .25% .44%
International Bond Fund .40% .40% .61%
Currency Hedged International
Bond Fund .40% .50% .62%
Global Bond Fund .34% .35% .64%
Emerging Country Debt Fund .50% .50% .67%
Core Emerging Country Debt Fund .45% .45% .90%
</TABLE>
4 Based on estimated amounts for the Fund's first complete fiscal year based
on actual expenses incurred through August 31, 1995.
5 May be reduced if it is not necessary to incur costs relating to the early
termination of hedging transactions to meet redemption requests.
6 Applies only to shares acquired on or after June 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
7 Figure based on actual expenses for the fiscal year ended February 28, 1995
but restated to give effect to a change in the fee waiver and/or expense
limitation of the Fund, which change was effective as of June 27, 1995.
8 Applies only to shares acquired on or after July 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
9 Restated to reflect higher expenses anticipated for the current fiscal year.
10 Based on estimated expenses during the year ended February 29, 1996.
11 Figure based on actual expenses for the fiscal year ended February 28, 1995,
but restated to give effect to a change in the fee waiver and/or expense
limitation of the Fund, which change is effective as of September 18, 1995.
12 Based on estimated amounts for the Fund's first fiscal year.
13 Figure based on actual expenses for fiscal year ended February 28, 1995, but
restated to give effect to a change in the fee waiver and/or expense
limitation of the Fund, which change was effective as of February 7, 1996.
Unless otherwise noted, Annual Fund Operating Expenses shown are actual
expenses for the year ended February 28, 1995. Where a purchase premium and/or
redemption fee is indicated as being charged by a Fund in certain instances, the
foregoing examples assume the payment of such purchase premium and/or redemption
fee even though such purchase premium and/or redemption fee is not applicable in
all cases. (See "Purchase of Shares" and "Redemption of Shares").
The purpose of the foregoing tables is to assist in understanding the
various costs and expenses of each Fund that are borne by holders of Fund
shares. THE FIVE PERCENT ANNUAL RETURN AND EXPENSE NUMBERS USED ARE NOT
REPRESENTATIONS OF FUTURE PERFORMANCE OR EXPENSES: SUBJECT TO THE MANAGER'S
UNDERTAKING TO WAIVE ITS FEE AND/OR BEAR CERTAIN EXPENSES FOR EACH FUND AS
DESCRIBED IN THE FOREGOING TABLES, ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE
MORE OR LESS THAN SHOWN.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
DOMESTIC EQUITY FUNDS
CORE FUND
Six Months Ended
August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1991 2
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.45 $ 15.78 $ 15.73 $ 15.96 $ 15.13 $ 13.90
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 3 0.21 0.41 0.42 0.45 0.43 0.43
Net realized and unrealized gain
(loss) on investments 2.82 0.66 1.59 1.13 1.55 1.74
------ ------ ------ ------ ------ ------
Total from investment operations 3.03 1.07 2.01 1.58 1.98 2.17
------ ------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.18) (0.39) (0.43) (0.46) (0.42) (0.51)
From net realized gains (0.05) (1.01) (1.53) (1.35) (0.73) (0.43)
------ ------ ------ ------ ------ ------
Total distributions (0.23) (1.40) (1.96) (1.81) (1.15) (0.94)
------ ------ ------ ------ ------ ------
Net asset value, end of period $18.25 $ 15.45 $ 15.78 $ 15.73 $ 15.96 $ 15.13
====== ====== ====== ====== ====== ======
Total Return 4 19.73% 7.45% 13.36% 10.57% 13.62% 16.52%
Ratios/Supplemental Data:
Net assets, end of period (000's) $2,895,124 $2,309,248 $1,942,005 $1,892,955 $2,520,710 $1,613,945
Net expenses to average daily
net assets 3 0.48% 5 0.48% 0.48% 0.49% 0.50% 0.50%
Net investment income to average
daily net assets 3 2.44% 5 2.63% 2.56% 2.79% 2.90% 3.37%
Portfolio turnover rate 37% 99% 40% 54% 39% 55%
</TABLE>
<TABLE>
<CAPTION>
CORE FUND (continued) Year Ended February 28/29,
1990 2 1989 2 1988 2 1987 2 1986 1, 2
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.47 $ 13.43 $ 15.24 $ 12.64 $ 10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 3 0.65 0.54 0.45 0.34 0.11
Net realized and unrealized gain
(loss) on investments 2.43 0.96 (0.92) 3.15 2.53
------ ------ ------ ------ ------
Total from investment operations 3.08 1.50 (0.47) 3.49 2.64
------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.70) (0.46) (0.38) (0.46) --.--
From net realized gains (2.95) --.-- (0.96) (0.43) --.--
------ ------ ------ ------ ------
Total distributions (3.65) (0.46) (1.34) (0.89) --.--
------ ------ ------ ------ ------
Net asset value, end of period $ 13.90 $ 14.47 $ 13.43 $ 15.24 $ 12.64
====== ====== ====== ====== ======
Total Return 4 21.19% 11.49% (3.20%) 28.89% 26.46%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,016,965 $1,222,115 $1,010,014 $909,394 $266,734
Net expenses to average daily
net assets 3 0.50% 0.50% 0.52% 0.53% 0.53% 5
Net investment income to average
daily net assets 3 3.84% 4.02% 3.23% 3.06% 3.63% 5
Portfolio turnover rate 72% 51% 46% 75% 81%
1 For the period from the commencement of operations, September 25, 1985 to
February 28, 1986.
2 The per share amounts and the number of shares outstanding have been
restated to reflect a ten for one split effective December 31, 1990.
3 Net of fees and expenses voluntarily waived or borne by the Manager of $ .01
per share for each period presented.
4 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
5 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
TOBACCO - FREE CORE FUND August 31, 1995 Year Ended February 28/29
(Unaudited) 1995 1994 1993 1992 1
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.65 $ 11.07 $ 11.35 $ 10.50 $ 10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 2 0.15 0.23 0.34 0.31 0.12
Net realized and unrealized gain
(loss) on investments 1.92 0.50 1.18 0.84 0.44
------ ------ ------ ------ ------
Total from investment operations 2.07 0.73 1.52 1.15 0.56
------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.08) (0.28) (0.35) (0.30) (0.06)
From net realized gains (0.20) (0.87) (1.45) -.- -.-
------ ------ ------ ------ ------
Total distributions (0.28) (1.15) (1.80) (0.30) (0.06)
------ ------ ------ ------ ------
Net asset value, end of period $12.44 $ 10.65 $ 11.07 $ 11.35 $ 10.50
====== ====== ====== ====== ======
Total Return 3 19.66% 7.36% 14.12% 11.20% 5.62%
Ratios/Supplemental Data:
Net assets, end of period (000's) $55,374 $47,969 $55,845 $85,232 $75,412
Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.49% 0.49%
assets 2
Net investment income to average
daily net assets 2 2.47% 4 2.52% 2.42% 2.88% 3.77% 4
Portfolio turnover rate 43% 112% 38% 56% 0%
1 For the period from the commencement of operations, October 31, 1991 to
February 29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.02,
$.03, $.03, $.02 and $.01 per share for the six months ended August 31,
1995, for the fiscal years 1995, 1994, and 1993 and for the period ended
February 29, 1992, respectively.
3 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
VALUE ALLOCATION FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1991 1
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25 $ 10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 2 0.21 0.41 0.43 0.38 0.40 0.12
Net realized and unrealized gain
(loss) on investments 1.77 0.32 1.27 0.98 1.11 2.16
------ ------ ------ ------ ------ ------
Total from investment operations 1.98 0.73 1.70 1.36 1.51 2.28
------ ------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.18) (0.45) (0.40) (0.38) (0.41) (0.03)
From net realized gains (0.20) (1.71) (1.32) (0.42) (0.41) --.--
------ ------ ------ ------ ------ ------
Total distributions (0.38) (2.16) (1.72) (0.80) (0.82) (0.03)
------ ------ ------ ------ ------ ------
Net asset value, end of period $ 13.65 $ 12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25
====== ====== ====== ====== ====== ======
Total Return 3 16.63% 6.85% 13.02% 11.01% 12.96% 22.85%
Ratios/Supplemental Data:
Net assets, end of period (000's) $311,995 $350,694 $679,532 $1,239,536 $644,136 $190,664
Net expenses to average daily net 0.61% 4 0.61% 0.61% 0.62% 0.67% 0.70% 4
assets 2
Net investment income to average
daily net assets 2 2.85% 4 2.86% 2.70% 3.15% 3.75% 7.89% 4
Portfolio turnover rate 37% 77% 35% 50% 41% 23%
1 For the period from the commencement of operations, November 14, 1990 to
February 28, 1991.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.02, $.02, $.01, $.01 and $.01 per share for the six months ended August
31, 1995, for the fiscal years 1995, 1994, 1993, and 1992 and for the period
ended February 28, 1991, respectively.
3 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
GROWTH ALLOCATION FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1991 1990 1989 1
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49 $ 10.00
------ ------ ------ ------ ------- ------ ------ ------
Income (loss) from investment operations:
Net investment income 2 0.04 0.06 0.06 0.07 0.19 0.25 0.26 0.03
Net realized and unrealized gain
(loss) on investments 0.74 0.38 0.11 0.17 1.63 2.61 2.40 0.46
------ ------ ------ ------ ------- ------ ------ ------
Total from investment operations 0.78 0.44 0.17 0.24 1.82 2.86 2.66 0.49
------ ------ ------ ------ ------- ------ ------ ------
Less distributions to shareholders:
From net investment income (0.03) (0.06) (0.06) (0.08) (0.23) (0.25) (0.23) --.--
From net realized gains (0.16) (0.07) (0.52) (1.43) (10.31) (0.71) (0.28) --.--
------ ------ ------ ------ ------- ------ ------ ------
Total distributions (0.19) (0.13) (0.58) (1.51) (10.54) (0.96) (0.51) --.--
------ ------ ------ ------ ------- ------ ------ ------
Net asset value, end of period $ 5.04 $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49
====== ====== ====== ====== ======= ====== ====== ======
Total Return 3 17.67% 10.86% 4.13% 3.71% 20.47% 24.24% 25.35% 4.90%
Ratios/Supplemental Data:
Net assets, end of period (000's) $339,184 $239,006 $230,698 $168,143 $338,439 $1,004,345 $823,891 $291,406
Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.49% 0.50% 0.50% 0.50% 0.08% 4
assets 2
Net investment income to average
daily net assets 2 1.65% 4 1.50% 1.38% 1.15% 1.38% 1.91% 2.34% 0.52% 4
Portfolio turnover rate 30% 139% 57% 36% 46% 45% 57% 0%
1 For the period from the commencement of operations, December 28, 1988 to
February 28, 1989.
2 Net of fees and expenses voluntarily waived or borne by the Manager of less
than $.01 for each period presented.
3 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
U.S. SECTOR ALLOCATION FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.06 $ 11.26 $ 10.38 $ 10.00
------ ------ ------ ------
Income (loss)from investment operations:
Net investment income 2 0.16 0.28 0.29 0.05
Net realized and unrealized gain
(loss) on investments 2.02 0.49 1.21 0.33
------ ------ ------ ------
Total from investment operations 2.18 0.77 1.50 0.38
------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.12) (0.27) (0.30) --.--
From net realized gains (0.06) (0.70) (0.32) --.--
------ ------ ------ ------
Total distributions (0.18) (0.97) (0.62) --.--
------ ------ ------ ------
Net asset value, end of period $ 13.06 $ 11.06 $ 11.26 $ 10.38
====== ====== ====== ======
Total Return 3 19.81% 7.56% 14.64% 3.80%
Ratios/Supplemental Data:
Net assets, end of period (000's) $235,792 $207,291 $167,028 $169,208
Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.48% 4
assets 2
Net investment income to average
daily net assets 2 2.42% 4 2.61% 2.56% 3.20%4
Portfolio turnover rate 37% 101% 53% 9%
1 For the period from the commencement of operations, January 4, 1993 to
February 28, 1993.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
3 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
CORE II SECONDARIES FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.61 $ 14.31 $ 12.68 $ 11.12 $ 10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 2 0.14 0.20 0.21 0.22 0.04
Net realized and unrealized gain
(loss) on investments 2.11 0.34 2.14 1.59 1.08
------ ------ ------ ------ ------
Total from investment operations 2.24 0.54 2.35 1.81 1.12
------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.11) (0.20) (0.22) (0.21) --.--
From net realized gains (0.82) (1.04) (0.50) (0.04) --.--
------ ------ ------ ------ ------
Total distributions (0.93) (1.24) (0.72) (0.25) --.--
------ ------ ------ ------ ------
Net asset value, end of period $ 14.92 $ 13.61 $ 14.31 $ 12.68 $ 11.12
====== ====== ====== ====== ======
Total Return 3 17.03% 4.48% 18.97% 16.46% 11.20%
Ratios/Supplemental Data:
Net assets, end of period (000's) $151,753 $235,781 $151,286 $102,232 $58,258
Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.49% 0.49% 4
assets 2
Net investment income to average
daily net assets 2 1.53% 4 1.55% 1.66% 2.02% 2.19% 4
Portfolio turnover rate 49% 54% 30% 3% 0%
1 For the period from the commencement of operations, December 31, 1991 to
February 29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.01, $.02, $.02 and $.01 per share for the six months ended August 31,
1995, for the fiscal years 1995, 1994, and 1993 and for the period ended
February 29, 1992, respectively.
3 Calculation excludes subscription and redemption fees. The total returns
would have been lower had certain expenses not been waived during the
periods shown.
4 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
FUNDAMENTAL VALUE FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.54 $ 12.49 $ 11.71 $ 10.82 $ 10.00
------ ------ ------ ------ ------
Income (loss)from investment operations:
Net investment income 2 0.19 0.34 0.27 0.30 0.11
Net realized and unrealized gain
(loss) on investments 1.69 0.55 1.64 1.32 0.77
------ ------ ------ ------ ------
Total from investment operations 1.88 0.89 1.91 1.62 0.88
------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.17) (0.32) (0.28) (0.30) (0.06)
From net realized gains (0.23) (0.52) (0.85) (0.43) --.--
------ ------ ------ ------ ------
Total distributions (0.40) (0.84) (1.13) (0.73) (0.06)
------ ------ ------ ------ ------
Net asset value, end of period $ 14.02 $ 12.54 $ 12.49 $ 11.71 $ 10.82
====== ====== ====== ====== ======
Total Return 3 15.17% 7.75% 16.78% 15.66% 8.87%
Ratios/Supplemental Data:
Net assets, end of period (000's) $197,570 $182,871 $147,767 $62,339 $32,252
Net expenses to average daily net 0.75% 4 0.75% 0.75% 0.73% 0.62% 4
assets 2
Net investment income to average
daily net assets 2 2.81% 4 2.84% 2.32% 2.77% 3.43% 4
Portfolio turnover rate 15% 49% 65% 83% 33%
1 For the period from the commencement of operations, October 31, 1991 to
February 29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of less
than $.01, $.01, $.01, $.03 and $.03 per share for the six months ended
August 31, 1995, for the fiscal years 1995, 1994, and 1993 and for the
period ended February 29, 1992, respectively.
3 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUNDS
Six Months Ended
INTERNATIONAL CORE FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1991 1990 1989 1988 1
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 22.32 $ 25.56 $ 18.51 $ 18.80 $ 18.73 $ 18.79 $ 17.22 $ 14.76 $ 15.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)from investment
operations:
Net investment income 2 0.30 0.27 0.29 0.29 0.29 0.55 0.49 0.45 0.18
Net realized and unrealized
gain(loss) on investments 1.72 (1.57) 7.44 (0.04) 0.22 0.69 1.93 3.37 (0.03)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 2.02 (1.30) 7.73 0.25 0.51 1.24 2.42 3.82 0.15
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions to
shareholders:
From net investment income (0.03) (0.35) (0.27) (0.20) (0.28) (0.54) (0.55) (0.45) (0.05)
From net realized gains (0.66) (1.59) (0.41) (0.34) (0.16) (0.76) (0.30) (0.91) (0.34)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.69) (1.94) (0.68) (0.54) (0.44) (1.30) (0.85) (1.36) (0.39)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $ 23.65 $22.32 $25.56 $18.51 $18.80 $18.73 $18.79 $17.22 $14.76
====== ======= ======= ======= ======= ======= ======= ======= ======
Total Return 3 9.05% (5.31%) 42.10% 1.43% 2.84% 7.44% 13.99% 26.35% 1.07%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $3,326,025 $2,591,646 $2,286,431 $918,332 $414,341 $173,792 $101,376 $35,636 $11,909
Net expenses to average 0.70% 5 0.70% 0.71%4 0.70% 0.70% 0.78% 0.80% 0.88% 0.70% 5
daily net assets 2
Net investment income to
average daily net
assets 2 2.81% 5 1.48% 1.48% 2.36% 2.36% 3.32% 3.17% 3.19% 1.27% 5
Portfolio turnover rate 6% 53% 23% 23% 35% 81% 45% 37% 129%
1 For the period from the commencement of operations, April 7, 1987 to
February 29, 1988.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.02,
$.03, $.03, $.03, $.02, $.01, $.02, $.05 and $.08 per share for the six
months ended August 31, 1995, for the fiscal years 1995, 1994, 1993, 1992,
1991, 1990, and 1989 and for the period ended February 29, 1988,
respectively.
3 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
5 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Period from
CURRENCY HEDGED INTERNATIONAL CORE FUND June 30, 1995
(commencement
of operations)
to August 31, 1995
(Unaudited)
<S> <C>
Net asset value, beginning of period $ 10.00
------
Income from investment operations:
Net investment income 1 -.-
Net realized and unrealized gain
(loss) on investments 0.80
------
Total from investment operations 0.80
------
Net asset value, end of period $ 10.80
======
Total Return 2 8.00%
Ratios/Supplemental Data:
Net assets, end of period (000's) $189,848
Net expenses to average daily net 0.70%3,4
assets 1
Net investment income to average
daily net assets 1 0.91%4
Portfolio turnover rate -.-
1 Net of fees and expenses voluntarily waived or borne by the Manager of less
than $.01 per share.
2 Calculation excludes subscription fees. The total return would have been
lower had certain expenses not been waived during the period shown.
3 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
4 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
INTERNATIONAL SMALL COMPANIES FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.95 $ 14.45 $ 8.91 $ 9.62 $ 10.00
------ ------ ------ ------ ------
Income (loss)from investment operations:
Net investment income 2 0.15 0.18 0.15 0.35 0.06
Net realized and unrealized gain
(loss) on investments 0.65 (1.52) 5.59 (0.68) (0.43)
------ ------ ------ ------ ------
Total from investment operations 0.80 (1.34) 5.74 (0.33) (0.37)
------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income --.-- (0.20) (0.12) (0.38) (0.01)
From net realized gains (0.07) (0.96) (0.08) --.-- --.--
------ ------ ------ ------ ------
Total distributions (0.07) (1.16) (0.20) (0.38) (0.01)
------ ------ ------ ------ ------
Net asset value, end of period $ 12.68 $ 11.95 $ 14.45 $ 8.91 $ 9.62
====== ====== ====== ====== ======
Total Return 3 6.69% (9.66%) 64.67% (3.30%) (3.73%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $199,024 $186,185 $132,645 $35,802 $24,467
Net expenses to average daily net 0.75% 5 0.76%4 0.75% 0.75% 0.85% 5
assets 2
Net investment income to average
daily net assets 2 2.52% 5 1.45% 1.50% 4.02% 1.91% 5
Portfolio turnover rate 5% 58% 38% 20% 1%
1 For the period from the commencement of operations, October 15, 1991 to
February 29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.05,
$.08, $.09, $.09 and $.05 per share for the six months ended August 31,
1995, for the fiscal years 1995, 1994, and 1993 and for the period ended
February 29, 1992, respectively.
3 Calculation excludes subscription and redemption fees. The total returns
would have been lower had certain expenses not been waived during the
periods shown.
4 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
5 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
JAPAN FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 1991 1
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48 $ 10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 2 --.-- --.-- 3 --.-- 0.01 --.-- (0.01)
Net realized and unrealized gain (loss)
on investments 0.57 (1.08) 3.94 (0.36) (1.74) (0.39)
------ ------ ------ ------ ------ ------
Total from investment operations 0.57 (1.08) 3.94 (0.35) (1.74) (0.40)
------ ------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income --.-- --.-- --.-- (0.01) --.-- --.--
In excess of net investment income --.-- --.-- (0.01) --.-- --.-- --.--
From net realized gains --.-- (0.93) (0.17) --.-- --.-- --.--
From paid-in capital 4 --.-- --.-- --.-- --.-- (0.01) (0.12)
------ ------ ------ ------ ------ ------
Total distributions --.-- (0.93) (0.18) (0.01) (0.01) (0.12)
------ ------ ------ ------ ------ ------
Net asset value, end of period $ 9.69 $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48
====== ====== ====== ====== ====== ======
Total Return 5 6.25% (10.62%) 53.95% (4.49%) (18.42%) (3.79%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $100,134 $60,123 $450,351 $306,423 $129,560 $60,509
Net expenses to average daily net 1.00%6 0.83% 0.87% 0.88% 0.93% 0.95%6
assets2
Net investment income to average
daily net assets2 (0.03%)6 (0.02%) (0.01%) 0.12% (0.11%) (0.32%)6
Portfolio turnover rate 0% 60% 8% 17% 25% 11%
1 For the period from the commencement of operations, June 8, 1990 to February
28, 1991.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
3 Based on average month end shares outstanding.
4 Return of capital for book purposes only. A distribution was required for
tax purposes to avoid the payment of federal excise tax.
5 Calculation excludes subscription and redemptions fees. The total returns
would have been lower had certain expenses not been waived during the
periods shown.
6 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Period from
December 9,
EMERGING MARKETS FUND 1993
Year Ended (commencement of
Six Months Ended February 28, operations) to
August 31, 1995 1995 February 28,
(Unuadited) 1994
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.52 $ 12.13 $ 10.00
------ ------- ------
Income (loss) from investment operations:
Net investment income 0.11 1 0.05 0.02 1
Net realized and unrealized gain
(loss) on investments 1.03 (2.37) 2.11
------ ------- ------
Total from investment operations 1.14 (2.32) 2.13
Less distributions to shareholders:
From net investment income -.- (0.07) (0.00) 2
From net realized gains (0.13) (0.22) (0.00)
------ ------- ------
Total distributions (0.13) (0.29) (0.00)
------ ------- ------
Net asset value, end of period $ 10.53 $ 9.52 $ 12.13
====== ======= ======
Total Return 3 12.03% (19.51%) 21.35%
Ratios/Supplemental Data:
Net assets, end of period (000's) $609,630 $384,259 $114,409
Net expenses to average daily net 1.42% 1,4 1.58% 1.64% 1,4
assets
Net investment income to average
daily net assets 2.61% 1,4 0.85% 0.87% 1,4
Portfolio turnover rate 26% 50% 2%
1 Net of fees and expenses voluntarily waived or borne by the Manager of less
than $.01 and $.003 per share for the six months ended August 31, 1995 and
for the period ended February 28, 1994, respectively.
2 The per share income distribution was $0.004.
3 Calculation excludes subscription and redemption fees. The total returns for
the period ended February 28, 1994 would have been lower had certain
expenses not been waived during the periods shown.
4 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Period from
GLOBAL HEDGED EQUITY FUND July 29, 1994
(commencement
Six Months Ended of operations)
August 31, 1995 to February
(Unaudited) 28, 1995
<S> <C> <C>
Net asset value, beginning of period $ 10.12 $ 10.00
------ ------
Income (loss) from investment operations:
Net investment income 1 0.12 0.11
Net realized and unrealized gain
(loss) on investments 0.29 0.08
------ ------
Total from investment operations 0.41 0.19
------ ------
Less distributions to shareholders:
From net investment income (0.03) (0.07)
------ ------
Total distributions (0.03) (0.07)
------ ------
Net asset value, end of period $ 10.50 $ 10.12
====== ======
Total Return 2 4.01% 1.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $340,697 $214,638
Net expenses to average daily net 0.77%3 0.92%3
assets 1
Net investment income to average
daily net assets 1 3.07%3 2.85%3
Portfolio turnover rate 67% 194%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.002
and $.006 per share for the six months ended August 31, 1995 and for the
period ended February 28, 1995, respectively.
2 Calculation excludes subscription and redemption fees. The total returns
would have been lower had certain expenses not been waived during the
periods shown.
3 Annualized.
</TABLE>
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
Period from
August 18, 1994
DOMESTIC BOND FUND (commencement
Six Months Ended of operations)
August 31, 1995 to February
(Unaudited) 28, 1995
<S> <C> <C>
Net asset value, beginning of period $ 10.13 $ 10.00
------ ------
Income (loss) from investment operations:
Net investment income 1 0.33 0.24
Net realized and unrealized gain
(loss) on investments 0.49 0.07
------ ------
Total from investment operations 0.82 0.31
------ ------
Less distributions to shareholders:
From net investment income (0.27) (0.18)
From net realized gains (0.05) -.-
------ ------
Total distributions (0.32) (0.18)
------ ------
Net asset value, end of period $ 10.63 $ 10.13
====== ======
Total Return 2 8.15% 3.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) $293,426 $209,377
Net expenses to average daily net 0.25%3 0.25%3
assets 1
Net investment income to average
daily net assets 1 6.65%3 6.96%3
Portfolio turnover rate 34% 65%
1 Net of fees and expenses voluntarily waived or borne by the Manager of less
than $.01 and $.01 per share for the six months ended August 31, 1995 and
for the period ended February 28, 1994, respectively.
2 The total returns would have been lower had certain expenses not been waived
during the periods shown.
3 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
SHORT-TERM INCOME FUND August 31, 1995 Year Ended February 28/29,
(Unaudited) 1995 1994 1993 1992 3 1991 1,2,3
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.56 $ 9.79 $ 10.05 $ 10.11 $ 10.00 $ 10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 4 0.33 0.63 0.44 0.46 0.56 0.67
Net realized and unrealized gain
(loss) on investments 0.10 (0.28) (0.09) 0.30 0.11 --.--
------ ------ ------ ------ ------ ------
Total from investment operations 0.43 0.35 0.35 0.76 0.67 0.67
------ ------ ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.34) (0.58) (0.46) (0.38) (0.56) (0.67)
From net realized gains --.-- --.-- (0.15) (0.44) --.-- --.--
------ ------ ------ ------ ------ ------
Total distributions (0.34) (0.58) (0.61) (0.82) (0.56) (0.67)
------ ------ ------ ------ ------ ------
Net asset value, end of period $ 9.65 $ 9.56 $ 9.79 $ 10.05 $ 10.11 $ 10.00
====== ====== ====== ====== ====== ======
Total Return 5 4.59% 3.78% 3.54% 8.25% 11.88% 3.83%
Ratios/Supplemental Data:
Net assets, end of period (000's) $6,733 $8,193 $8,095 $10,499 $9,257 $40,850
Net expenses to average daily net 0.25%6 0.25% 0.25% 0.25% 0.25% 0.25%6
assets 4
Net investment income to average
daily net assets 4 6.51%6 5.02% 4.35% 4.94% 5.83% 7.88%6
Portfolio turnover rate 7% 335% 243% 649% 135% --.--
1 For the period from the commencement of operations, April 17, 1990 to
February 28, 1991.
2 The per share amounts and the number of shares outstanding have been
restated to reflect a one for ten reverse stock split effective December 1,
1991.
3 The Fund operated as a money market fund from April 17, 1990 until June 30,
1991. Subsequently, the Fund became a short-term income fund.
4 Net of fees and expenses voluntarily waived or borne by the manager of $.02,
$.02, $.02, $.03, $.03 and $.09 per share for the six months ended August
31, 1995, for the fiscal years 1995, 1994, 1993, and 1992 and for the period
ended February 28, 1991, respectively.
5 The total returns would have been lower had certain expenses not been waived
during the periods shown.
6 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Period from
December 22,
INTERNATIONAL BOND FUND 1993
Year Ended (commencement of
Six Months Ended February 28, operations) to
August 31, 1995 1995 February 28,
(Unaudited) 1994
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.64 $ 9.96 $ 10.00
------ ------ ------
Income (loss) from investment operations:
Net investment income 1 0.41 0.98 0.08
Net realized and unrealized gain
(loss) on investments 0.90 (0.21) (0.12)
------ ------ ------
Total from investment operations 1.31 0.77 (0.04)
------ ------ ------
Less distributions to shareholders:
From net investment income (0.00)3 (0.75) --.--
From net realized gains (0.26) (0.34) --.--
------ ------ ------
Total distributions (0.26) (1.09) --.--
------- ------ ------
Net asset value, end of period $ 10.69 $ 9.64 $ 9.96
====== ====== ======
Total Return 2 13.56% 8.23% (0.40%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $190,684 $151,189 $39,450
Net expenses to average daily net 0.40%4 0.40% 0.40%4
assets
Net investment income to average
daily net assets 7.99%4 7.51% 5.34%4
Portfolio turnover rate 40% 141% 14%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.02 and $.01 per share for the six months ended August 31, 1995, for the
fiscal year 1995 and for the period ended February 28, 1994, respectively.
2 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 The per share income distribution was $0.003.
4 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
<TABLE>
<CAPTION>
Period from
CURRENCY HEDGED INTERNATIONAL BOND FUND September 30,
1994
(commencement
Six Months Ended of operations)
August 31, 1995 to February
(Unaudited) 28, 1995
<S> <C> <C>
Net asset value, beginning of period $ 9.99 $ 10.00
------ ------
Income (loss) from investment operations:
Net investment income 1 0.56 0.24
Net realized and unrealized gain
(loss) on investments 1.03 (0.09)
------ ------
Total from investment operations 1.59 0.15
------ ------
Less distributions to shareholders:
From net investment income (0.17) (0.16)
------ ------
From net realized gains (0.00) 3 --.--
------ ------
Total distributions (0.17) (0.16)
----- -----
Net asset value, end of period $ 11.41 $ 9.99
====== ======
Total Return 2 16.02% 1.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $223,926 $238,664
Net expenses to average daily net 0.40%4 0.40%3
assets 1
Net investment income to average
daily net assets 1 8.81%4 8.46%3
Portfolio turnover rate 57% 64%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.02
and $.01 per share for the six months ended August 31, 1995 and for the
period ended February 28, 1995, respectively.
2 Calculation excludes subscription fees. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 The per share capital gain distribution was $.002.
4 Annualized.
</TABLE>
<TABLE>
<CAPTION>
Period from
EMERGING COUNTRY DEBT FUND April 19, 1994
(commencement
Six Months Ended of operations)
August 31, 1995 to February
(Unaudited) 28, 1995
<S> <C> <C>
Net asset value, beginning of period $ 8.39 $ 10.00
------ ------
Income (loss) from investment operations:
Net investment income 1 0.64 0.48
Net realized and unrealized gain
(loss) on investments 1.96 (1.59)
------ ------
Total from investment operations 2.60 (1.11)
------ ------
Less distributions to shareholders:
From net investment income (0.08) (0.40)
From net realized gains -.- (0.10)
------ ------
Total distributions (0.08) (0.50)
------ ------
Net asset value, end of period $ 10.91 $ 8.39
====== =======
Total Return 2 30.99% (11.65%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $507,804 $243,451
Net expenses to average daily net 0.50%3 0.50%3
assets 1
Net investment income to average
daily net assets 1 14.73%3 10.57%3
Portfolio turnover rate 89% 104%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
2 Calculation excludes subscription and redemption fees. The total returns
would have been lower had certain expenses not been waived during the
periods shown.
3 Annualized.
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Statement of Additional Information.
</TABLE>
The Manager's discussion of the performance of each Fund in fiscal 1995,
as well as a comparison of each Fund's performance over the life of the Fund
with that of a benchmark securities index elected by the Manager, is included in
each Fund's Annual Report for the fiscal year ended February 28, 1995. Copies of
the Annual Reports are available upon request without charge.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the Core Fund, the Value Allocation
Fund, the Growth Allocation Fund, the Short-Term Income Fund, the International
Core Fund, and the Japan Fund is fundamental and may not be changed without
shareholder approval. The investment objective of each other Fund may be changed
without shareholder approval. Except for investment policies which are
explicitly described as fundamental, the investment policies of each Fund may be
changed without shareholder approval. There can be no assurance that the
investment objective of any Fund will be achieved.
As is noted below, several of the Funds seek a total return greater than the
S&P 500. The S&P 500 is an unmanaged weighted index of the common stock
performance of 500 industrial, transportation, utility and financial companies
selected for inclusion in the Index by Standard & Poor's Corporation on a
statistical basis. For over 25 years, investors have used the S&P 500 against
which to measure the performance of their portfolios because it is generally
believed by knowledgeable investors that the S&P 500 combines the breadth,
weight and statistical integrity needed to reflect overall market activity.
The International Equity Funds, together with the International Bond Fund,
Currency Hedged International Bond Fund, Global Bond Fund, Emerging Country Debt
Fund, and Core Emerging Country Debt Fund are sometimes collectively referred to
as the "International Funds."
DOMESTIC EQUITY FUNDS
CORE FUND
The Core Fund seeks a total return greater than that of the S&P 500 through
investment in common stocks. The Core Fund expects that substantially all of its
assets will be invested in the equity securities of at least 125 companies
chosen from among the approximately 1,200 companies with the largest equity
capitalization (i.e., number of shares outstanding multiplied by the market
price per share) at the time of investment which are also listed on a United
States national securities exchange (the "Large Cap 1200"). The Core Fund may,
from time to time, invest in fewer issuers if, in the opinion of the Manager,
there are not at least 125 attractive investment opportunities from among such
companies.
The Manager will select which issuers to invest in based on its assessment
of whether the common stock of the issuer is likely to perform better than the
S&P 500. Since the Core Fund's portfolio investments will not be chosen and
proportionately weighted to approximate the total return of the S&P 500, the
total return of the Core Fund may be more or less than the total return of the
S&P 500. An investment in the Fund involves risks similar to investing in common
stocks directly.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts and options on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
TOBACCO-FREE CORE FUND
The Tobacco-Free Core Fund seeks a total return greater than that of the S&P
500 through investment in common stocks chosen from the Large Cap 1200 and which
are not Tobacco Producing Issuers. The Tobacco-Free Core Fund expects that
substantially all of its assets will be invested in the securities of at least
125 companies chosen from the Large Cap 1200. The Tobacco-Free Core Fund may,
from time to time, invest in fewer issues if, in the opinion of the Manager,
there are not at least 125 attractive investment opportunities from among such
companies.
The Manager will select which issuers to invest in based on its assessment
of whether the common stock of the issuer is likely to perform better than the
S&P 500. Since the Tobacco-Free Core Fund's portfolio investments will not be
chosen and proportionately weighted to approximate the total return of the S&P
500, the total return of the Tobacco-Free Core Fund may be more or less than the
total return of the S&P 500. An investment in the Fund involves risks similar to
investing in common stocks directly.
The Manager has instituted procedures to avoid investment by the
Tobacco-Free Core Fund in the securities of issuers which, at the time of
purchase, derive more than 10% of their gross revenues from the production of
tobacco-related products ("Tobacco Producing Issuers"). For this purpose the
Manager will subscribe to and generally rely on information services provided by
third parties, although the Manager may cause the Tobacco-Free Core Fund to
purchase securities of issuers which are identified by those third parties as
Tobacco Producing Issuers if, at the time of purchase, the Manager has received
information from the issuer to the effect that it is no longer a Tobacco
Producing Issuer.
The Tobacco-Free Core Fund is required to have a fundamental policy, which
cannot be changed without shareholder approval, that under normal market
conditions at least 65% of its assets will be invested in the securities of
issuers other than Tobacco Producing Issuers. The requirements of this policy
are not, however, expected to affect the Manager's overall approach of not
investing in Tobacco Producing Issuers.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts and options on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices".
VALUE ALLOCATION FUND
The Value Allocation Fund seeks a total return greater than that of the S&P
500 through investment in a broadly diversified and liquid portfolio of common
stocks chosen from the Large Cap 1200. The Fund expects that any income it
derives will be from dividends on common stock. The Manager will select which
issuers to invest in based on its assessment of whether the common stock of the
issuer is likely to perform better than the S&P 500. Strong consideration is
given to common stocks whose current prices do not adequately reflect, in the
opinion of the Manager, the ongoing business value of the underlying company.
The Fund's investments are made in securities of companies which, in the
opinion of the Manager, are of average or above average investment quality.
Investment quality is evaluated using fundamental analysis emphasizing each
issuer's historic financial performance,balance sheet strength, management
capability and competitive position. Various valuation parameters are examined
to determine the attractiveness of individual securities. Since the Fund's
portfolio investments will not be chosen and proportionately weighted to
approximate the total return of the S&P 500, at times the total return of the
Value Allocation Fund may be more or less than the total return of the S&P 500.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts and options on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
GROWTH ALLOCATION FUND
The Growth Allocation Fund seeks long-term growth of capital. Current income
is only an incidental consideration. The Growth Allocation Fund attempts to
achieve its objective by investing in companies whose earnings per share are
expected by the Manager to grow at a rate faster than the average of the Large
Cap 1200. The Fund is designed for investors who wish to allocate a portion of
their assets to investment in growth-oriented stocks.
The Fund expects that at least 65% of its assets will be invested in the
common stocks (and securities convertible into common stocks) of issuers chosen
from the Large Cap 1200. Such companies may include foreign issuers, although
the Fund does not intend to invest in securities which are principally traded
outside of the United States. The balance of the common stocks (and securities
convertible into common stocks) held by the Fund may be less liquid investments
since the companies in question will have smaller equity capitalization and/or
the securities may not be listed on a national securities exchange.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts and options on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in the high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
U.S. SECTOR ALLOCATION FUND
The U.S. Sector Allocation Fund seeks a total return greater than that of
the S&P 500 through investment in common stocks chosen from among the 1,800
companies with the largest equity capitalization whose securities are listed on
United States national securities exchanges.
The Fund will allocate its assets, as directed by the Manager, among major
U.S. sectors (inlcuding value, growth, small/large capitalization and defensive
stocks, stocks in individual industries, etc.) and will overweight those sectors
which the Manager believes may outperform the S&P 500 generally. The Fund may
place varying degrees of emphasis on different types of companies depending on
the Manager's assessment of economic and market conditions, including companies
with superior growth prospects and/or companies whose common stock does not, in
the opinion of the Manager, adequately reflect the companies' ongoing business
value. The Fund may invest in companies with smaller equity capitalization than
the companies whose securities are purchased by the Value Allocation Fund and
the Growth Allocation Fund. The securities of small capitalization companies may
be less liquid and their market prices more volatile than those issued by
companies with larger equity capitalizations. Since the Fund's portfolio
investments will not be chosen and proportionately weighted to approximate the
S&P 500, the total return of the U.S. Sector Allocation Fund may be more or less
than the total return of the S&P 500.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts and options on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices".
CORE II SECONDARIES FUND
The investment objective of the Core II Secondaries Fund is long-term growth
of capital. Current income is only an incidental consideration. The Core II
Secondaries Fund attempts to achieve its objective by selecting its investments
from domestic second tier companies. For these purposes, "second tier companies"
are those companies whose equity capitalization at the time of investment by the
Core II Secondaries Fund ranks in the lower two-thirds of the 1800 publicly-held
issuers with the largest equity capitalization.
The Core II Secondaries Fund invests primarily in common stocks, although
the Fund may on rare occasions hold securities convertible into common stocks
such as convertible bonds, convertible preferred stocks and warrants. The Fund
expects that at least 65% of its assets will be invested in the securities of
second tier companies, as defined above. The Fund may also hold the common
stocks (and securities convertible into common stocks) of companies with smaller
equity capitalizations. Such investments may be less liquid, as the securities
may not be listed on a national securities exchange and their market prices may
be more volatile than those issued by companies with larger equity
capitalizations.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts for hedging and risk management. The Fund may also use
equity swap contracts and contracts for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices".
FUNDAMENTAL VALUE FUND
The Fundamental Value Fund seeks long-term capital growth through investment
primarily in equity securities. Current income is only a secondary
consideration. It is anticipated that at least 90% of the Fund's assets will be
invested in common stocks and securities convertible into common stocks.
Although the Fund invests primarily in securities traded in the United States,
it may invest up to 25% of its assets in securities of foreign issuers and
securities traded principally outside of the United States.
The Fund invests primarily in common stocks of domestic corporations that,
in the opinion of the Manager, represent favorable values relative to their
market prices. Under normal conditions, the Fund generally, but not exclusively,
looks for companies with low price/earnings ratios and rising earnings. The Fund
focuses on established firms with capitalizations of more than $100 million and
generally does not buy issues of companies with less than three years of
operating history. The Fund seeks to maintain lower than average equity risk
levels relative to the potential for return through a portfolio with an average
historic volatility (beta) below 1.0. The S&P 500, which serves as a standard
for measuring volatility, always has average volatility (beta) of 1.0. The
Fund's beta may change with market conditions.
The Fund's Manager analyzes key economic variables to identify general
trends in the stock markets. World economic indicators, which are tracked
regularly, include U.S. industry and trade indicators, interest rates,
international stock market indices, and currency levels. Under normal
conditions, investments are made in a variety of economic sectors, industry
segments, and individual securities to reduce the effects of price volatility in
any one area.
In making investments, the Manager takes into account, among other things, a
company's source of earnings, competitive edge, management strength, and level
of industry dominance as measured by market share. At the same time, the Manager
analyzes the financial condition of each company. The Manager examines current
and historical measures of relative value to find corporations that are selling
at discounts relative to both underlying asset values and market pricing. The
Manager then selects those companies with financial and business characteristics
that it believes will produce above-average growth in earnings. Sell decisions
are triggered when, in the opinion of the Manager, the stock price and other
fundamental considerations make further appreciation less likely.
The Manager generally selects equities that normally trade in sufficient
volume to provide liquidity. Domestic equities are usually traded on the New
York Stock Exchange or the American Stock Exchange or in the over-the-counter
markets.
The Fund's investments in foreign securities will generally consist of
equity securities traded in principal European and Pacific Basin markets. The
Manager evaluates the economic strength of a country, which includes its
resources, markets, and growth rate. In addition, it examines the political
climate of a country as to its stability and business policies. The Manager then
assesses the strength of the country's currency and considers foreign exchange
issues in general. The Fund aims for diversification not only among countries
but also among industries in order to enable shareholders to participate in
markets that do not necessarily move in concert with U.S. markets.
Once the Fund has identified a rapidly expanding foreign economy, the Fund
attempts to search out growing industries and corporations, focusing on
companies with established records. Individual securities are selected based on
value indicators, such as low price to earnings ratio. Foreign securities in the
portfolio are generally listed on principal overseas exchanges.
In pursuing its objective, the Fund may invest without limit in depository
receipts of foreign issuers, and purchase convertible securities. The Fund may
also invest up to 15% of its net assets in illiquid securities, lend portfolio
securities valued at up to one-third of total assets, and enter into repurchase
agreements.
In addition, the Fund may purchase index futures on the S&P 500 and other
domestic indices for investment, anticipatory hedging and risk management and to
effect synthetic sales and purchases. The Fund may also buy exchange traded or
over-the-counter put and call options, sell (write) covered options and enter
into futures contracts and options on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks, index
futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be invested in high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks. The Fund does not expect to invest
in long or short-term fixed income securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding five paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
The investment objective of the International Core Fund is to maximize total
return through investment in a portfolio of common stocks of non-U.S. issuers.
The Fund will usually invest primarily in common stocks, including
dividend-paying common stocks. Capital appreciation may be sought through
investment in common stocks, convertible bonds, convertible preferred stocks,
warrants or rights. Income may be sought through investment in dividend-paying
common stocks, convertible bonds, money market instruments or fixed income
securities such as long and medium term corporate and government bonds and
preferred stocks. Some of these fixed income securities may have speculative
qualities and the values of these securities generally fluctuate more than those
of other, less speculative fixed income securities. See "Descriptions and Risks
of Fund Investment Practices -- Lower Rated Securities."
The relative emphasis of the Fund on capital appreciation or income will
depend upon the views of the Manager with respect to the opportunities for
capital appreciation relative to the opportunities for income. There are no
prescribed limits on geographic asset distribution and the Fund has the
authority to invest in securities traded in securities markets of any country in
the world, although under normal market conditions the Fund will invest in
securities traded in the securities markets of at least three foreign countries.
The responsibility for allocating the Fund's assets among the various securities
markets of the world is borne by the Manager. In making these allocations, the
Manager will consider such factors as the condition and growth potential of the
various economic and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. The Fund
generally will not invest in securities of U.S. issuers, except that for
temporary defensive purposes the Fund may invest up to 100 percent of its assets
in United States securities.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging and for currency risk management, although the
Fund's foreign currency exposure will not generally vary by more than 30% from
the foreign currency exposure of a benchmark index (the "EAFE-lite Index"),
which is a modification of the Morgan Stanley Capital International EAFE Index
(the "EAFE Index") developed by the Manager so as to reduce the weighting of
Japan in the EAFE Index. The put and call options on currency futures written by
the Fund will always be covered. For more information on foreign currency
transactions, see "Descriptions and Risks of Fund Investment Practices --
Foreign Currency Transactions." The stocks held by the Fund will not be chosen
to approximate the weightings of the EAFE-lite Index.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets or
other of the International Equity Funds to the extent permitted under the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder (the "1940 Act"). As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays its service providers.
In addition, the Fund may invest in securities of foreign issuers traded on
U.S. exchanges and securities traded abroad, American Depositary Receipts,
European Depository Receipts and other similar securities convertible into
securities of foreign issuers. The Fund may also enter repurchase agreements,
lend portfolio securities valued at up to 25% of total assets, and may invest up
to 15% of its net assets in illiquid securities. The Fund expects that, not
including the margin deposits or the segregated accounts created in connection
with index futures and other derivatives, less than 5% of its total net assets
will be invested in cash or high quality money market instruments such as
securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit.
The Fund may also buy put and call options, sell (write) covered options and
enter into futures contracts and options on futures contracts for hedging and
risk management. The Fund's use of options on particular securities (as opposed
to market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also write options in connection with buy-and- write transactions, and
use index futures (on foreign stock indices), options on futures, equity swap
contracts and contracts for differences for investment, anticipatory hedging and
risk management and to effect synthetic sales and purchases.
For a detailed description of the investment practices described in the four
preceding paragraphs and the risks associated with them, see "Descriptions and
Risks of Fund Investment Practices."
CURRENCY HEDGED INTERNATIONAL CORE FUND
The investment objective of the Currency Hedged International Core Fund is
to maximize total return through investment in a portfolio of common stocks of
non-U.S. issuers and through management of the Fund's currency positions. The
Fund has policies that are similar to the International Core Fund, except that
the Currency Hedged International Core Fund will employ a different strategy
with respect to foreign currency exposure. While the International Core Fund's
foreign currency exposure will not generally differ from that of the EAFE-lite
Index by more than 30%, the Currency Hedged International Core Fund's foreign
currency exposure will generally vary no more than 30% from the currency
exposure of a fully hedged EAFE-lite Index. That is, the Currency Hedged
International Core Fund will hedge a substantial portion (generally at least
70%) of the EAFE-lite foreign currency exposure while the International Core
Fund will generally hedge only a limited portion (generally less than 30%) of
EAFE-lite currency exposure. The Currency Hedged International Core Fund may use
forward foreign currency contracts, currency futures contracts, currency swap
contracts, options on currencies and buy and sell foreign currencies for hedging
and for currency risk management. The put and call options on currency futures
written by the Fund will always be covered. For more information on foreign
currency transactions, see "Descriptions and Risks of Fund Investment Practices
- -- Foreign Currency Transactions." Because of its name, the Currency Hedged
International Core Fund is required to have a policy that it will maintain short
currency positions with respect to at least 65% of the foreign currency exposure
represented by the common stocks owned by the Fund.
The Fund will usually invest primarily in common stocks, including
dividend-paying common stocks. The stocks held by the Fund will not be chosen to
approximate the weightings of the EAFE-lite Index. Capital appreciation may be
sought through investment in common stocks, convertible bonds, convertible
preferred stocks, warrants or rights. Income may be sought through investment in
dividend-paying common stocks, convertible bonds, money market instruments or
fixed income securities such as long and medium term corporate and government
bonds and preferred stocks. Some of these fixed income securities may have
speculative qualities and the values of these securities generally fluctuate
more than those of other, less speculative fixed income securities. See
"Descriptions and Risks of Fund Investment Practices -- Lower Rated Securities."
The relative emphasis of the Fund on capital appreciation or income will
depend upon the views of the Manager with respect to the opportunities for
capital appreciation relative to the opportunities for income. There are no
prescribed limits on geographic asset distribution and the Fund has the
authority to invest in securities traded in securities markets of any country in
the world, although under normal market conditions the Fund will invest in
securities traded in the securities markets of at least three foreign countries.
The responsibility for allocating the Fund's assets among the various securities
markets of the world is borne by the Manager. In making these allocations, the
Manager will consider such factors as the condition and growth potential of the
various economic and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. The Fund
generally will not invest in securities of U.S. issuers, except that for
temporary defensive purposes the Fund may invest up to 100 percent of its assets
in United States securities.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets or
other of the International Equity Funds to the extent permitted under the 1940
Act. As a shareholder of an investment company, the Fund may indirectly bear
service fees which are in addition to the fees the Fund pays its service
providers.
In addition, the Fund may invest in securities of foreign issuers traded on
U.S. exchanges and securities traded abroad, American Depositary Receipts,
European Depository Receipts and other similar securities convertible into
securities of foreign issuers. The Fund may also enter repurchase agreements,
and lend portfolio securities valued at up to 25% of total assets. The Fund may
also invest up to 15% of its net assets in illiquid securities and temporarily
invest in cash and high quality money market instruments such as securities
issued by the U.S. government and agencies thereof, bankers' acceptances,
commercial paper, and bank certificates of deposit. The Fund expects that, not
including the margin deposits or the segregated accounts created in connection
with index futures and other derivatives, less than 5% of its total net assets
will be invested in such high quality cash items.
The Fund may also buy put and call options, sell (write) covered options and
enter into futures contracts and options on futures contracts for hedging and
risk management. The Fund's use of options on particular securities (as opposed
to market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also write options in connection with buy-and- write transactions, and
use index futures (on foreign stock indices), options on futures, equity swap
contracts and contracts for differences for investment, anticipatory hedging and
risk management and to effect synthetic sales and purchases.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
FOREIGN FUND
The investment objective of the Foreign Fund is to maximize total return
through investment primarily in equity securities of non-U.S. issuers. The
Fund's investment strategy is based on a fundamental analysis of issuers and
country economics. The Fund will usually invest primarily in common stocks,
including dividend-paying common stocks. Capital appreciation may be sought
through investment in common stocks, convertible bonds, convertible preferred
stocks, warrants or rights. Income may be sought through investment in
dividend-paying common stocks, convertible bonds, money market instruments or
fixed income securities such as long and medium term corporate and government
bonds and preferred stocks. Some of these fixed income securities may have
speculative qualities and the values of these securities generally fluctuate
more than those of other, less speculative fixed income securities. See
"Descriptions and Risks of Fund Investment Practices -- Lower Rated Securities".
The relative emphasis of the Fund on capital appreciation or income will
depend upon the views of the Manager with respect to the opportunities for
capital appreciation relative to the opportunities for income. There are no
prescribed limits on geographic asset distribution and the Fund has the
authoritiy to invest in securities traded in securities markets of any country
in the world other than the United States, although under normal market
conditions the Fund will invest in securities principally traded in the
securities markets of at least three countries. The responsibility for
allocating the Fund's assets among the various securities markets of the world
is borne by the Manager. In making these allocations, the Manager will consider
such factors as the condition and growth potential of the various economic and
securities markets, currency and taxation considerations and other pertinent
financial, social, national and political factors.
The Fund may use forward foreign currency contracts, currency futures
contracts, options on currencies and buy and sell foreign currencies for the
purpose of hedging the currency exposure of its portfolio securities. The Fund
is not required to hedge its currency risk and will not normally hedge more than
90% of such risks.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets or
other of the International Equity Funds to the extent permitted under the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder (the "1940 Act"). As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays its service providers.
In addition, the Fund may invest in securities of foreign issuers traded on
U.S. exchanges and securities traded abroad, American Depositary Receipts,
European Depository Receipts and other similar securities convertible into
securities of foreign issuers. The Fund may also enter into repurchase
agreements, lend portfolio securities valued at up to one-third of total assets,
and may invest up to 15% of its net assets in illiquid securities. The Fund may
invest up to 20% of its assets in securities of issuers in newly industrialized
countries of the type invested in by the Emerging Markets Fund.
The Fund may also buy put and call options, sell (write) covered options and
enter into futures contracts and options on futures contracts for hedging and
risk management. The Fund's use of options on particular securities (as opposed
to market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also write options in connection with buy-and-write transactions and
use index futures (on foreign stock).
For a detailed description of the investment practices described in the four
preceding paragraphs and the risks associated with the, see "Descriptions and
Risks of Fund Investment Practices."
INTERNATIONAL SMALL COMPANIES FUND
The International Small Companies Fund seeks to maximize total return
through investment primarily in equity securities of foreign issuers whose
equity securities are traded on a major stock exchange of a foreign country
("foreign stock exchange companies") and whose equity capitalization at the time
of investment, when aggregated with the equity capitalizations of all foreign
stock exchange companies in that country whose equity capitalizations are
smaller than that of such company, is less than 50% of the aggregate equity
capitalization of all foreign stock exchange companies in such country ("small
capitalization foreign companies"). With the exception of the International
Small Companies Fund's policy of investing in securities of small capitalization
foreign companies, and except as otherwise disclosed in this Prospectus and the
related Statement of Additional Information, the International Small Companies
Fund's investment objectives and policies are the same as those described above
with respect to the International Core Fund.
It is currently expected that at least 65% of the International Small
Companies Fund's assets will be invested in common stocks of small
capitalization foreign companies. Such companies may present greater
opportunities for capital appreciation because of high potential earnings
growth, but may also involve greater risk. Small capitalization foreign
companies tend to be smaller and newer than other foreign companies and may be
dependent upon a single proprietary product or market niche. They may have
limited product lines, markets or financial resources, or may depend on a
limited management group. Typically, small capitalization foreign companies have
fewer securities outstanding and are less liquid than large companies. Their
common stock and other securities may trade less frequently and in limited
volume. The securities of small capitalization foreign companies are generally
more sensitive to purchase and sale transactions and, therefore, the prices of
such securities tend to be more volatile than the securities of larger
companies.
The Fund also may invest in securities of foreign issuers traded on U.S.
exchanges and securities traded abroad, American Depositary Receipts, European
Depository Receipts and other similar securities convertible into securities of
foreign issuers. The Fund may also enter repurchase agreements, and lend
portfolio securities valued at up to one-third of total assets. The Fund may
also invest up to 15% of its net assets in illiquid securities and temporarily
invest in cash and high quality money market instruments such as securities
issued by the U.S. government and agencies thereof, bankers' acceptances,
commercial paper, and bank certificates of deposit. The Fund expects that, not
including the margin deposits or the segregated accounts created in connection
with index futures and other derivatives, less than 5% of its total net assets
will be invested in such high quality cash items.
The Fund may also buy put and call options, sell (write) covered options and
enter into futures contracts and options on futures contracts for hedging and
risk management. The Fund's use of options on particular securities (as opposed
to market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also write options in connection with buy-and- write transactions, and
use index futures (on foreign stock indices), options on futures, equity swap
contracts and contracts for differences for investment, anticipatory hedging and
risk management and to effect synthetic sales and purchases.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging and for currency risk management. The put and
call options on currency futures written by the Fund will always be covered.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
JAPAN FUND
The Japan Fund seeks to maximize total return through investment in a
portfolio of Japanese securities, consisting primarily of common stocks of
Japanese companies. It is currently expected that the Japan Fund will invest at
least 90% of its assets in "Japanese Securities," that is, securities issued by
entities that are organized under the laws of Japan and that either have 50% or
more of their assets in Japan or derive 50% or more of their revenues from Japan
("Japanese Companies"). Although the Japan Fund will invest primarily in common
stocks of Japanese Companies, it may also invest in other Japanese Securities,
such as convertible preferred stock, warrants or rights as well as short-term
government debt securities or other short-term prime obligations (i.e., high
quality debt obligations maturing not more than one year from the date of
issuance). The Japan Fund expects that any income it derives will be from
dividend or interest payments on securities.
Unlike mutual funds which invest in the securities of many other countries,
the Japan Fund will be invested almost exclusively in Japanese Securities. No
effort will be made by the Manager to assess the Japanese economic, political or
regulatory developments or changes in currency exchange rates for purposes of
varying the portion of the Fund's assets invested in Japanese Securities. This
means that the Fund's performance will be directly affected by political,
economic, market and exchange rate conditions in Japan. Also, since the Japanese
economy is dependent to a significant extent on foreign trade, the relationships
between Japan and its trading partners and between the yen and other currencies
are expected to have a significant impact on particular Japanese Companies and
on the Japanese economy generally. Also, the Japan Fund's investments are
denominated in yen, whose value continually changes in relation to the dollar.
This varying relationship will also directly affect the value of the Japan
Fund's shares. The Japan Fund is designed for investors who are willing to
accept the risks associated with changes in such conditions and relationships.
To achieve its objectives, the Fund may invest in securities of foreign
issuers traded on U.S. exchanges and securities traded abroad, American
Depositary Receipts, European Depositary Receipts and other similar securities
convertible into securities of foreign issuers. The Fund may also enter
repurchase agreements, and lend portfolio securities valued at up to one-third
of total assets. The Fund may also invest up to 15% of its net assets in
illiquid securities and temporarily invest in cash and high quality money market
instruments such as securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, and bank certificates of
deposit. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures or other
derivatives, less than 5% of its total net assets will be invested in such high
quality cash items.
The Fund may also buy put and call options, sell (write) covered options and
enter into futures contracts and options on futures contracts for hedging and
risk management. The Fund's use of options on particular securities (as opposed
to market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also write options in connection with buy-and-write transactions, and
use index futures (on foreign stock indices), options on futures, equity swap
contracts and contracts for differences for investment, anticipatory hedging and
risk management and to effect synthetic sales and purchases.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging and for currency risk management. The put and
call options on currency futures written by the Fund will always be covered.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
EMERGING MARKETS FUND
The Emerging Markets Fund seeks long-term capital appreciation consistent
with what the Manager believes to be a prudent level of risk through investment
in equity and equity-related securities traded in the securities markets of
newly industrializing countries in Asia, Latin America, the Middle East,
Southern Europe, Eastern Europe and Africa. The Manager has appointed Dancing
Elephant, Ltd. to serve as a consultant (the "Consultant") to the Fund.
The Consultant's efforts focus on asset allocation among the selected
emerging markets. (See "Descriptions and Risks of Fund Investment Practices --
Certain Risks of Foreign Investments.") In addition to considerations relating
to a particular market's investment restrictions and tax barriers, this asset
allocation is based on certain other relevant factors including the outlook for
economic growth, currency exchange rates, commodity prices, interest rates,
political factors and the stage of the local market cycle in such emerging
market. The Consultant expects to allocate the Fund's investments over
geographic as well as economic sectors.
There are currently over 50 newly industrializing and developing countries
with equity markets. A number of these markets are not yet easily accessible to
foreign investors and have unattractive tax barriers or insufficient liquidity
to make significant investments by the Fund feasible or attractive. However,
many of the largest of the emerging markets have, in recent years, liberalized
access and more are expected to do so over the coming few years if the present
trend continues.
Emerging markets in which the Fund intends to invest may include the
following emerging markets ("Emerging Markets"):
Asia: Bangladesh, China, India, Indonesia,
Korea, Malaysia, Mynanmar, Mongolia,
Pakistan, Philippines, Sri Lanka,
Republic of China (Taiwan), Thailand,
Vietnam
Latin
America: Argentina, Bolivia, Brazil, Chile,
Columbia, Costa Rica, Ecuador,
Jamaica, Mexico, Peru, Uruguay,
Venezuela,
Europe/
Middle East/
Africa: Botswana, Czech Republic, Ghana,
Greece, Hungary, Israel, Jordan,
Kazakhstan, Kenya, Morocco, Namibia,
Nigeria, Poland, Portugal, Russia,
Slovakia, Slovenia, South Africa,
Turkey, Ukraine, Zimbabwe
The Emerging Markets Fund has a fundamental policy that, under normal
conditions, at least 65% of its total assets will be invested in equity and
equity-related securities which are predominantly traded on Emerging Market
exchanges ("Emerging Market Securities"). The Fund invests predominantly in
individual stocks listed on Emerging Market stock exchanges or in depository
receipts of such stocks listed on markets in industrialized countries or traded
in the international equity market. The Fund may also invest in shares of
companies which are not presently listed but are in the process of being
privatized by the government and, subject to a maximum aggregate investment
equal to 25% of the total assets of the Fund, shares of companies that are
traded in unregulated over-the-counter markets or other types of unlisted
securities mar kets. The Fund may also invest through investment funds, pooled
accounts or other investment vehicles designed to permit investments in a
portfolio of stocks listed in a particular developing country or region subject
to obtaining any necessary local regulatory approvals, particularly in the case
of countries in which such an investment vehicle is the exclusive or main
vehicle for foreign portfolio investment. Such investments may result in
additional costs, as the Fund may be required to bear a pro rata share of the
expenses of each such fund in which it invests. The Fund may also invest in
companies listed on major markets outside of the emerging markets that, based on
information obtained by the Consultant, derive at least half of their revenues
from trade with or production in developing countries. In addition, the Fund's
assets may be invested on a temporary basis in debt securities issued by
companies or governments in developing countries or money market securities of
high-grade issuers in industrialized countries denominated in various
currencies.
The Fund may also invest in bonds and money market instruments in Canada,
the United States and other markets of industrialized nations and emerging
securities markets, and, for temporary defensive purposes, may invest without
limit in cash and high quality money market instruments such as securities
issued by the U.S. government and agencies thereof, bankers' acceptances,
commercial paper, and bank certificates of deposit. The Fund expects that, not
including the margin deposits or the segregated accounts created in connection
with index futures and other derivatives, less than 5% of its total net assets
will be invested in such high quality cash items. The Fund may also invest in
indexed securities, the redemption value and/or coupons of which are indexed to
the prices of other securities, securities indices, currencies, precious metal,
or other commodities, as well as other technical indicators.
The Fund may also invest up to 10% of its total assets through debt-equity
conversion funds established to exchange foreign bank debt of countries whose
principal repayments are in arrears into a portfolio of listed and unlisted
equities, subject to certain repatriation restrictions. The Fund may also invest
in convertible securities, enter repurchase agreements and lend portfolio
securities valued at up to one-third of total assets. The Fund may invest up to
15% of its net assets in illiquid securities.
The Fund may also buy put and call options, sell (write) covered options and
enter into futures contracts and options on futures contracts for hedging and
risk management. The Fund's use of options on particular securities (as opposed
to market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also write options in connection with buy-and-write transactions, and
use index futures (on foreign stock indices), options on futures, equity swap
contracts and contracts for differences for investment, anticipatory hedging and
risk management and to effect synthetic sales and purchases.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging and for currency risk management. The put and
call options on currency futures written by the Fund will always be covered.
For a detailed description of the investment practices described in the five
preceding paragraphs and the risks associated with them, see "Descriptions and
Risks of Fund Investment Practices."
GLOBAL HEDGED EQUITY FUND
The Global Hedged Equity Fund seeks total return consistent with minimal
exposure to general equity market risk. The Fund will pursue its investment
objective by investing substantially all of its assets in a combination of (i)
equity securities, (ii) derivative instruments intended to hedge the value of
the Fund's equity securities against substantially all of the general movements
in the relevant equity market(s), including hedges against substantially all of
the changes in the value of the U.S. dollar relative to the currencies
represented in the indices used to hedge general equity market risk and (iii)
long interest rate futures contracts intended to adjust the duration of the
theoretical fixed income security embedded in the pricing of the derivatives
used for hedging the Fund's equity securities (the "Theoretical Fixed Income
Security"). The Fund may also buy exchange traded or over-the-counter put and
call options and sell (write) covered options for hedging or investment. To the
extent that the Fund's portfolio strategy is successful, the Fund is expected to
achieve a total return consisting of (i) the performance of the Fund's equity
securities, relative to the relevant equity market indices (including
appreciation or depreciation of any overweighted currency relative to the
currency weighting of the equity hedge), plus or minus (ii) short-term capital
gains or losses approximately equal to the total return on the Theoretical Fixed
Income Security, plus or minus (iii) capital gains or losses on the Fund's
interest rate futures positions minus (iv) transaction costs and other Fund
expenses. Investors should understand that, as opposed to conventional equity
portfolios, to the extent that the Fund's hedging positions are effective, the
performance of the Fund is not expected to correlate with the movements of
equity markets generally. Rather, the performance of the Fund will tend to be a
function of the total return on fixed income securities and the performance of
the Fund's equity securities relative to broad market indices, including changes
in overweighted currencies relative to the currency weighting of those indices.
The Global Hedged Equity Fund has a fundamental policy that, under normal
market conditions, at least 65% of its total assets will be invested in equity
securities. In addition, under normal market conditions, the Fund will invest in
securities principally traded in the securities markets of at least three
countries. The Global Hedged Equity Fund will generally invest in at least 125
different common stocks chosen from among (i) the Large Cap 1200 and (ii) stocks
traded primarily outside of the United States similarly chosen from among
issuers with the largest market capitalization that are principally traded on a
given foreign securities exchange. The Fund may invest up to 20% of its assets
in securities of issuers in newly industrializing countries of the type invested
in by the Emerging Markets Fund. The Manager will select which common stocks to
purchase based on its assessment of whether the common stock of an issuer
(and/or the currency in which the stock is traded) is likely to perform better
than the broad global equity market index (the "Selected Equity Index") selected
by the Manager to serve as a hedge for the Fund's portfolio as a whole.
As indicated above, the Fund will seek to hedge fully the value of its
equity holdings (measured in U.S. dollars) against substantially all movements
in the global equity markets (measured in U.S. dollars). This means that, if the
hedging strategy is successful, when the world equity markets and/or the U.S.
dollar go up or down, the Fund's net asset value will not be materially affected
by those movements in the relevant equity or currency markets generally, but
will rise or fall based primarily on whether the Fund's selected equity
securities perform better or worse than the Selected Equity Index. Those changes
will include the changes in any overweighted currency relative to the currency
weighting of the Selected Equity Index.
The Fund may use a variety of equity hedging instruments. It is currently
anticipated that the Fund will primarily use a combination of short equity swap
contracts and Index Futures for the purpose of hedging equity market exposure,
including, to the extent permitted by regulations of the Commodity Futures
Trading Commission, those traded on foreign markets. Derivative short positions
represented by the Fund's equity swap contracts will generally relate to
modified versions of the market capitalization weighted U.S., Europe, Australia
and Far East Index (or "Global Index") calculated by Morgan Stanley Capital
International. These modified indices ("Modified Global Index") generally reduce
the size of the Japanese equity markets for purposes of the country weighting by
40% or more. The Fund generally expects to build its currency hedging into its
equity swap contracts, although it may also attempt to hedge directly its
foreign currency-denominated portfolio securities against an appreciation in the
U.S. dollar relative to the foreign currencies in which such securities are
denominated.
The Manager expects to select specific equity investments without regard to
the country weightings of the Modified Global Index and in some cases may
intentionally emphasize holdings in a particular market or traded in a
particular currency. Because the country market and currency weighting of the
Modified Global Index will generally not precisely mirror the country market
weightings represented by the Fund's equity securities, there will be an
imperfect correlation between the Fund's equity securities and the hedging
position(s). Consequently, the Fund's hedging strategies using those equity swap
contracts are expected to be somewhat imperfect. This means there is a risk that
if the Fund's equity securities decline in value as a result of general market
conditions, the hedging position(s) may not appreciate enough to offset that
decline (or may actually depreciate). Likewise, if the Fund's equity securities
increase in value, that value may be more than offset by a decline in the value
of the hedging position(s). Also, because the Manager may conclude that a
particular currency is likely to appreciate relative to the currencies
represented by the Selected Equity Index, securities traded in that particular
currency may be overweighted relative to the Selected Equity Index. Such an
overweighted position may result in a loss or reduced gain to the Fund (even
when the security appreciates in local currency) if the relevant currency
depreciates relative to the currencies represented by the Modified Global Index.
The Fund's hedging positions are also expected to increase or decrease the
Fund's gross total return by an amount approximating the total return on
relevant short-term fixed income securities referred to above as the Theoretical
Fixed Income Security. For example, as the holder of a short derivative position
on an equity index, the Fund will be obligated to pay the holder of the long
position (the "counterparty") the total return on that equity index. The Fund's
contractual obligation eliminates for the counterparty the opportunity cost that
would be associated with actually owning the securities underlying that equity
index. That opportunity cost would generally be considered the total return that
a counterparty could achieve if the counterparty's capital were invested in a
short-term fixed income security (i.e., up to 2 years maturity) rather than in
the securities underlying the Relevant Equity Index. Because the counterparty is
relieved of this cost, the pricing of the hedging instruments is designed to
compensate the holder of the short position (in this case the Fund) by paying to
the holder the total return on the Theoretical Fixed Income Security. (Another
way of thinking about this is that the holder of the short position must, in
theory, be compensated for the cost of borrowing money over some relatively
short term (generally up to 2 years) to purchase an equity portfolio matching
that holder's obligations under the hedging instrument.)
In practice, the Manager has represented that generally, if there is no
movement in the Relevant Equity Index during the term of the derivative
instrument, the Fund as the holder of the short (hedging) position would be able
to close out that position with a gain or loss equal to the total return on a
Theoretical Fixed Income Security with a principal amount equal to the face or
notional amount of the hedging instrument.
The total return on the Theoretical Fixed Income Security would be accrued
interest plus or minus the capital gain or loss on that security. In the case of
Index Futures, the Fund would expect the Theoretical Fixed Income Security would
be one with a term equal to the remaining term of the Index Future and bearing
interest at a rate approximately equal to the weighted average interest rate for
money market obligations denominated in the currency or currencies used to
settle the Index Futures (generally LIBOR if settled in U.S. dollars). In the
case of equity swap contracts, the Manager can specify the Theoretical Fixed
Income Security whose total return will be paid to (or payable by) the Fund. In
cases where the Manager believes the implicit "duration" of the Fund's
theoretical fixed income securities is too short to provide an acceptable total
return, the Fund may enter into long interest rate futures (or purchase call
options on longer maturity fixed-income securities) which, together with the
Theoretical Fixed Income Security, creates a synthetic Theoretical Fixed Income
Security with a longer duration (but never with a duration causing the Fund's
overall duration to exceed that of 3-year U.S. Treasury obligations) (See
"Descriptions and Risks of Fund Investment Practices -- Use of Options, Futures
and Options on Futures -- Investment Purposes"). The Fund will segregate cash,
U.S. Treasury obligations and other high grade debt obligations in an amount
equal, on a marked-to-market basis, to the Fund's obligations under the interest
rate futures. Duration is the average time until payment (or anticipated payment
in the case of a callable security) of interest and principal on a fixed income
security, weighted according to the present value of each payment.
If interest rates rise, the Fund would expect that the value of any long
interest rate future owned by the Fund would decline and that amounts payable to
the Fund under an equity swap contract in respect of the Theoretical Fixed
Income Security would decrease or that amounts payable by the Fund thereunder
would increase. Any such decline (and/or the amount of any such decrease or
increase under a short equity swap contract) could be greater than the
derivative "interest" received on the Fund's Theoretical Fixed Income
Securities. The Fund's gross return is also expected to be reduced by
transaction costs and other Fund expenses. Those expenses will generally include
currency hedging costs if interest rates outside the U.S. are higher than those
in the U.S.
For the equity swap contracts entered into by the Fund, the counterparty
will typically be a bank, investment banking firm or broker/dealer. The
counterparty will generally agree to pay the Fund (i) interest on the
Theoretical Fixed Income Security with a principal amount equal to the notional
amount of the equity swap contract plus (ii) the amount, if any, by which that
notional amount would have decreased in value (measured in U.S. Dollars) had it
been invested in the stocks comprising the equity index agreed to by the Fund
(the "Contract Index") in proportion to the composition of the Contract Index.
(The Contract Index will be the Modified Global Index except that, to the extent
short futures contracts on a particular country's equity securities are also
used by the Fund, the Contract Index may be the Modified Global Index with a
reduced weighting for that country to reflect the futures position.) The Fund
will agree to pay the counterparty (i) any negative total return on the
Theoretical Fixed Income Security plus (ii) the amount, if any, by which the
notional amount of the equity swap contract would have increased in value
(measured in U.S. Dollars) had it been invested in the stocks comprising the
Contract Index plus (iii) the dividends that would have been received on those
stocks. Therefore, the return to the Fund on any equity swap contract should be
the total return on the Theoretical Fixed Income Security reduced by the gain
(or increased by the loss) on the notional amount as if invested in the Contract
Index and reduced by the dividends on the stocks comprising the Contract Index.
The Fund will only enter into equity swap contracts on a net basis, i.e., the
two parties' obligations are netted out, with the Fund paying or receiving, as
the case may be, only the net amount of any payments. Payments under the equity
swap contracts may be made at the conclusion of the contract or periodically
during its term.
The Fund may from time to time enter into the opposite side of equity swap
contracts (i.e., where the Fund is obligated to pay the decrease (or receive the
increase) on the Contract Index increased by any negative total return (and
decreased by any positive total return) on the Theoretical Fixed Income
Security) to reduce the amount of the Fund's equity market hedging consistent
with the Fund's objective. These positions are sometimes referred to as "long
equity swap contracts." The Fund may also take long positions in index futures
for similar purposes.
The Fund may also take a long position in index futures to reduce the amount
of the Fund's equity market hedging consistent with the Fund's objective. When
hedging positions are reduced using index futures, the Fund will also be exposed
to the risk of imperfect correlations between the index futures and the hedging
positions being reduced.
The Fund will use a combination of long and short equity swap contracts and
long and short positions in index futures in an attempt to hedge generally its
equity securities against substantially all movements in the relevant equity
markets generally. The Fund will not use equity swap contracts or Relevant
Equity Index Futures to leverage the Fund.
The Fund's actual exposure to an equity market or markets will not be
completely hedged if the aggregate of the notional amount of the long equity
swap contracts (less the notional amount of any short equity swap contracts)
relating to the relevant equity index plus the face amount of the short Index
Futures (less the face amount of any long Index Futures) is less than the Fund's
total net assets invested in common stocks principally traded on such market or
markets and will tend to be overhedged if such aggregate is more than the Fund's
total net assets so invested. Under normal conditions, the Manager expects the
Fund's total net assets invested in equity securities generally to be up to 5%
more or less than this aggregate because purchases and redemptions of Fund
shares will change the Fund's total net assets frequently, because Index Futures
can only be purchased in integral multiples of an equity index and because the
Funds' positions may appreciate or depreciate over time. Also, the ability of
the Fund to hedge risk may be diminished by imperfect correlations between price
movements of the underlying equity index with the price movements of Index
Futures relating to that index and by lack of correlation between the market
weightings of the Modified Global Index, on the one hand, and, on the other, the
market weightings represented by the common stocks selected for purchase by the
Fund.
In theory, the Fund will only be able to achieve its objective with
precision if (i) the aggregate face amount of the net short Index Futures plus
the notional amount of the long equity swap contracts (less the notional amount
of any short equity swap contracts) relating to the Selected Equity Index is
precisely equal to a Fund's total net assets, (ii) there is exact price movement
correlation between any Index Futures and the relevant equity index, (iii) there
is exact price correlation between the Modified Global Index and the overall
movements of the relevant equity markets and (iv) the Fund's currency hedging
strategies are effective. As noted, in practice there are a number of risks and
cash flows which will tend to undercut these assumptions.
The purchase and sale of common stocks and Index Futures involve transaction
costs and reverse equity swap contracts require the Fund to pay interest on the
notional amount of the contract.
In addition to the practices described above, in order to pursue its
objective the Fund may invest in securities of foreign issuers traded on U.S.
exchanges and securities traded abroad, American Depositary Receipts, European
Depositary Receipts and other similar securities convertible into securities of
foreign issuers. The Fund may also invest up to 15% of its net assets in
illiquid securities and temporarily invest up to 50% of its assets in cash and
high quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit.
The Fund may also enter repurchase agreements, and lend portfolio securities
valued at up to one-third of total assets.
In addition, for hedging purposes only the Fund may use forward foreign
currency contracts, currency futures contracts, related options and options on
currencies, and buy and sell foreign currencies.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices" later in this Prospectus.
FIXED INCOME FUNDS
As used in several of the Fixed Income Funds' investment objectives below,
"bond" means any fixed income obligation with an original maturity of two years
or more, as well as "synthetic" bonds created by combining a futures contract or
option on a fixed income security with cash, a cash equivalent investment or
another fixed income security. (See "Descriptions and Risks of Fund Investment
Practices -- Uses of Options, Futures and Options on Futures -- Investment
Purposes".) Total return for each Fund will be measured by aggregating capital
value changes and income. Under normal market conditions, each of the Emerging
Country Debt Fund, the Core Emerging Country Debt Fund, the International Bond
Fund, the Currency Hedged International Bond Fund and the Global Bond Fund will
invest at least 65% of its assets in bonds of issuers of at least three
countries (excluding the United States). However, up to 100% of these Fixed
Income Fund's assets may be denominated in U.S. dollars, and for temporary
defensive purposes, each such Fixed Income Fund may invest as much as 100% of
its assets in issuers from one or two countries, which may include the United
States.
DOMESTIC BOND FUND
The Domestic Bond Fund seeks to earn high total return through investment
primarily in U.S. Government Securities. The Fund may also invest a significant
portion of its assets in other investment grade bonds (including convertible
bonds) denominated in U.S. dollars. The Fund's portfolio will generally have a
duration of approximately four to six years (excluding short-term investments).
The duration of a fixed income security is the weighted average maturity,
expressed in years, of the present value of all future cash flows, including
coupon payments and principal repayments. The Fund will attempt to provide a
total return greater than that generally provided by the U.S. government
securities market as measured by an index selected from time to time by the
Manager. The Fund may invest in fixed income securities of any maturity,
although the Fund expects that at least 65% of its total assets will be
comprised of "bonds" (as such term is defined above) of U.S. issuers. Fixed
income securities include securities issued by federal, state, local and foreign
governments, and a wide range of private issuers.
The Fund may lend portfolio securities valued at up to one-third of total
assets, invest up to 5% of its assets in lower rated securities (also known as
"junk bonds"), and invest in adjustable rate securities, zero coupon securities
and depository receipts. The Fund may also enter into repurchase agreements,
reverse repurchase agreements and dollar roll transactions. The Fund may also
enter into loan participation agreements and invest in other direct debt
instruments. In addition, the Fund may invest in mortgage-backed and other
asset-backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its assets in illiquid securities.
In addition, the Fund may buy put and call options, sell (write) covered
options, and enter into futures contracts and options on futures contracts for
hedging, investment and risk management and to effect synthetic sales and
purchases. The Fund's use of options on particular securities (as opposed to
market indices) is limited such that the premiums paid by the Fund on all
outstanding options it has purchased may not exceed 5% of its total assets. The
Fund may also use interest rate swap contracts, contracts for differences and
interest rate caps, floors and collars for hedging, investment and risk
management.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
SHORT-TERM INCOME FUND
The Short-Term Income Fund seeks current income to the extent consistent
with the preservation of capital and liquidity through investment in a portfolio
of fixed income instruments rated high quality by Standard & Poor's Corporation
("S&P") or by Moody's Investors Service, Inc. ("Moody's") or considered by the
Manager to be of comparable quality. While the Short-Term Income Fund intends to
invest in short-term securities, it is not a money market fund. Debt securities
held by the Fund which have a remaining maturity of 60 days or less will be
valued at amortized cost unless circumstances dictate otherwise. See
"Determination of Net Asset Value." It is the present policy of the Short-Term
Income Fund, which may be changed without shareholder approval, to maintain at
least 65% of the Fund's assets invested in securities with remaining maturities
of two years or less.
In determining whether a security is a suitable investment for the
Short-Term Income Fund, reference will be made to the quality of the security,
including its rating, at the time of purchase. The Manager may or may not
dispose of a portfolio security as a result of a change in the securities'
rating, depending on its evaluation of the security in light of the Fund's
investment objectives and policies.
The Fund may invest in prime commercial paper and master demand notes (rated
"A-1" by S&P or "Prime-1" by Moody's or, if not rated, issued by companies
having an outstanding debt issue rated at least "AA" by S&P or at least "Aa" by
Moody's), high-quality corporate debt securities (rated at least "AA" by S&P or
at least "Aa" by Moody's), and high-quality debt securities backed by pools of
commercial or consumer finance loans (rated at least "AA" by S&P or "Aa" by
Moody's) and certificates of deposit, bankers' acceptances and other bank
obligations (when and if such other bank obligations become available in the
future) issued by banks having total assets of at least $2 billion as of the
date of the bank's most recently published financial statement.
In addition to the foregoing, the Short-Term Income Fund may also invest in
certificates of deposit of $100,000 or less of domestic banks and savings and
loan associations, regardless of total assets, if the certificates of deposit
are fully insured as to principal by the Federal Deposit Insurance Corporation
or the Federal Savings and Loan Insurance Corporation. The Short-Term Income
Fund may invest up to 100% of its assets in obligations issued by banks, and up
to 15% of its assets in obligations issued by any one bank. If the bank is a
domestic bank, it must be a member of the Federal Deposit Insurance Corporation.
This does not prevent the Short-Term Income Fund from investing in obligations
issued by foreign branches of domestic banks and there is currently no limit on
the Fund's ability to invest in these obligations. If the bank is foreign, the
obligation must, in the opinion of the Manager, be of a quality comparable to
the other debt securities which may be purchased by the Short-Term Income Fund.
There are special risks associated with investments in such foreign bank
obligations, including the risks associated with foreign political, economic and
legal developments and the fact that foreign banks may not be subject to the
same or similar regulatory requirements that apply to domestic banks. (See
"Descriptions and Risks of Fund Investment Practices - Certain Risks of Foreign
Investments.") The Short-Term Income Fund will invest in these securities only
when the Manager believes the risks are minimal. In addition, to the extent the
Short-Term Income Fund concentrates its assets in the banking industry,
including the domestic banking industry, adverse events affecting the industry
may also have an adverse effect on the Fund. Such adverse events include, but
are not limited to, rising interest rates which affect a bank's ability to
maintain the "spread" between the cost of money and any fixed return earned on
money, as well as industry-wide increases in loan default rates and declines in
the value of loan collateral such as real estate. The Fund may also invest in
U.S. Government Securities.
The Short-Term Income Fund may purchase any of the foregoing instruments
through firm commitment arrangements with domestic commercial banks and
registered broker-dealers and may enter into repurchase agreements with such
banks and broker-dealers with respect to any of the foregoing money market
instruments, longer term U.S. Government Securities or corporate debt securities
rated at least "AA" by S&P or at least "Aa" by Moody's. The Fund will only enter
into firm commitment arrangements and repurchase agreements with banks and
broker-dealers which the Manager determines present minimal credit risks.
All of the Short-Term Income Fund's investments will, at the time of
investment, have remaining maturities of five years or less and the average
maturity of the Short-Term Income Fund's portfolio securities based on their
dollar value will not exceed two years at the time of each investment. When the
Fund has purchased a security subject to a repurchase agreement, the amount and
maturity of the Fund's investment will be determined by reference to the amount
and term of the repurchase agreement, not by reference to the underlying
security. When the Fund purchases an adjustable rate security, the security's
maturity will be determined with reference to the frequency with which the rate
is adjusted. If the disposition of a portfolio security results in a
dollar-weighted average portfolio maturity in excess of two years for the Fund,
it will invest its available cash in such a manner as to reduce its
dollar-weighted average maturity to two years or less as soon as reasonably
practicable.
The Fund may also invest in foreign securities when the Manager believes the
risks are minimal, and lend portfolio securities valued at up to one-third of
its total assets.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Descriptions and
Risks of Fund Investment Practices."
INTERNATIONAL BOND FUND
The International Bond Fund seeks to earn high total return through
investment primarily in investment-grade bonds (including convertible bonds)
denominated in various currencies, including U.S. dollars, or in multicurrency
units. The Fund will attempt to provide a total return greater than that
generally provided by the international fixed income securities markets as
measured by an index selected from time to time by the Manager. Because the Fund
will not generally attempt to hedge against an appreciation in the U.S. dollar
relative to the foreign currency in which its portfolio securities are
denominated, investors should expect that the Fund's performance will be
adversely affected by appreciation of the U.S. dollar and will be positively
affected by a decline in the U.S. dollar relative to the currencies in which the
Funds' portfolio securities are denominated.
The Fund may invest in fixed income securities of any maturity, although the
Fund expects that at least 65% of its total assets will be comprised of "bonds"
as such term is defined above. Fixed income securities include securities issued
by federal, state, local and foreign governments, and a wide range of private
issuers.
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, and purchase or sell
securities on a when- issued or delayed delivery basis. The Fund may also invest
a portion of its assets in sovereign debt (bonds, including convertible bonds
and Brady bonds, and loans) of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa (see "Emerging Country Debt
Fund") and, to the extent permitted by the 1940 Act, may invest in shares of the
Emerging Country Debt Fund or the Core Emerging Country Debt Fund.
The Fund may lend portfolio securities valued at up to one-third of total
assets, invest up to 25% of its assets in lower rated securities (also known as
"junk bonds"), and invest in adjustable rate securities, zero coupon securities
and depositary receipts of foreign issuers. The Fund may also enter into
repurchase agreements, reverse repurchase agreements and dollar roll agreements.
In addition, the Fund may invest in mortgage-backed and other asset- backed
securities issued by the U.S. government, its agencies and by non-government
issuers, including collateral mortgage obligations ("CMO's"), strips and
residuals. The Fund may also invest in indexed securities the redemption values
and/or coupons of which are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. The Fund may also enter into firm commitment agreements
with banks or broker-dealers, and may invest up to 15% of its assets in illiquid
securities.
The Fund may buy put and call options, sell (write) covered options, and
enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indices) is
limited such that the premiums paid by the Fund on all outstanding options it
has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy- and-write transactions, and use index futures on
foreign indices for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts for
differences and interest rate caps, floors and collars for hedging, investment
and risk management.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
CURRENCY HEDGED INTERNATIONAL BOND FUND
The Currency Hedged International Bond Fund seeks to earn high total return
through investment primarily in investment-grade bonds (including convertible
bonds) denominated in various currencies including U.S. dollars or in
multicurrency units. The Fund will attempt to provide a total return greater
than that generally provided by the international fixed income securities
markets as measured by an index selected from time to time by the Manager. The
Fund has the same objectives and policies as the International Bond Fund, except
that the Currency Hedged International Bond Fund will generally attempt to hedge
at least 75% of its foreign currency-denominated portfolio securities against an
appreciation in the U.S. dollar relative to the foreign currencies in which the
portfolio securities are denominated. However, there can be no assurance that
the Fund's hedging strategies will be totally effective.
The Fund may invest in fixed income securities of any maturity, although the
Fund expects that at least 65% of its total assets will be comprised of "bonds"
as such term is defined above. Fixed income securities include securities issued
by federal, state, local and foreign governments, and a wide range of private
issuers.
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements and purchase or sell securities
on a when-issued or delayed delivery basis. The Fund may also invest a portion
of its assets in sovereign debt (bonds, including convertible bonds and Brady
Bonds, and loans) of countries in Asia, Latin America, the Middle East, Southern
Europe, Eastern Europe and Africa (see "Emerging Country Debt Fund") and, to the
extent permitted by the 1940 Act, may invest in shares of the Emerging Country
Debt Fund or the Core Emerging Country Debt Fund.
The Fund may lend portfolio securities valued at up to one-third of total
assets, invest up to 25% of its assets in lower rated securities (also known as
"junk bonds"), and invest in adjustable rate securities, zero coupon securities
and depositary receipts of foreign issuers. The Fund may also enter into
repurchase agreements, reverse repurchase agreements and dollar roll agreements.
In addition, the Fund may invest in mortgage-backed and other asset- backed
securities issued by the U.S. government, its agencies and by non-government
issuers, including collateral mortgage obligations ("CMO's"), strips and
residuals. The Fund may also invest in indexed securities the redemption values
and/or coupons of which are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. The Fund may also enter into firm commitment agreements
with banks or broker-dealers, and may invest up to 15% of its assets in illiquid
securities.
The Fund may buy put and call options, sell (write) covered options, and
enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indices) is
limited such that the premiums paid by the Fund on all outstanding options it
has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy- and-write transactions, and use index futures on
foreign indices for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts for
differences and interest rate caps, floors and collars for hedging, investment
and risk management.
For a detailed description of the investment practices described in the
three preceding paragraphs and the risks associated with them, see "Descriptions
and Risks of Fund Investment Practices."
GLOBAL BOND FUND
The Global Bond Fund seeks to earn high total return through investment
primarily in investment-grade bonds (including convertible bonds) denominated in
various currencies, including U.S. dollars, or in multicurrency units. The Fund
will attempt to provide a total return greater than that generally provided by
the global fixed income securities markets as measured by an index selected from
time to time by the Manager. The Fund will invest in fixed income securities of
both United States and foreign issuers. Because the Fund will not generally
attempt to hedge against an appreciation in the U.S. dollar relative to the
foreign currencies in which some of its portfolio securities are denominated,
investors should expect that the Fund's performance will be adversely affected
by appreciation of the U.S. dollar and will be positively affected by a decline
in the U.S. dollar relative to the currencies in which the Funds' portfolio
securities are denominated.
The Fund may invest in fixed income securities of any maturity, although the
Fund expects that at least 65% of its total assets will be comprised of "bonds"
as such term is defined above. Fixed income securities include securities issued
by federal, state, local and foreign governments, and a wide range of private
issuers.
Under certain adverse investment conditions, the Fund may restrict the
number of securities markets in which assets will be invested, although under
normal market circumstances it is expected that the Fund's investments will
involve securities principally traded in at least three different countries. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
securities principally traded in the United States and/or denominated in U.S.
dollars.
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, and purchase or sell
securities on a when- issued or delayed delivery basis. The Fund may also invest
a portion of its assets in sovereign debt (bonds, including convertible bonds
and Brady bonds, and loans) of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa (See "Emerging Country Debt
Fund") and, to the extent permitted by the 1940 Act, may invest in shares of the
Emerging Country Debt Fund, the Core Emerging Country Debt Fund, the Domestic
Bond Fund and/or the International Bond Fund.
The Fund may lend portfolio securities valued at up to one-third of total
assets, invest up to 25% of its assets in lower rated securities (also known as
"junk bonds"), and invest in adjustable rate securities, zero coupon securities
and depository receipts of foreign issuers. The Fund may also enter into
repurchase agreements, reverse repurchase agreements and dollar roll
transactions. In addition, the Fund may invest in mortgage-backed and other
asset- backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its assets in illiquid securities.
The Fund may buy put and call, sell (write) covered options, and enter into
futures contracts and options on futures contracts for hedging, investment and
risk management and to effect synthetic sales and purchases. The Fund's use of
options on particular securities (as opposed to market indices) is limited such
that the premiums paid by the Fund on all outstanding options it has purchased
may not exceed 10% of its total assets. The Fund may also write options in
connection with buy-and- write transactions, and use index futures on foreign
indices for investment, anticipatory hedging and risk management. In addition,
the Fund may use forward foreign currency contracts, currency futures contracts
and related options, currency swap contracts, options on currencies, and buy and
sell currencies for hedging and for currency risk management. The Fund may also
use futures contracts and foreign currency forward contracts to create synthetic
bonds and synthetic foreign currency denominated securities to approximate
desired risk/return profiles where the non-synthetic security having the desired
risk/return profile is either unavailable or possesses undesirable
characteristics.
In addition, the Fund may use interest rate and currency swap contracts,
contracts for differences and interest rate caps, floors and collars for
hedging, investment and risk management. The use of unsegregated futures
contracts, related options, interest rate floors, caps and collars and interest
rate swap contracts for risk management is limited to no more than 10% of the
Fund's total net assets when aggregated with the Fund's traditional borrowings.
This 10% limitation applies to the face amount of unsegregated futures contracts
and related options and to the amount of a Fund's net payment obligation that is
not segregated against in the case of interest rate floors, caps and collars and
interest rate swap contracts.
For a more detailed description of the investment practices described above
and the risks associated with them, see "Descriptions and Risks of Fund
Investment Practices" later in this Prospectus.
EMERGING COUNTRY DEBT FUND
The Emerging Country Debt Fund seeks to earn high total return by investing
primarily in sovereign debt (bonds, including convertible bonds, and loans) of
countries in Asia, Latin America, the Middle East and Africa, as well as any
country located in Europe which is not in the European Community ("Emerging
Countries"). In addition to considerations relating to investment restrictions
and tax barriers, allocation of the Fund's investments among selected emerging
countries will be based on certain other relevant factors including the outlook
for economic growth, currency exchange rates, interest rates, political factors
and the stage of the local market cycle. The Fund will generally have at least
50% of its assets denominated in hard currencies such as the U.S. dollar,
Japanese yen, Italian lira, British pound, Deutchmark, French franc and Canadian
dollar. The Fund will attempt to provide a total return greater than that
generally provided by the international fixed income securities markets as
measured by an index selected from time to time by the Manager.
The Fund has a fundamental policy that, under normal market conditions, at
least 65% of its total assets will be invested in debt securities of Emerging
Countries. In addition, the Fund may invest in fixed income securities of any
maturity, although the Fund expects that at least 65% of its total assets will
be comprised of "bonds" as such term is defined above. Fixed income securities
include securities issued by federal, state, local and foreign governments, and
a wide range of private issuers.
The Emerging Country Debt Fund's investments in Emerging Country debt
instruments are subject to special risks that are in addition to the usual risks
of investing in debt securities of developed foreign markets around the world,
and investors are strongly advised to consider those risks carefully. See
"Descriptions and Risks of Fund Investment Practices -- Certain Risks of Foreign
Investments."
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, invest in Brady bonds and
purchase or sell securities on a when-issued or delayed delivery basis. The Fund
may also lend portfolio securities valued at up to one third of total assets,
invest without limit in lower rated securities (also known as "junk bonds"), and
invest in adjustable rate securities, zero coupon securities and depository
receipts of foreign issuers. The Fund may also enter into repurchase agreements,
reverse repurchase agreements and dollar roll agreements. In addition, the Fund
may invest in mortgage-backed and other asset-backed securities issued by the
U.S. government, its agencies and by non-government issuers, including
collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may
also invest in indexed securities the redemption values and/or coupons of which
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. The Fund
may also enter into firm commitment agreements with banks or broker-dealers, and
may invest up to 15% of its assets in illiquid securities.
The Fund may buy put and call options, sell (write) covered options, and
enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indices) is
limited such that the premiums paid by the Fund on all outstanding options it
has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy- and-write transactions, and use index futures on
foreign indices for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts for
differences and interest rate caps, floors and collars for hedging, investment
and risk management.
For a detailed description of the investment practices described in the four
preceding paragraphs and the risks associated with them, see "Descriptions and
Risks of Fund Investment Practices" later in this Prospectus.
CORE EMERGING COUNTRY DEBT FUND
The Core Emerging Country Debt Fund seeks to earn high total return by
investing primarily in sovereign debt (bonds, including convertible bonds, and
loans) of Emerging Countries. The Fund's investments will be concentrated in
emerging country debt issues having above average marketability. In addition to
considerations relating to investment restrictions and tax barriers, allocation
of the Fund's investments among selected emerging countries will be based on
certain other relevant factors including the outlook for economic growth,
currency exchange rates, interest rates, political factors and the stage of the
local market cycle. The Fund will generally have at least 50% of its assets
denominated in hard currencies such as the U.S. dollar, Japanese yen, Italian
lira, British pound, Deutchmark, French franc and Canadian dollar. The Fund will
attempt to provide a total return greater than that generally provided by the
international fixed income securities markets as measured by an index selected
from time to time by the Manager.
The Fund has a fundamental policy that, under normal market conditions, at
least 65% of its total assets will be invested in debt securities of Emerging
Countries. In addition, the Fund may invest in fixed income securities of any
maturity, although the Fund expects that at least 65% of its total assets will
be comprised of "bonds" as such term is defined above. Fixed income securities
include securities issued by federal, state, local and foreign governments, and
a wide range of private issuers.
The investments of the Core Emerging Country Debt Fund in Emerging Country
debt instruments are subject to special risks that are in addition to the usual
risks of investing in debt securities of developed foreign markets around the
world, and investors are strongly advised to consider those risks carefully. See
"Descriptions and Risks of Fund Investment Practices -- Certain Risks of Foreign
Investments."
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, invest in Brady bonds and
purchase or sell securities on a when-issued or delayed delivery basis. The Fund
may also lend portfolio securities valued at up to one-third of total assets,
invest without limit in lower rated securities (also known as "junk bonds"), and
invest in adjustable rate securities, zero coupon securities and depository
receipts of foreign issuers. The Fund may also enter into repurchase agreements,
reverse repurchase agreements and dollar roll agreements. In addition, the Fund
may invest in mortgage-backed and other asset-backed securities issued by the
U.S. government, its agencies and by non-government issuers, including
collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may
also invest in indexed securities the redemption values and/or coupons of which
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. The Fund
may also enter into firm commitment agreements with banks or broker-dealers, and
may invest up to 15% of its assets in illiquid securities.
The Fund may buy put and call options, sell (write) covered options, and
enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indices) is
limited such that the premiums paid by the Fund on all outstanding options it
has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy- and-write transactions, and use index futures on
foreign indices for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts for
differences and interest rate caps, floors and collars for hedging, investment
and risk management.
For a detailed description of the investment practices described in the four
preceding paragraphs and the risks associated with them, see "Descriptions and
Risks of Fund Investment Practices" later in this Prospectus.
DESCRIPTIONS AND RISKS OF FUND
INVESTMENT PRACTICES
The following is a detailed description of the various investment practices
in which the Funds may engage and the risks associated with their use. Not all
Funds may engage in all practices described below. Please refer to the
"Investment Objectives and Policies" section above for determination of which
practices a particular Fund may engage in.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment
decisions for the Funds. The portfolio turnover rate of those Funds with at
least five months of operational history is shown under the heading "Financial
Highlights."
In any particular year, market conditions may well result in greater rates
than are presently anticipated. However, portfolio turnover for the Core
Emerging Country Debt Fund, the Currency Hedged International Core Fund, the
Global Bond Fund and the Foreign Fund is not expected to exceed 150%. High
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which will be borne directly by the relevant Fund, and
could involve realization of capital gains that would be taxable when
distributed to shareholders of the relevant Fund unless such shareholders are
themselves exempt. See "Taxes" section below.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
It is a fundamental policy of each of the Core Fund, the Tobacco-Free Core
Fund, the Core II Secondaries Fund, the Fundamental Value Fund, the
International Core Fund, and the International Small Companies Fund, which may
not be changed without shareholder approval, that (i) no more than 5% of the
relevant Fund's assets will be invested in the securities of any one issuer,
although up to 25% of each Fund's assets may be invested without regard to this
restriction and (ii) the Fund may not own more than 10% of the outstanding
voting securities of any single issuer. Each such Fund is referred to herein as
a "diversified" fund.
All other Funds are "non-diversified" funds under the 1940 Act, and as such
are not required to satisfy the "diversified" requirements stated above. As a
non-diversified fund, each of these Funds may invest a relatively high
percentage of its assets in the securities of relatively few issuers that the
Manager deems to be attractive investments, rather than invest in the securities
of a large number of issuers merely to satisfy diversification requirements.
Such concentration may increase the risk of loss to such Funds should there be a
decline in the market value of any one portfolio security. Investment in a
non-diversified fund may therefore entail greater risks than investment in a
diversified fund. All Funds, however, must meet certain diversification
standards to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation of assets or nationalization, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit a Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater extent
to investments in emerging markets. The securities markets of emerging countries
are generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign markets. There also may be a lower level of monitoring and
regulation of securities markets in emerging market countries and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited. Many emerging countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries in which they
trade. The economies of countries with emerging markets may also be
predominantly based on only a few industries or dependent on revenues from
particular commodities. In addition, custodial services and other costs relating
to investment in foreign markets may be more expensive in emerging markets than
in many developed foreign markets, which could reduce a Fund's income from such
securities. Finally, because publicly traded debt instruments of emerging
markets represent a relatively recent innovation in the world debt markets,
there is little historical data or related market experience concerning the
attributes of such instruments under all economic, market and political
conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
SECURITIES LENDING
All of the Funds may make secured loans of portfolio securities amounting to
not more than one-third of the relevant Fund's total assets, except for the
International Core and Currency Hedged International Core Funds, each of which
may make loans of portfolio securities amounting to not more than 25% of their
respective total assets. The risks in lending portfolio securities, as with
other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. However, such loans will be made only to broker-dealers that are
believed by the Manager to be of relatively high credit standing. Securities
loans are made to broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral in cash or U.S. Government Securities at
least equal at all times to the market value of the securities lent. The
borrower pays to the lending Fund an amount equal to any dividends or interest
the Fund would have received had the securities not been lent. If the loan is
collateralized by U.S. Government Securities, the Fund will receive a fee from
the borrower. In the case of loans collateralized by cash, the Fund typically
invests the cash collateral for its own account in interest-bearing, short-term
securities and pays a fee to the borrower. Although voting rights or rights to
consent with respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable notice, and it
will do so in order that the securities may be voted by the Fund if the holders
of such securities are asked to vote upon or consent to matters materially
affecting the investment. The Fund may also call such loans in order to sell the
securities involved. The Manager has retained a lending agent on behalf of
several of the Funds that is compensated based on a percentage of a Fund's
return on the securities lending activity. The Fund also pays various fees in
connection with such loans including shipping fees and reasonable custodian fees
approved by the Trustees of the Trust or persons acting pursuant to direction of
the Board.
DEPOSITORY RECEIPTS
Each Fund (except the Short-Term Income Fund) may invest in American
Depositary Receipts (ADRs), Global Depository Receipts (GDRs) and European
Depository Receipts (EDRs) (collectively, "Depository Receipts") if issues of
such Depository Receipts are available that are consistent with a Fund's
investment objective. Depository Receipts generally evidence an ownership
interest in a corresponding foreign security on deposit with a financial
institution. Transactions in Depository Receipts usually do not settle in the
same currency in which the underlying securities are denominated or traded.
Generally, ADRs, in registered form, are designed for use in the U.S. securities
markets and EDRs, in bearer form, are designed for use in European securities
markets. GDRs may be traded in any public or private securities markets and may
represent securities held by institutions located anywhere in the world.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature, an
opportunity to participate in capital appreciation resulting from a market price
advance in a convertible security's underlying common stock. The price of a
convertible security is influenced by the market value of the underlying common
stock and tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. The Manager regards convertible securities as a form of equity
security.
FUTURES AND OPTIONS
As has been described in the "Investment Objectives and Policies" section
above, many of the Funds may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indices, and foreign currencies. The
Funds may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts and options on futures contracts involves risk.
Thus, while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices, or currency exchange
rates may result in poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions. Losses incurred in
transactions in futures and options on futures and the costs of these
transactions will affect a Fund's performance. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Funds' investments in futures contracts and
related options.
OPTIONS. As has been noted above, many Funds which may use options (1) may
enter into contracts giving third parties the right to buy the Fund's portfolio
securities for a fixed price at a future date (writing "covered call options");
(2) may enter into contracts giving third parties the right to sell securities
to the Fund for a fixed price at a future date (writing "covered put options");
and (3) may buy the right to purchase securities from third parties ("call
options") or the right to sell securities to third parties ("put options") for a
fixed price at a future date.
WRITING COVERED OPTIONS. Each of the International Equity Funds and Fixed
Income Funds (except the Short- Term Income Fund) may seek to increase its
return by writing covered call or put options on optionable securities or
indices. A call option written by a Fund on a security gives the holder the
right to buy the underlying security from the Fund at a stated exercise price; a
put option gives the holder the right to sell the underlying security to the
Fund at a stated exercise price. In the case of options on indices, the options
are usually cash settled based on the difference between the strike price and
the value of the index.
Each such Fund will receive a premium for writing a put or call option,
which increases the Fund's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if a Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if a Fund owns the underlying
security or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds on a share-for-share basis a call on the same security as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call written
if the difference is maintained by the Fund in cash, U.S. Government Securities
or other high grade debt obligations in a segregated account with its custodian.
A put option is "covered" if the Fund maintains cash, U.S. Government Securities
or other high grade debt obligations with a value equal to the exercise price in
a segregated account with its custodian, or else holds on a share-for-share
basis a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
If the writer of an option wishes to terminate his obligation, he may effect
a "closing purchase transaction." This is accomplished, in the case of exchange
traded options, by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
canceled by the clearing corporation. The writer of an option may not effect a
closing purchase transaction after he has been notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate his
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that a Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security or securities owned by the Fund.
A Fund may write options in connection with buy-and- write transactions;
that is, a Fund may purchase a security and then write a call option against
that security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy- and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the- money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and- write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the- money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which a Fund will be able to write and purchase call and put
options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
FUTURES. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm which is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted. See
Appendix A, "Risks and Limitations of Options, Futures and Swaps" for more
information concerning these practices and their accompanying risks.
The purchase or sale of a futures contract differs from the purchase or sale
of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the same delivery date.
If the price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds (except the Short- Term Income Fund) may
purchase futures contracts on various securities indices ("Index Futures"). Each
of the Domestic Equity Funds may purchase Index Futures on the S&P 500 ("S&P 500
Index Futures") and on such other domestic stock indices as the Manager may deem
appropriate. The Japan Fund may purchase Index Futures on the Nikkei 225 Stock
Average and on the Tokyo Stock Price Index ("TOPIX") (together with Nikkei 225
futures contracts, "Japanese Index Futures"). The International Core Fund,
Currency Hedged International Core Fund, the Foreign Fund, the International
Small Companies Fund and the Emerging Markets Fund may each purchase Index
Futures on foreign stock indices, including those which may trade outside the
United States. The Domestic Bond Fund, the International Bond Fund, the Currency
Hedged International Bond Fund, the Global Bond Fund, the Emerging Country Debt
Fund and the Core Emerging Country Debt Fund may each purchase Index Futures on
domestic and (except for the Domestic Bond Fund) foreign fixed income securities
indices, including those which may trade outside the United States. A Fund's
purchase and sale of Index Futures is limited to contracts and exchanges which
have been approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled." An
Index Future that calls for physical delivery is a contract to buy an integral
number of units of the particular securities index at a specified future date at
a price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While a Fund that purchases an Index Future that
calls for physical delivery is obligated to pay the face amount on the stated
date, such an Index Future may be closed out on that date or any earlier date by
selling an Index Future with the same face amount and contract date. This will
terminate the Fund's position and the Fund will realize a profit or a loss based
on the difference between the cost of purchasing the original Index Future and
the price obtained from selling the closing Index Future. The amount of the
profit or loss is determined by the change in the value of the relevant index
while the Index Future was held.
Index Futures that are "cash settled" provide by their terms for settlement
on a net basis reflecting changes in the value of the underlying index. Thus,
the purchaser of such an Index Future is never obligated to pay the face amount
of the contract. The net payment obligation may in fact be very small in
relation to the face amount.
The use of Index Futures involves risk. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Funds' investment in futures contracts.
INTEREST RATE FUTURES. For the purposes previously described, the Fixed
Income Funds (other than the Short- Term Income Fund) may engage in a variety of
transactions involving the use of futures with respect to U.S. Government
Securities and other fixed income securities. The use of interest rate futures
involves risk. See Appendix A, "Risks and Limitations of Options, Futures and
Swaps" for a more detailed discussion of the limits, conditions and risks of the
Fund's investment in futures contracts.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. Funds may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, a Fund may purchase
put options or write call options on futures contracts rather than selling
futures contracts. Similarly, a Fund may purchase call options or write put
options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund expects to purchase. Such options generally operate in the same manner
as options purchased or written directly on the underlying investments. See
"Descriptions and Risks of Fund Investment Practices -- Foreign Currency
Transactions" for a description of the Funds' use of options on currency
futures.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if a Fixed Income Fund wants to increase its exposure to a particular
fixed income security, the Fund may take long positions in futures contracts on
that security. Likewise, if an Equity Fund holds a portfolio of stocks with an
average volatility (beta) lower than that of the Fund's benchmark securities
index as a whole (deemed to be 1.00), the Fund may purchase Index Futures to
increase its average volatility to 1.00. In the case of futures and options on
futures, a Fund is only required to deposit the initial and variation margin as
required by relevant CFTC regulations and the rules of the contract markets.
Because the Fund will then be obligated to purchase the security or index at a
set price on a future date, the Fund's net asset value will fluctuate with the
value of the security as if it were already included in the Fund's portfolio.
Risk management transactions have the effect of providing a degree of investment
leverage, particularly when the Fund does not segregate assets equal to the face
amount of the contract (i.e., in cash settled futures contracts) since the
futures contract (and related options) will increase or decrease in value at a
rate which is a multiple of the rate of increase or decrease in the value of the
initial and variable margin that the Fund is required to deposit. As a result,
the value of the Fund's portfolio will generally be more volatile than the value
of comparable portfolios which do not engage in risk management transactions. A
Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, a Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if the Fund were fully invested in
the securities comprising the relevant index. However, a Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures equity swaps
and contracts for differences as described below does not exceed 10% of a Fund's
assets.
HEDGING. To the extent indicated elsewhere, a Fund may also enter into
options, futures contracts and buy and sell options thereon for hedging. For
example, if a Fund wants to hedge certain of its fixed income securities against
a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indices of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. Likewise, the Equity Funds may sell equity index futures if a Fund
wants to hedge its equity securities against a general decline in the relevant
equity market(s). The Funds may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that a Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, the Fund may purchase call options or write put
options as a substitute for the purchase of futures contracts. See "Descriptions
and Risks of Fund Investment Practices -- Foreign Currency Transactions" for
more information regarding the currency hedging practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also
enter into futures contracts and buy and sell options thereon for investment.
For example, a Fund may invest in futures when its Manager believes that there
are not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When any Fund purchases futures contracts for investment, it will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount which, together with the
initial and variation margin deposited on the futures contracts, is equal to the
face value of the futures contracts at all times while the futures contracts are
held.
Incidental to other transactions in fixed income securities, for investment
purposes a Fund may also combine futures contracts or options on fixed income
securities with cash, cash equivalent investments or other fixed income
securities in order to create "synthetic" bonds which approximate desired risk
and return profiles. This may be done where a "non-synthetic" security having
the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When a Fund creates a "synthetic" bond with a futures contract, it will maintain
cash, U.S. Government securities or other high grade debt obligations in a
segregated account with its custodian with a value at least equal to the face
amount of the futures contract (less the amount of any initial or variation
margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization (e.g., between $300 million and $5.2 billion)
and, in the opinion of the Manager, such stocks are likely to underperform
larger capitalization stocks, the Fund might sell some or all of its
mid-capitalization stocks, buy large capitalization stocks with the proceeds and
then, when the expected trend had played out, sell the large capitalization
stocks and repurchase the mid-capitalization stocks with the proceeds. In the
alternative, the Fund may use futures to achieve a similar result with reduced
transaction costs. In that case, the Fund might simultaneously enter into short
futures positions on an appropriate index (e.g., the S&P Mid Cap 400 Index) (to
synthetically "sell" the stocks in the Fund) and long futures positions on
another index (e.g., the S&P 500) (to synthetically buy the larger
capitalization stocks). When the expected trend has played out, the Fund would
then close out both futures contract positions. A Fund will only enter into
these combined positions if (1) the short position (adjusted for historic
volatility) operates as a hedge of existing portfolio holdings, (2) the face
amount of the long futures position is less than or equal to the value of the
portfolio securities that the Fund would like to dispose of, (3) the contract
settlement date for the short futures position is approximately the same as that
for the long futures position and (4) the Fund segregates an amount of cash,
U.S. Government Securities and other high-quality debt obligations whose value,
marked-to-market daily, is equal to the Fund's current obligations in respect of
the long futures contract positions. If a Fund uses such combined short and long
positions, in addition to possible declines in the values of its investment
securities, the Fund may also suffer losses associated with a securities index
underlying the long futures position underperforming the securities index
underlying the short futures position. However, the Manager will enter into
these combined positions only if the Manager expects that, overall, the Fund
will perform as if it had sold the securities hedged by the short position and
purchased the securities underlying the long position. A Fund may also use swaps
and options on futures to achieve the same objective. For more information, see
Appendix A, "Risks and Limitations of Options, Futures and Swaps."
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
As has been described in the "Investment Objectives and Policies" section
above, many of the Funds may use swap contracts and other two-party contracts
for the same or similar purposes as they may use options, futures and related
options. The use of swap contracts and other two- party contracts involves risk.
See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more
detailed discussion of the limits, conditions and risks of the Funds'
investments in swaps and other two-party contracts.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. A Fund
will usually enter into swaps on a net basis, i.e., the two returns are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g., an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. As described under
"Investment Objectives and Policies -- International Equity Funds -- Global
Hedged Equity Fund," equity swap contracts involve the exchange of one party's
obligation to pay the loss, if any, with respect to a notional amount of a
particular equity index (e.g., the S&P 500 Index) plus interest on such notional
amount at a designated rate (e.g., the London Inter-Bank Offered Rate) in
exchange for the other party's obligation to pay the gain, if any, with respect
to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Funds will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, a Fund will not normally enter an equity swap
contract to increase the volatility (beta) of the Fund's portfolio above 1.00,
the volatility that would be present in the stocks comprising the Fund's
benchheld Index. However, a Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of a Fund's
net assets.
Contracts for differences are swap arrangements in which a Fund may agree
with a counterparty that its return (or loss) will be based on the relative
performance of two different groups or "baskets" of securities. As to one of the
baskets, the Fund's return is based on theoretical long futures positions in the
securities comprising that basket (with an aggregate face value equal to the
notional amount of the contract for differences) and as to the other basket, the
Fund's return is based on theoretical short futures positions in the securities
comprising the basket. The Fund may also use actual long and short futures
positions to achieve the same market exposure(s) as contracts for differences.
The Funds will only enter into contracts for differences where payment
obligations of the two legs of the contract are netted and thus based on changes
in the relative value of the baskets of securities rather than on the aggregate
change in the value of the two legs. The Funds will only enter into contracts
for differences (and analogous futures positions) when the Manager believes that
the basket of securities constituting the long leg will outperform the basket
constituting the short leg. However, it is possible that the short basket will
outperform the long basket - resulting in a loss to the Fund, even in
circumstances where the securities in both the long and short baskets appreciate
in value.
Except for instances in which a Fund elects to obtain leverage up to the 10%
limitation mentioned above, a Fund will maintain cash, U.S. Government
Securities or other high grade debt obligations in a segregated account with its
custodian in an amount equal to the aggregate of net payment obligations on its
swap contracts and contracts for differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contacts, when
aggregated with the Index Futures and equity swaps contracts as described above,
does not exceed 10% of a Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Funds may use interest rate
caps, floors and collars for the same purposes or similar purposes as for which
they use interest rate futures contracts and related options. Interest rate
caps, floors and collars are similar to interest rate swap contracts because the
payment obligations are measured by changes in interest rates as applied to a
notional amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, each Fund will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount at least equal to its
obligations, if any, under interest rate cap, floor and collar arrangements. As
with futures contracts, when a Fund uses notional amount contracts for risk
management it is only required to segregate assets equal to its net payment
obligation, not the notional amount of the contract. In those cases, the
notional amount contract will have the effect of providing a degree of
investment leverage similar to the leverage associated with non-segregated
futures contracts. The Funds' use of interest rate caps, floors and collars for
the same or similar purposes as those for which they use futures contracts and
related options present the same risks and similar opportunities to those
associated with futures and related options. For a description of certain
limitations on the Funds' use of caps, floors and collars, see Appendix A,
"Risks and Limitations of Options, Futures and Swaps -- Additional Regulatory
Limitations on the Use of Futures, Related Options, Interest Rate Floors, Caps
and Collars and Interest Rate and Currency Swap Contracts." Because caps, floors
and collars are recent innovations for which standardized documentation has not
yet been developed they are deemed by the SEC to be relatively illiquid
investments which are subject to a Fund's limitation on investment in illiquid
securities. See "Descriptions and Risks of Fund Investment Practices -- Illiquid
Securities."
FOREIGN CURRENCY TRANSACTIONS
To the extent each of the International Funds and the Fundamental Value Fund
is invested in foreign securities, it may buy or sell foreign currencies or may
deal in forward foreign currency contracts, that is, agree to buy or sell a
specified currency at a specified price and future date. These Funds may use
forward contracts for hedging, investment or currency risk management.
These Funds may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, the Funds may engage in currency "cross hedging" when, in the opinion
of the Manager, the historical relationship among foreign currencies suggests
that the Funds may achieve the same protection for a foreign security at reduced
cost through the use of a forward foreign currency contract relating to a
currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Funds
assume the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps."
A Fund is not required to enter into hedging transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Funds may be required to forego the benefits of advantageous changes in the
exchange rates.
Each of the International Funds may also enter foreign currency forward
contracts for investment and currency risk management. When a Fund uses currency
instruments for such purposes, the foreign currency exposure of the Fund may
differ substantially from the currencies in which the Fund's investment
securities are denominated. However, a Fund's aggregate foreign currency
exposure will not normally exceed 100% of the value of the Fund's securities,
except that a Fund may use currency instruments without regard to this
limitation if the amount of such excess, when aggregated with futures contracts,
equity swap contracts and contracts for differences used in similar ways, does
not exceed 10% of a Fund's net assets. The International Bond Fund, the Currency
Hedged International Bond Fund, the Global Bond Fund, the Emerging Country Debt
Fund and the Core Emerging Country Debt Fund may each also enter into foreign
currency forward contracts to give fixed income securities denominated in one
currency (generally the U.S. dollar) the risk characteristics of similar
securities denominated in another currency as described above under "Uses of
Options Futures and Options on Futures--Investment Purposes" or for risk
management in a manner similar to such Funds' use of futures contracts and
related options.
Except to the extent that the Funds may use such contracts for risk
management, whenever a Fund enters into a foreign currency forward contract,
other than a forward contract entered into for hedging, it will maintain cash,
U.S. Government securities or other high grade debt obligations in a segregated
account with its custodian with a value, marked to market daily, equal to the
amount of the currency required to be delivered. A Fund's ability to engage in
forward contracts may be limited by tax considerations.
A Fund may use currency futures contracts and related options and options on
currencies for the same reasons for which they use currency forwards. Except to
the extent that the Funds may use futures contracts and related options for risk
management, a Fund will, so long as it is obligated as the writer of a call
option on currency futures, own on a contract-for-contract basis an equal long
position in currency futures with the same delivery date or a call option on
currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, U.S. Government securities or other high grade
debt obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by a Fund falls below
100% of the market value of the call written by the Fund, the Fund will maintain
an amount of cash, U.S. Government securities or other high grade debt
obligations in a segregated account with its custodian equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and broker-dealers by
which the Fund acquires a security (usually an obligation of the Government
where the transaction is initiated or in whose currency the agreement is
denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the
relevant Fund to expenses, delays and risks of loss including: (a) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (b) possible reduced levels of income
and lack of access to income during this period and (c) inability to enforce
rights and the expenses involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities of
any maturity, although, under normal circumstances, a Fixed Income Fund (other
than the Short- Term Income Fund) will only invest in a security if, at the time
of such investment, at least 65% of its total assets will be comprised of bonds,
as defined in "Investment Objectives and Policies -- Fixed Income Funds" above.
Fixed income securities pay a specified rate of interest or dividends, or a rate
that is adjusted periodically by reference to some specified index or market
rate. Fixed income securities include securities issued by federal, state, local
and foreign governments and related agencies, and by a wide range of private
issuers.
Fixed income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future income
of a Fund investing in such securities. The net asset value of each such Fund's
shares will vary as a result of changes in the value of the securities in its
portfolio and will be affected by the absence and/or success of hedging
strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
Each of the Domestic Equity and International Equity Funds may temporarily
invest a portion of its assets in cash or cash items pending other investments
or in connection with the maintenance of a segregated account. These cash items
must be of high quality and may include a number of money market instruments
such as securities issued by the United States government and agencies thereof,
bankers' acceptances, commercial paper, and bank certificates of deposit. By
investing only in high quality money market securities a Fund will seek to
minimize credit risk with respect to such investments. The Short-Term Income
Fund may make many of the same investments, although it imposes less strict
restrictions concerning the quality of such investments. See "Investment
Objectives and Policies -- Fixed Income Funds -- Short-Term Income Fund" for a
general description of various types of money market instruments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT
SECURITIES
U.S. Government Securities include securities issued or guaranteed by the
U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supranational agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political instability in such countries and the possible
inability of a Fund to enforce its rights against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and Foreign
Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and Foreign
Government Securities, a Fund may purchase certificates of accrual or similar
instruments evidencing undivided ownership interests in interest payments or
principal payments, or both, in U.S. Government Securities and Foreign
Government Securities. These certificates of accrual and similar instruments may
be more volatile than other government securities.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed and other asset-backed securities may be issued by the U.S.
government, its agencies or instrumentalities, or by non-governmental issuers.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed security. Prepayments occur when the mortgagor on an individual
mortgage prepays the remaining principal before the mortgage's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying mortgages, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. Because
the prepayment characteristics of the underlying mortgages vary, there can be no
certainty as to the predicted yield or average life of a particular issue of
pass-through certificates. Prepayments are important because of their effect on
the yield and price of the securities. During periods of declining interest
rates, such prepayments can be expected to accelerate and a Fund would be
required to reinvest the proceeds at the lower interest rates then available. In
addition, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses because the premium may not have been
fully amortized at the time the obligation was prepaid. As a result of these
principal prepayment features, the values of mortgage-backed securities
generally fall when interest rates rise, but their potential for capital
appreciation in periods of falling interest rates is limited because of the
prepayment feature. The mortgage-backed securities purchased by a Fund may
include Adjustable Rate Securities as such term is defined in "Descriptions and
Risks of Fund Investment Practices -- Adjustable Rate Securities" below.
Other "asset-backed securities" include securities backed by pools of
automobile loans, educational loans and credit card receivables. Mortgage-backed
and asset-backed securities of non-governmental issuers involve prepayment risks
similar to those of U.S. government guaranteed mortgage-backed securities and
also involve risk of loss of principal if the obligors of the underlying
obligations default in payment of the obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"); STRIPS AND RESIDUALS. A CMO is
a security backed by a portfolio of mortgages or mortgage-backed securities held
under an indenture. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued in multiple classes or series which have different
maturities representing 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 stated maturity. Thus, the early retirement of a particular class
or series of CMO held by a Fund would have the same effect as the prepayment of
mortgages underlying a mortgage-backed pass-through security.
CMOs include securities ("Residuals") representing the interest in any
excess cash flow and/or the value of any collateral remaining on mortgages or
mortgage-backed securities from the payment of principal of and interest on all
other CMOs and the administrative expenses of the issuer. Residuals have value
only to the extent income from such underlying mortgages or mortgage-backed
securities exceeds the amounts necessary to satisfy the issuer's debt
obligations represented by all other outstanding CMOs.
CMOs also include certificates representing undivided interests in payments
of interest-only or principal-only ("IO/PO Strips") on the underlying mortgages.
IO/PO Strips and Residuals tend to be more volatile than other types of
securities. IO Strips and Residuals also involve the additional risk of loss of
a substantial portion of or the entire value of the investment if the underlying
securities are prepaid. In addition, if a CMO bears interest at an adjustable
rate, the cash flows on the related Residual will also be extremely sensitive to
the level of the index upon which the rate adjustments are based.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that are
reset at periodic intervals, usually by reference to some interest rate index or
market interest rate. They may be U.S. Government Securities or securities of
other issuers. Some adjustable rate securities are backed by pools of mortgage
loans. 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 rate is reset only
periodically, changes in the interest rates on adjustable rate securities may
lag changes in prevailing market interest rates. Also, some adjustable rate
securities (or, in the case of securities backed by mortgage loans, 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. Because of the resetting of interest rates, adjustable rate securities
are less likely than non-adjustable rate securities of comparable quality and
maturity to increase significantly in value when market interest rates fall.
LOWER RATED SECURITIES
Certain Funds may invest some or all of their assets in securities rated
below investment grade (that is, rated below BBB by Standard & Poor's or below
Baa by Moody's) at the time of purchase, including securities in the lowest
rating categories, and comparable unrated securities ("Lower Rated Securities").
A Fund will not necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although the Manager will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed income securities.
Lower Rated 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 Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated 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 Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See Appendix B for more information concerning commercial paper
and corporate debt ratings.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented in Mexico,
Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other
countries.
Brady Bonds have been issued only recently, and for that reason do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the dollar) and are actively
traded in over-the-counter secondary markets. Dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation components:
any collateralized repayment of principal at final maturity; any collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
ZERO COUPON SECURITIES
A Fund investing in "zero coupon" fixed income securities is required to
accrue interest income on these securities at a fixed rate based on the initial
purchase price and the length to maturity, but these securities do not pay
interest in cash on a current basis. Each Fund is required to distribute the
income on these securities to its shareholders as the income accrues, even
though that Fund is not receiving the income in cash on a current basis. Thus,
each Fund may have to sell other investments to obtain cash to make income
distributions. The market value of zero coupon securities is often more volatile
than that of non-zero coupon fixed income securities of comparable quality and
maturity. Zero coupon securities include IO and PO strips.
INDEXED SECURITIES
Indexed Securities are securities the redemption values and/or the coupons
of which are indexed to the prices of a specific instrument or statistic.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to other
securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency- indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which each Fund may invest include so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as short-term market interest rates increase and increase as
short-term market rates decline. Such securities have the effect of providing a
degree of investment leverage, since they will generally increase or decrease in
value in response to changes in market interest rates at a rate which is a
multiple of the rate at which fixed-rate long-term securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed rate
securities.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or broker-dealer for
the purchase of securities at an agreed-upon price on a specified future date. A
Fund may enter into firm commitment agreements with such banks and
broker-dealers with respect to any of the instruments eligible for purchase by
the Fund. A Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
Each such Fund will maintain in a segregated account with its custodian cash,
U.S. Government Securities or other liquid high grade debt obligations in an
amount equal to the Fund's obligations under firm commitment agreements.
LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments are subject to a Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating and
yield could be adversely affected. Loans that are fully secured offer the Fund
more protections than an unsecured loan in the event of non-payment of scheduled
interest of principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the borrower's obligation, or that
the collateral can be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks, and may be highly
speculative. Borrowers that are in bankruptcy or restructuring may never pay off
their indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of emerging countries will also involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
When investing in a loan participation, a Fund will typically have the right
to receive payments only from the lender to the extent the lender receives
payments from the borrower, and not from the borrower itself. Likewise, a Fund
typically will be able to enforce its rights only through the lender, and not
directly against the borrower. As a result, a Fund will assume the credit risk
of both the borrower and the lender that is selling the participation.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, a Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a Fund could be held liable as a co-lender.
In the case of a loan participation, direct debt instruments may also involve a
risk of insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less legal
protection to a Fund in the event of fraud or misrepresentation. In the absence
of definitive regulatory guidance, a Fund may rely on the Manager's research to
attempt to avoid situations where fraud or misrepresentation could adversely
affect the fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by a Fund may include letters of credit,
revolving credit facilities, or other standby financing commitments obligating
the Fund to pay additional cash on demand. These commitments may have the effect
of requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. A Fund will set aside appropriate liquid
assets in a segregated custodial account to cover its potential obligations
under standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL
AGREEMENTS
Certain Funds may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for delivery
in the current month and simultaneously contracts to repurchase substantially
similar (same type and coupon) securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
A Fund which makes such investments will establish segregated accounts with
its custodian in which the Fund will maintain cash, U.S. Government Securities
or other liquid high grade debt obligations equal in value to its obligations in
respect of reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by a Fund may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement or dollar roll
files for bankruptcy or becomes insolvent, a Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party or its
trustee or receiver whether to enforce the Fund's obligation to repurchase the
securities. Reverse repurchase agreements and dollar rolls are not considered
borrowings by a Fund for purposes of a Fund's fundamental investment restriction
with respect to borrowings.
ILLIQUID SECURITIES
Each Fund may purchase "illiquid securities," i.e., securities which may not
be sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
Each Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps, floors and
collars to be illiquid securities. Consequently, while the staff maintains this
position, the Fund will not enter into an equity swap contract or a reverse
equity swap contract or purchase a cap, floor or collar if, as a result of the
investment, the total value (i.e., marked-to-market value) of such investments
(without regard to their notional amount) together with that of all other
illiquid securities which the Fund owns would exceed 15% of the Fund's total
assets.
PURCHASE OF SHARES
Shares of each Fund may be purchased directly from the Trust on any day when
the New York Stock Exchange is open for business (a "business day"). The minimum
for an initial investment in the Trust (which minimum investment may be
allocated among one or more Funds) is $10,000,000, and the minimum for each
subsequent investment is $250,000; provided, however, that, in the Manager's
sole discretion, smaller initial and subsequent investments may be made if the
investor is an employee of the Manager, or the Manager otherwise determines it
is appropriate to permit such investments.
The purchase price of a share of each Fund is (i) the net asset value next
determined after a purchase order is received in good order plus (ii) a premium
established from time to time by the Trust. The following table summarizes the
maximum purchase premiums that each Fund may charge in connection with cash
investments in such Funds:
PURCHASE
FUND PREMIUM
Short-Term Income, Domestic Bond and NONE
Foreign Funds
Currency Hedged International Bond, Value
Allocation, Fundamental Value, International
Bond and Global Bond Funds 0.15%
Core, Tobacco-Free Core, Growth Allocation
and U.S. Sector Allocation Funds 0.17%
Japan Fund and Core Emerging Country
Debt Fund 0.40%
Emerging Country Debt Fund 0.50%
Global Hedged Equity Fund 0.60%
Core II Secondaries, International Core and 0.75%
Currency Hedged International Core Funds
International Small Companies Fund 1.25%
Emerging Markets Fund 1.60%
The Manager will waive the purchase premium if, in the view of the Manager,
there are minimal brokerage and transaction costs incurred in connection with
the purchase. Normally, no purchase premium is charged with respect to in-kind
purchases. In the case of in-kind purchases of each of the International Equity
Funds (except the Global Hedged Equity Fund) involving transfers of large
positions in markets where the costs of re- registration and/or other transfer
expenses are high, the Fund may charge a purchase premium of .10% (.20% in the
case of the Emerging Markets Fund). All purchase premiums are paid to and
retained by the relevant Fund and are intended to cover brokerage and other
expenses of the Fund arising in connection with the purchase.
Shares of each Fund may be purchased either (i) in exchange for securities
on deposit at The Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be exchanged are acceptable, (ii) in cash or (iii) by a
combination of such securities and cash. In all cases, the Manager reserves the
right to reject any particular investment. Securities accepted by the Manager in
exchange for Fund shares will be valued as set forth under "Determination of Net
Asset Value" (generally the last quoted sale price) as of the time of the next
determination of net asset value after such acceptance. All dividends,
subscription or other rights which are reflected in the market price of accepted
securities at the time of valuation become the property of the relevant Fund and
must be delivered to the Trust upon receipt by the investor from the issuer. A
gain or loss for federal income tax purposes may be realized by investors
subject to Federal income taxation upon the exchange, depending upon the
investor's basis in the securities tendered.
The Manager will not approve the acceptance of securities in exchange for
Fund shares unless (1) the Manager, 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; and (3) the securities may be acquired under the investment
restrictions applicable to the relevant Fund. Investors interested in purchases
through exchange should telephone the Manager at (617) 330-7500, Attention:
Shareholder Services.
Investors should call the offices of the Trust before attempting to place an
order for Trust shares. The Trust reserves the right at any time to reject an
order.
For purposes of calculating the purchase price of Trust shares, a purchase
order is received by the Trust on the day that it is "in good order" and is
accepted by the Trust.
For a purchase order to be in "good order" on a particular day, the
investor's consideration must be received before the relevant deadline on that
day. If the investor makes a cash investment, the deadline for wiring Federal
funds to the Trust is 2:00 p.m.; if the investor makes an investment in- kind,
the investor's securities must be placed on deposit at DTC (or such other
depository as is acceptable to the Manager) and 2:00 p.m. is the deadline for
transferring those securities to the account designated by the transfer agent,
Investors Bank & Trust Company, One Lincoln Plaza, Boston, Massachusetts 02205.
Investors should be aware that approval of the securities to be used for
purchase must be obtained from the Manager prior to this time. When the
consideration is received by the Trust after the relevant deadline, the purchase
order is not considered to be in good order and is required to be resubmitted on
the following business day. With the prior consent of the Manager, in certain
circumstances the Manager may, in its discretion, permit purchases based on
receiving adequate written assurances that Federal Funds or securities, as the
case may be, will be delivered to the Trust by 2:00 p.m. on the fourth business
day after such assurances are received.
The International Core Fund may be available through a broker or dealer who
may charge a transaction fee for purchases and redemptions of that Fund's
shares. If shares of the International Core Fund are purchased directly from the
Trust without the intervention of a broker or dealer, no such charge will be
imposed.
PURCHASE PROCEDURES:
(a) Purchase Order Form: The Trust reserves the right to reject any order
for Trust shares. Therefore, investors must submit an application to the Manager
and obtain the Manager's acceptance of the order before it will be considered
"in good order." A Purchase Order Form may be obtained by calling the Trust at
(617) 330-7500, Attention: Shareholder Services. The Order Form may be submitted
to the Manager (i) By Mail to Grantham, Mayo, Van Otterloo & Co., 40 Rowes
Wharf, Boston, MA 02110; Attention: Shareholder Services, or (ii) By Facsimile
to (617) 439-4192; Attention: Shareholder Services.
(b) Acceptance of Order: No purchase order is in "good order" until it has
been accepted by the Manager. Investors should call the Trust (at (617)
330-7500, Attention: Shareholder Services) before attempting to place an order
for Trust shares. If a Purchase Order Form is mailed or faxed to the Trust
without first contacting Shareholder Services, investors should not consider
their order acknowledged until they have received notification from the Trust or
have confirmed receipt of the order by contacting Shareholder Services.
(c) Payment: All Federal funds must be transmitted to Investors Bank & Trust
Company for the account of the specific Fund of GMO Trust as set forth below:
Core Fund Account No. 4001
Tobacco-Free Core Fund Account No. 4008
Value Allocation Fund Account No. 4004
Growth Allocation Fund Account No. 4002
U.S. Sector Allocation Fund Account No. 4014
Core II Secondaries Fund Account No. 4012
Fundamental Value Fund Account No. 4009
International Core Fund Account No. 4006
Currency Hedged International
Core Fund Account No. 4028
International Small Companies Fund Account No. 4010
Japan Fund Account No. 4007
Emerging Markets Fund Account No. 4018
Global Hedged Equity Fund Account No. 4024
Domestic Bond Fund Account No. 4025
Short-Term Income Fund Account No. 4005
International Bond Fund Account No. 4015
Currency Hedged International
Bond Fund Account No. 4026
Global Bond Fund Account No. 4029
Emerging Country Debt Fund Account No. 4021
Core Emerging Country Debt Fund Account No. 4027
Foreign Fund Account No. 4032
"Federal funds" are monies credited to Investors Bank & Trust Company's account
with the Federal Reserve Bank of Boston.
DO NOT SEND CASH, CHECKS OR SECURITIES DIRECTLY TO THE TRUST OR TO THE
MANAGER. Wire transfer and mailing instructions are contained on the Purchase
Order Form which can be obtained from the Manager.
Purchases will be made in full and fractional shares of each Fund calculated
to three decimal places. The Trust will send to shareholders written
confirmation (including a statement of shares owned) at the time of each
transaction. The Manager may attempt to process orders for Trust shares that are
submitted less formally than as described above but, in such cases, the investor
should carefully review confirmations sent by the Trust to verify that the order
was properly executed. The Trust and the Manager can not be responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.
REDEMPTION OF SHARES
Shares of each Fund may be redeemed on any business day in cash or in kind.
The redemption price is the net asset value per share next determined after
receipt of the redemption request in "good order" less any applicable redemption
fee. With the exception of the redemption fees for those Funds set forth in the
table below, there is no redemption fee for cash redemptions of shares of any of
the Funds:
Redemption Fee
(as a percentage of
Fund amount redeemed)
Core II Secondaries Fund 0.75%
International Small Companies Fund 0.75%
Japan Fund 0.70%
Emerging Markets Fund 0.40%*
Global Hedged Equity Fund 1.40%
Emerging Country Debt Fund 0.25%**
* Applies only to shares acquired on or after June 1, 1995 (including shares
acquired through the reinvestment of dividends and other distributions after
such date).
** Applies only to shares acquired on or after July 1, 1995 (including shares
acquired through the reinvestment of dividends and other distributions after
such date).
In addition, the Manager may waive the Redemption Fees stated above if there
are minimal brokerage and transaction costs incurred in connection with the
redemption. To the extent that shares are redeemed at a time when other shares
of the same Fund are being purchased, the Manager will treat the redemption (up
to the amount being concurrently purchased) as involving minimal brokerage and
transaction costs and will charge any redemption fee only with respect to the
excess, if any, of the amount of the redemption over the amount of the
concurrent purchase. If there is more than one redemption at the time of a
concurrent purchase, each of the redeeming shareholders will share, pro rata, in
the reduction in redemption fee caused by the concurrent purchase. There is no
redemption fee on redemptions in-kind. Redemption fees will be retained by the
relevant Fund and are intended to cover brokerage and other expenses of the Fund
arising out of redemptions.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of a 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 securities held by the Fund in
lieu of cash. Securities used to redeem Fund shares in kind will be valued in
accordance with the relevant Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a Fund in kind
will be selected by the Manager 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. Any in-kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
Payment on redemption will be made as promptly as possible and in any event
within seven days after the request for redemption is received by the Trust in
good order. A redemption request is in good order if it includes the exact name
in which shares are registered, the investor's account number and the number of
shares or the dollar amount of shares to be redeemed and if it is signed exactly
in accordance with the form of registration. In addition, for a redemption
request to be in "good order" on a particular day, the investor's request must
be received by the Manager by 4:15 p.m. on a business day. When a redemption
request is received after 4:15 p.m., the redemption request will not be
considered to be in "good order" and is required to be resubmitted on the
following business day. Persons acting in a fiduciary capacity, or on behalf of
a corporation, partnership or trust must specify, in full, the capacity in which
they are acting. The redemption request can be considered "received" by the
Trust only after (i) it is mailed or faxed to the Trust (at the address or
facsimile number set forth above for purchase orders), and (ii) the investor has
confirmed receipt of the request by calling (617) 330-7500, Attention:
Shareholder Services. In-kind distributions will be transferred and delivered as
directed by the investor. Cash payments will be made by transfer of Federal
funds for payment into the investor's account.
When opening an account with the Trust, shareholders will be required to
designate the account(s) to which funds or securities may be transferred upon
redemption. Designation of additional accounts and any change in the accounts
originally designated must be made in writing.
Each Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because the International Funds each hold portfolio
securities listed on foreign exchanges which may trade on days on which the New
York Stock Exchange is closed, the net asset value of such Funds' shares may be
significantly affected on days when shareholders have no access to such Funds.
DETERMINATION OF NET ASSET VALUE
Except on days during which no security is tendered for redemption and no
order to purchase or sell such security is received by the relevant Fund, the
net asset value of a share is determined for each Fund once on each day on which
the New York Stock Exchange is open as of 4:15 p.m., New York City Time, by
dividing the total market value of the Fund's portfolio investments and other
assets, less any liabilities, by the total outstanding shares of the Fund.
Portfolio securities listed on a securities exchange for which market quotations
are available are valued at the last quoted sale price on each business day, or,
if there is no such reported sale, at the most recent quoted bid price. Price
information on listed securities is generally taken from the closing price on
the exchange where the security is primarily traded. Unlisted securities for
which market quotations are readily available are valued at the most recent
quoted bid price, except that debt obligations with sixty days or less remaining
until maturity may be valued at their amortized cost. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees or persons acting at their
direction. The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at current exchange rates or at such other rates as
the Trustees may determine in computing net asset value. Debt securities with a
remaining maturity of 60 days or less will be valued at amortized cost, unless
circumstances dictate otherwise. Circumstances may dictate otherwise, among
other times, when the issuer's creditworthiness has become impaired.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closings of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the International Funds. If an event
materially affecting the value of such foreign securities occurs during such
period, then such securities will be valued at fair value as determined in good
faith by the Trustees or persons acting at their direction.
Because foreign securities, options on foreign securities and foreign
futures are quoted in foreign currencies, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
shares of the International Funds even though there has not been any change in
the values of such securities and options, measured in terms of the foreign
currencies in which they are denominated.
DISTRIBUTIONS
Each Fund intends to pay out as dividends substantially all of its net
investment income (which comes from dividends and interest it receives from its
investments and net short-term capital gains). For these purposes and for
federal income tax purposes, a portion of the premiums from certain expired call
or put options written by a Fund, net gains from certain closing purchase and
sale transactions with respect to such options and a portion of net gains from
other options and futures transactions are treated as short-term capital gain.
Each Fund also intends to distribute substantially all of its net long-term
capital gains, if any, after giving effect to any available capital loss
carryover. With the exception of the International Funds, each Fund's present
policy is to declare and pay distributions of its dividends and interest
quarterly. The policy of each International Fund is to declare and pay
distributions of its dividends, interest and foreign currency gains
semi-annually. Each Fund also intends to distribute net short-term capital gains
and net long-term gains at least annually.
All dividends and/or distributions will be paid in shares of the relevant
Fund, at net asset value, unless the shareholder elects to receive cash. There
is no purchase premium on reinvested dividends or distributions. Shareholders
may make this election by marking the appropriate box on the Purchase Order Form
or by writing to the Trust.
TAXES
Each Fund is treated as a separate taxable entity for federal income tax
purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. So
long as a Fund so qualifies, the Fund itself will not pay federal income tax on
the amount distributed.
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Designated distributions of any long-term capital
gains whether received in cash or reinvested shares are taxable as such to
shareholders subject to federal income tax, regardless of how long a shareholder
may have owned shares in the Fund. Any loss realized upon a taxable disposition
of shares held for six months or less will be treated as long-term capital loss
to the extent of any long-term capital gain distributions received by a
shareholder with respect to those shares. A distribution paid to shareholders by
a Fund in January of a year generally is deemed to have been received by
shareholders on December 31 of the preceding year, if the distribution was
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. The Trust will provide federal tax information
annually, including information about dividends and distributions paid during
the preceding year.
The back-up withholding rules do not apply to tax exempt entities so long as
each such entity furnishes the Trust with an appropriate certification. However,
other shareholders are subject to back-up withholding at a rate of 31% on all
distributions of net investment income and capital gain, whether received in
cash or reinvested in shares of the relevant Fund, and on the amount of the
proceeds of any redemption of Fund shares paid or credited to any shareholder
account for which an incorrect or no taxpayer identification number has been
provided, where appropriate certification has not been provided for a foreign
shareholder, or where the Trust is notified that the shareholder has
underreported income in the past (or the shareholder fails to certify that he is
not subject to such withholding).
The foregoing is a general summary of the federal income tax consequences
for shareholders who are U.S. citizens, residents or domestic corporations.
Shareholders should consult their own tax advisors about the tax consequences of
an investment in a Fund in light of each shareholder's particular tax situation.
Shareholders should also consult their own tax advisors about consequences under
foreign, state, local or other applicable tax laws.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 31% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net long-term capital gains to a
foreign shareholder, and any gain realized upon the sale of Fund shares by such
a shareholder will ordinarily not be subject to U.S. taxation, unless the
recipient or seller is a nonresident alien individual who is present in the
United States for more than 182 days during the taxable year. However, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the total assets of any
Fund is represented by stock of foreign corporations, the Fund intends to make
an election with respect to the relevant Fund which allows shareholders whose
income from the Fund is subject to U.S. taxation at the graduated rates
applicable to U.S. citizens, residents or domestic corporations to claim a
foreign tax credit or deduction (but not both) on their U.S. income tax return.
In such case, the amounts of foreign income taxes paid by the Fund would be
treated as additional income to Fund shareholders from non-U.S. sources and as
foreign taxes paid by Fund shareholders. Investors should consult their tax
advisors for further information relating to the foreign tax credit and
deduction, which are subject to certain restrictions and limitations.
Shareholders of any of the International Funds whose income from the Fund is not
subject to U.S. taxation at the graduated rates applicable to U.S. citizens,
residents or domestic corporations may receive substantially different tax
treatment of distributions by the relevant Fund, and may be disadvantaged as a
result of the election described in this paragraph.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company, the Fund may be required to recognize unrealized gains, pay taxes on
such gains, and make certain distributions.
MANAGEMENT OF THE TRUST
Each Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co., 40
Rowes Wharf, Boston, Massachusetts 02110 (the "Manager") which provides
investment advisory services to a substantial number of institutional and other
investors, including one other registered investment company. Each of the
following four general partners holds a greater than 5% interest in the Manager:
R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley Durant.
Under separate Management Contracts with the Trust, the Manager selects and
reviews each Fund's investments and provides executive and other personnel for
the management of the Trust. Pursuant to the Trust's Agreement and Declaration
of Trust, the Board of Trustees supervises the affairs of the Trust as conducted
by the Manager. In the event that the Manager ceases to be the manager of any
Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn.
The Manager has entered into a Consulting Agreement (the "Consulting
Agreement") with Dancing Elephant, Ltd., 1936 University Avenue, Berkeley,
California 94704 (the "Consultant), with respect to the management of the
portfolio of the Emerging Markets Fund. The Consultant is wholly-owned by Mr.
Arjun Divecha. Under the Consulting Agreement, the Manager pays the Consultant a
monthly fee at an annual rate equal to the greater of 0.50% of the Fund's
average daily net assets or $500,000. The Consultant may from time to time waive
all or a portion of its fee. Payments made by the Manager to the Consultant will
not affect the amounts payable by the Fund to the Manager or the Fund's expense
ratio.
Each Management Contract provides for payment to the Manager of a monthly
fee at the stated annual rates set forth under Schedule of Fees and Expenses.
While the fee paid to the Manager by each of the Fundamental Value Fund, the
International Core Fund, the Currency Hedged International Core Fund, the
Foreign Fund, the International Small Companies Fund, the Japan Fund and the
Emerging Markets Fund is higher than that paid by most funds, each is comparable
to the fees paid by many funds with similar investment objectives. In addition,
with respect to each Fund, the Manager has voluntarily agreed to waive its fee
and to bear certain expenses until further notice in order to limit each Fund's
annual expenses to specified limits (with certain exclusions). These limits and
the terms applicable to them are described under Schedule of Fees and Expenses.
During the fiscal year ended February 28, 1995, the Manager received, as
compensation for advisory services rendered in such year (after waiver), the
percentages of each Fund's average net assets as set forth below:
Fund % of Average Net Assets
Core Fund 0.45%
Tobacco-Free Core Fund 0.23%
Value Allocation Fund 0.56%
Growth Allocation Fund 0.42%
U.S. Sector Allocation Fund 0.40%
Core II Secondaries Fund 0.39%
Fundamental Value Fund 0.68%
International Core Fund 0.61%
International Small Companies Fund 0.47%
Japan Fund 0.72%
Emerging Markets Fund 1.00%
Global Hedged Equity Fund 0.62%
Domestic Bond Fund 0.19%
Short-Term Income Fund 0.06%
International Bond Fund 0.19%
Currency Hedged International Bond Fund 0.31%
Emerging Country Debt Fund 0.42%
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Ms. Jody Shuman Meslin
are primarily responsible for the day-to-day management of the portfolio of each
of the Core Fund, the Tobacco-Free Core Fund, the Growth Allocation Fund, the
U.S. Sector Allocation Fund, and the Core II Secondaries Fund. Each has served
in this capacity for more than five years. Mr. William L. Nemerever and Mr.
Thomas F. Cooper are primarily responsible for the day-to-day management of the
Fixed Income Funds. Each of Messrs. Nemerever and Cooper has served in this
capacity since the inception of all of these Funds except the Short-Term Income
Fund. Messrs. Nemerever and Cooper have served as the managers of the Short-Term
Income Fund since 1993. Prior to 1993, the Short-Term Income Fund was managed by
Mr. Robert Brokaw. Mr. Richard A. Mayo has been primarily responsible for the
day-to-day management of the portfolio of the Fundamental Value Fund since the
inception of the Fund. Mr. Mayo and Mr. Christopher Darnell have been primarily
responsible for the day-to-day management of the portfolio of the Value
Allocation Fund since the inception of the Fund. Mr. Grantham, Mr. Forrest
Berkley and Ms. Doris Chu have been primarily responsible for the day-to-day
management of the portfolio of each of the Currency Hedged International Core
Fund, the International Small Companies Fund, the Japan Fund and the Global
Hedged Equity Fund since inception of the Funds and have served as managers of
the International Core Fund for the last five years. Mr. Arjun Bhagwan Divecha
has been primarily responsible for the day-to-day management of the portfolio of
the Emerging Markets Fund since the inception of the Fund. Day-to-day management
of the portfolio of the Foreign Fund is the responsibility of a committee and no
person or persons is primarily responsible for making recommendations to that
committee.
Mr. Grantham and Mr. Mayo are both founding partners of the Manager and have
been employed by the Manager in equity and fixed-income portfolio management
since its inception in 1977. Mr. Grantham serves as President - Domestic
Quantitative and Mr. Mayo serves as President - Domestic Active of the Trust.
Ms. Meslin has been employed by the Manager principally in equity portfolio
management for more than ten years. Mr. Darnell has been employed by the Manager
since 1979 and has been involved in equity portfolio management for more than
ten years. Mr. Berkley and Ms. Chu have each been employed by the Manager for
more than eight years and have each been involved in portfolio management
(principally of international equities) for more than six years. Mr. Nemerever
and Mr. Cooper have been employed by the Manager in fixed-income portfolio
management since October, 1993. For the five years prior to October, 1993, Mr.
Nemerever was employed by Boston International Advisors and Fidelity Management
Trust Company in fixed-income portfolio management. For the five years prior to
October, 1993, Mr. Cooper was employed by Boston International Advisors, Goldman
Sachs Asset Management and Western Asset Management in fixed-income portfolio
management. Mr. Divecha is the sole shareholder and President of the Consultant
which he began to organize in September 1993. From 1981 until September 1993,
Mr. Divecha was employed by BARRA and during this period he was involved in
equity portfolio management for more than five years.
ORGANIZATION AND CAPITALIZATION
OF THE TRUST
The Trust was established on June 24, 1985 as a business trust under
Massachusetts law. The Trust has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series of such shares, and which are presently divided into
twenty-four series of shares: one for each Fund, one for the Pelican Fund and
one for each of the REIT Fund and the Conservative Equity Fund which are both
currently inactive. All shares of all series are entitled to vote at any
meetings of shareholders. The Trust does not generally hold annual meetings of
shareholders and will do so only when required by law. Matters submitted to
shareholder vote must be approved by each Fund separately except (i) when
required by the 1940 Act shares shall be voted together as a single class and
(ii) when the Trustees have determined that the matter does not affect a Fund,
then only shareholders of the Fund(s) affected shall be entitled to vote on the
matter. Shares are freely transferable, are entitled to dividends as declared by
the Trustees, and, in liquidation of the Trust, are entitled to receive the net
assets of their Fund, but not of any other Fund. Shareholders holding a majority
of the outstanding shares of all series may remove Trustees from office by votes
cast in person or by proxy at a meeting of shareholders or by written consent.
On October 13, 1995, the following shareholders held greater than 25% of the
outstanding shares of the series noted below:
Fund Shareholders
Tobacco-Free Core Fund Dewitt Wallace - Reader's
Digest Fund, Inc.; Lila
Wallace - Reader's Digest
Fund, Inc.
U.S. Sector Allocation Fund John D. MacArthur &
Catherine T. MacArthur
Foundation
Fundamental Value Fund Yale University; Leland
Stanford Junior University II
Japan Fund International Monetary Staff
Retirement Fund; Brown
University
Domestic Bond Fund Bankers Trust Company as
Trustee, GTE Service Corp.
Pension Trust; Bost & Co./
Bell Atlantic
Short-Term Income Fund MJH Foundation
Currency Hedged Bankers Trust Company as
International Bond Fund Trustee, GTE Service
Pension Trust
Global Hedged Equity Fund Bankers Trust Company as
Trustee, GTE Service
Corp. Pension Trust
As a result, such shareholders may be deemed to "control" their respective
series as such term is defined in the 1940 Act.
Shareholders could, under certain circumstances, be held personally liable
for the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of that liability is considered remote since it may
arise only in very limited circumstances.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to the Trust
c/o Grantham, Mayo, Van Otterloo & Co.,
40 Rowes Wharf, Boston, MA 02110
(1-617-330-7500)
APPENDIX A
RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS
Limitations on the Use of Options and Futures Portfolio Strategies. As noted
in "Descriptions and Risks of Fund Investment Practices--Futures and Options"
above, the Funds may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, each such
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Funds' ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options and futures with respect to currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes set forth above. Furthermore, each Fund's ability to engage in
options and futures transactions may be limited by tax considerations.
Risk Factors in Options Transactions. The option writer has no control over
when the underlying securities or futures contract must be sold, in the case of
a call option, or purchased, in the case of a put option, since the writer may
be assigned an exercise notice at any time prior to the termination of the
obligation. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security or futures contract during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security or futures contract. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security or futures contract
at the exercise price, which will usually exceed the then market value of the
underlying security or futures contract.
An exchange-traded option may be closed out only on a national securities
exchange ("Exchange") which generally provides a liquid secondary market for an
option of the same series. An over-the-counter option may be closed out only
with the other party to the option transaction. If a liquid secondary market for
an exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund holding the option would have to exercise the option in order to realize
any profit. For example, in the case of a written call option, if the Fund is
unable to effect a closing purchase transaction in a secondary market (in the
case of a listed option) or with the purchaser of the option (in the case of an
over-the-counter-option), the Fund will not be able to sell the underlying
security (or futures contract) until the option expires or it delivers the
underlying security (or futures contract) upon exercise. Reasons for the absence
of a liquid secondary market on an Exchange include the following: (i) there may
be insufficient trading interest in certain options; (ii) restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that Exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange should continue to be
exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
Risk Factors in Futures Transactions. Investment in futures contracts
involves risk. If the futures are used for hedging, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or currency being hedged. The correlation
is higher between price movements of futures contracts and the instrument
underlying that futures contract. The correlation is lower when futures are used
to hedge securities other than such underlying instrument, such as when a
futures contract on an index of securities is used to hedge a single security, a
futures contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency (e.g., the German Mark) is used to hedge a security denominated
in another currency (e.g., the Spanish Peseta). In the event of an imperfect
correlation between a futures position and a portfolio position (or anticipated
position) which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
always possible to hedge fully or perfectly against currency fluctuations
affecting the value of the securities denominated in foreign currencies because
the value of such securities also is likely to fluctuate as a result of
independent factors not related to currency fluctuations. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.
As noted in the Prospectus, a Fund may also purchase futures contracts (or
options thereon) as an anticipatory hedge against a possible increase in the
price of currency in which is denominated the securities the Fund anticipates
purchasing. In such instances, it is possible that the currency may instead
decline. If the Fund does not then invest in such securities because of concern
as to possible further market and/or currency decline or for other reasons, the
Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. Short positions in index
futures may be closed out only by entering into a futures contract purchase on
the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless a
Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realized in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
Risk Factors in Swap Contracts, OTC Options and other Two-Party Contracts. A
Fund may only close out a swap, contract for differences, cap floor or collar or
OTC option, with the particular counterparty. Also, if the counterparty
defaults, a Fund will have contractual remedies pursuant to the agreement
related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, a Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor subject to the oversight of the Trustees, the creditworthiness
of contract counterparties and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard and Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the counterparty may be adversely affected by larger-than-average
volatility in the markets, even if the counterparty's net market exposure is
small relative to its capital. The management of caps, floors, collars and swaps
may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.
Additional Regulatory Limitations on the Use of Futures and Related
Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency
Swap Contracts. In accordance with CFTC regulations, investments by any Fund as
provided in the Prospectus in futures contracts and related options for purposes
other than bona fide hedging are limited such that the aggregate amount that a
Fund may commit to initial margin on such contracts or premiums on such options
may not exceed 5% of that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective
obligations under equity swap contracts, reverse equity swap contracts or Index
Futures are senior securities and, accordingly, the Fund will not treat them as
being subject to its borrowing restrictions. However, the net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each equity swap contract will be accrued on a daily basis and an amount of
cash, U.S. Government Securities or other high grade debt obligations having an
aggregate market value at least equal to the accrued excess will be maintained
in a segregated account by the Fund's custodian. Likewise, when a Fund takes a
short position with respect to an Index Futures contract the position must be
covered or the Fund must maintain at all times while that position is held by
the Fund, cash, U.S. government securities or other high grade debt obligations
in a segregated account with its custodian, in an amount which, together with
the initial margin deposit on the futures contract, is equal to the current
delivery or cash settlement value.
The use of unsegregated futures contracts, related written options,
interest rate floors, caps and collars and interest rate and currency swap
contracts for risk management by a Fund permitted to engage in any or all of
such practices is limited to no more than 10% of a Fund's total net assets when
aggregated with such Fund's traditional borrowings in accordance with SEC
pronouncements. This 10% limitation applies to the face amount of unsegregated
futures contracts and related options and to the amount of a Fund's net payment
obligation that is not segregated against in the case of interest rate floors,
caps and collars and interest rate and currency swap contracts.
APPENDIX B
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's Corporation ("Standard &
Poor's") are current assessments of the likelihood of timely payment of debts
having original maturities of no more than 365 days. Commercial paper rated A-1
by Standard & Poor's indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Commercial paper
rated A-2 by Standard and Poor's indicates that capacity for timely payment on
issues is strong. However, the relative degree of safety is not as high as for
issues designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternate liquidity is maintained.
CORPORATE DEBT RATINGS
Standard & Poor's Corporation. A Standard & Poor's corporate debt rating is
a current assessment of the creditworthiness of an obligor with respect to a
specific obligation. The following is a summary of the ratings used by Standard
& Poor's for corporate debt:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
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 - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc. The following is a summary of the ratings
used by Moody's Investor Services, Inc. for corporate debt:
AAA - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.1
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.1
BAA - Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
BA - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
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 a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols 1Aa1,
A1, Baa1, and B1.
GRANTHAM, MAYO, VAN OTTERLOO & CO.
40 ROWES WHARF, BOSTON, MA 02110
(617) 330-7500
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 29, 1996
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated February 29, 1996, as
amended from time to time and should be read in conjunction therewith. A copy of
the Prospectus may be obtained from GMO Trust, 40 Rowes Wharf, Boston,
Massachusetts 02110.
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Table of Contents
Caption Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES.................................................................................1
MISCELLANEOUS INVESTMENT PRACTICES................................................................................1
INVESTMENT RESTRICTIONS...........................................................................................2
INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS...................................................................5
MANAGEMENT OF THE TRUST...........................................................................................7
INVESTMENT ADVISORY AND OTHER SERVICES............................................................................8
PORTFOLIO TRANSACTIONS...........................................................................................13
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.................................................................15
FINANCIAL STATEMENTS.............................................................................................26
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objectives and policies of each Fund are described in
the Prospectus. Unless otherwise indicated in the Prospectus or this Statement
of Additional Information, the investment objective and policies of the Funds
may be changed without shareholder
approval.
MISCELLANEOUS INVESTMENT PRACTICES
Index Futures. As stated in the Prospectus under the heading
"Descriptions and Risks of Fund Investment Practices -- Futures and Options,"
each of the Funds may purchase futures contracts on various securities indices
("Index Futures"). As indicated in the Prospectus, an Index Future is a contract
to buy or sell an integral number of units of the particular stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the value from time to time of the relevant index. Entering into a contract
to buy units is commonly referred to as buying or purchasing a contract or
holding a long position in the relevant index.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if a Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
Index Futures in which a Fund may invest typically can be traded
through all major commodity brokers and trades are currently effected on the
exchanges described in the Prospectus. A Fund may close open positions on the
futures exchange on which Index Futures are then traded at any time up to and
including the expiration day. All positions which remain open at the close of
the last business day of the contract's life are required to settle on the next
business day (based upon the value of the relevant index on the expiration day)
with settlement made, in the case of S&P 500 Index Futures, with the Commodities
Clearing House. Because the specific procedures for trading foreign stock Index
Futures on futures exchanges are still under development, additional or
different margin requirements as well as settlement procedures may be applicable
to foreign stock Index Futures at the time a Fund purchases foreign stock Index
Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the S&P 500 Index and futures markets.
Secondly, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions. In addition, trading hours for foreign stock Index
Futures may not correspond perfectly to hours of trading on the foreign exchange
to which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to any Fund:
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of the Fund's total assets (not
including the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the meeting
of redemption requests (not for leverage) which might otherwise require
the untimely disposition of portfolio investments or for extraordinary
or emergency purposes. Such borrowings will be repaid before any
additional investments are purchased.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of the Fund's total assets (taken at cost) and
then only to secure borrowings permitted by Restriction 1 above. (The
deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options,
respectively, is not deemed to be a pledge or other encumbrance.) (For
the purposes of this restriction, collateral arrangements with respect
to the writing of options, stock index, interest rate, currency or
other futures, options on futures contracts and collateral arrangements
with respect to initial and variation margin are not deemed to be a
pledge or other encumbrance of assets.)
(3) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. (For this purpose, the deposit or payment of initial or
variation margin in connection with futures contracts or related
options transactions is not considered the purchase of a security on
margin.)
(4) Make short sales of securities or maintain a short
position for the Fund's account unless at all times when a short
position is open the Fund owns an equal amount of such securities or
owns securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue
as, and equal in amount to, the securities sold short.
(5) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(6) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, including securities
of real estate investment trusts, and may purchase securities which are
secured by interests in real estate.
(7) Make loans, except by purchase of debt obligations or by
entering into repurchase agreements or, through the lending of the
Fund's portfolio
securities.
Loans of portfolio securities may be made with respect to up to 100% of
a Fund's total assets in the case of each Fund (except the
International Core and Currency Hedged International Core Funds), and
with respect to not more than 25% of total assets in the case of each
of the International Core and Currency Hedged International Core Funds.
(8) Invest in securities of any issuer if, to the knowledge of
the Trust, officers and Trustees of the Trust and officers and partners
of Grantham, Mayo, Van Otterloo & Co. (the "Manager") who beneficially
own more than 1/2 of 1% of the securities of that issuer together
beneficially own more than 5%.
(9) Concentrate more than 25% of the value of its total assets
in any one industry (except that, as described in the Prospectus, the
Short-Term Income Fund may invest up to 100% of its assets in
obligations issued by banks, and the REIT Fund may invest more than 25%
of its assets in real estate-related securities).
(10) Invest in securities of other investment companies,
except by purchase in the open market involving only customary brokers'
commissions. For purposes of this restriction, foreign banks or their
agents or subsidiaries are not considered investment companies. (Under
the Investment Company Act of 1940 (the "Investment Company Act") no
registered investment company may (a) invest more than 10% of its total
assets (taken at current value) in securities of other investment
companies, (b) own securities of any one investment company having a
value in excess of 5% of its total assets (taken at current value), or
(c) own more than 3% of the outstanding voting stock of any one
investment company.)
(11) Purchase or sell commodities or commodity contracts,
except that the Funds (other than the Short-Term Income Fund) may
purchase and sell financial futures
contracts and options thereon.
(12) Except for the Global Bond Fund, the International Bond
Fund, the Domestic Bond Fund, the Currency Hedged International Bond
Fund, the Currency Hedged International Core Fund, the Foreign Fund,
the REIT Fund, the Global Hedged Equity Fund, the Emerging Country Debt
Fund and the Core Emerging Country Debt Fund, invest in (a) securities
which at the time of such investment are not readily marketable, (b)
securities the disposition of which is restricted under federal
securities laws, and (c) repurchase agreements maturing in more than
seven days if, as a result, more than 10% of the Fund's total assets
(taken at current value) would then be invested in securities described
in (a), (b) and (c) above.
(13) In addition to the foregoing, it is a fundamental policy
that none of the Core Fund, the Japan Fund, the Core II Secondaries
Fund, the Fundamental Value Fund, the Tobacco-Free Core Fund, the
International Core Fund or the Currency Hedged International Core Fund
will acquire more than 10% of the voting securities of any issuer.
(14) Issue senior securities, as defined in the 1940 Act and
as amplified by rules, regulations and pronouncements of the SEC. Under
appropriate circumstances, the SEC takes the position that none of the
following is deemed to be a senior security: any swap contract or
contract from differences; any pledge or encumbrance of assets
permitted by restriction 2 above; any borrowing permitted by
restriction 1 above; any collateral arrangements with respect to
initial and variational margin; and the purchase or sale of options,
forward contracts, futures contracts or options on futures contracts.
Notwithstanding the latitude permitted by Restrictions 1, 2, 4 and 6
above, no Fund has any current intention of (a) borrowing money, (b) entering
into short sales or (c) investing in real estate investment trusts (with the
exception of the REIT Fund).
It is contrary to the present policy of all the Funds, which may be
changed by the Trustees without shareholder approval, to:
(a) Invest in warrants or rights excluding options (other than
warrants or rights acquired by the Fund as a part of a unit or attached
to securities at the time of purchase) except that the International
Funds (other than the International Bond Fund) may invest in such
warrants or rights so long as the aggregate value thereof (taken at the
lower of cost or market) does not exceed 5% of the value of the Fund's
total net assets; provided that within this 5%, not more than 2% of its
net assets may be invested in warrants that are not listed on the New
York or American Stock Exchange or a recognized foreign exchange.
(b) Invest in securities of an issuer, which, together with
any predecessors or controlling persons, has been in operation for less
than three consecutive years if, as a result, the aggregate of such
investments would exceed 5% of the value of the Fund's net assets;
except that this restriction shall not apply to any obligation of the
U.S. Government or its instrumentalities or agencies; and except that
this restriction shall not apply to the investments of the Japan Fund.
(c) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(d) Make investments for the purpose of gaining control of a
company's management.
(e) In the case of the International Bond Fund, the Domestic
Bond Fund, the Currency Hedged International Bond Fund, the Foreign
Fund, the REIT Fund, the Global Hedged Equity Fund, and Emerging
Country Debt Fund and the Core Emerging Country Debt Fund, purchase
securities restricted as to resale, if, as a result, such investments
would exceed 15% of the value of the Fund's net assets, excluding
restricted securities that have been determined by the Trustees of the
Fund (or the person designated by them to make such determinations) to
be readily marketable.
Except as indicated above in Restriction No. 1, all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of that Fund, or (2) 67% or more of the
shares of that Fund present at a meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy.
INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to so qualify, the Fund must, among other things, (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, and gains from the sale of stock, securities and
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income from gains from the sale or other disposition of securities and
certain other assets (including certain foreign currency contracts) held for
less than three months; (c) distribute at least 90% of its dividend, interest
and certain other income (including, in general, short-term capital gains) each
year; and (d) diversify its holdings so that, at the end of each fiscal quarter
(i) at least 50% of the market value of the Fund's assets is represented by cash
items, U.S. Government securities, securities of other regulated investment
companies, and other securities, limited in respect of any one issuer to a value
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades or businesses. So long as a Fund qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income paid to its shareholders in the form of dividends
or capital gain distributions.
The tax status of each Fund and the distributions which it may make are
summarized in the Prospectus under the heading "Taxes." Each Fund intends to pay
out substantially all of its ordinary income and net short-term capital gains,
and to distribute substantially all of its net capital gain, if any, after
giving effect to any available capital loss carry-over. Net capital gain is the
excess of net long-term capital gain over net short-term capital loss. It is the
policy of each Fund to make distributions sufficient to avoid the imposition of
a 4% excise tax on certain undistributed amounts. The recognition of certain
losses upon the sale of shares of a Fund may be limited to the extent
shareholders dispose of shares of one Fund and invest in shares of the same or
another Fund.
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert short-term capital gains or losses into long-term capital
gains or losses. Qualification segments noted above may restrict the Fund's
ability to engage in these transactions, and these transactions may affect the
amount, timing and character of distributions to shareholders.
Investment by the International Funds in certain "passive foreign
investment companies" could subject a Fund to a U.S. federal income tax or other
charge on distributions received from or the sale of its investment in such a
company, which tax cannot be eliminated by making distributions to Fund
shareholders. If the Fund elects to treat a passive foreign investment company
as a "qualified electing fund," or elects the mark-to-market election under
proposed regulation 1291.8, different rules would apply, although the Fund does
not currently expect to be in the position to make such elections.
In general, all dividends derived from ordinary income and short-term
capital gain are taxable to investors as ordinary income (subject to special
rules concerning the extent of the dividends received deduction for
corporations) and long-term capital gain distributions are taxable to investors
as long-term capital gains, whether such dividends or distributions are received
in shares or cash. Tax exempt organizations or entities will generally not be
subject to federal income tax on dividends or distributions from a Fund, except
certain organizations or entities, including private foundations, social clubs,
and others, which may be subject to tax on dividends or capital gains. Each
organization or entity should review its own circumstances and the federal tax
treatment of its income.
The dividends-received deduction for corporations will generally apply
to a Fund's dividends paid from investment income to the extent derived from
dividends received by the
Fund from domestic corporations.
Certain of the Funds which invest in foreign securities may be subject
to foreign withholding taxes on income and gains derived from foreign
investments. Such taxes would reduce the yield on the Trust's investments, but,
as discussed in the Prospectus, may be taken as either a deduction or a credit
by U.S. citizens and corporations if the Fund makes the election described in
the Prospectus.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. Jeremy Grantham*. President-Domestic Quantitative and Trustee of the Trust.
Partner, Grantham, Mayo, Van Otterloo & Co. (investment adviser).
Harvey R. Margolis. Trustee of the Trust. Mathematics Professor, Boston College.
Eyk del Mol Van Otterloo*. President-International and Trustee of the Trust.
Partner, Grantham, Mayo, Van Otterloo & Co.
Richard Mayo*. President-Domestic Active of the Trust. Partner, Grantham, Mayo,
Van Otterloo & Co.
Kingsley Durant*. Vice President, Treasurer and Secretary of the Trust. Partner,
Grantham, Mayo, Van Otterloo & Co.
Susan Randall Harbert*. Secretary and Assistant Treasurer of the Trust. Partner,
Grantham, Mayo, Van Otterloo & Co.
William R. Royer, Esq.*. Clerk of the Trust. General Counsel, Grantham, Mayo,
Van Otterloo & Co. (January, 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September, 1992 - January, 1995).
*Deemed to be an "interested person" of the Trust and the Manager, as defined by
the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. The Trustees and officers of
the Trust as a group own less than 1% of any class of outstanding shares of the
Trust.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they
have held different positions with such employers.
The Manager pays the Trustees other than those who are interested
persons an annual fee of $40,000. Harvey Margolis is currently the only Trustee
who is not an interested person, and thus the only Trustee compensated directly
by the Trust. No other Trustee receives any direct compensation from the Trust
or any series thereof.
Messrs. Grantham, Van Otterloo, Mayo and Durant, as partners of the
Manager, will benefit from the management fees paid by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Fund," under separate Management Contracts (each a "Management Contract")
between the Trust and Grantham, Mayo, Van Otterloo & Co. (the "Manager"),
subject to such policies as the Trustees of the Trust may determine, the Manager
will furnish continuously an investment program for each Fund and will make
investment decisions on behalf of the Fund and place all orders for the purchase
and sale of portfolio securities. Subject to the control of the Trustees, the
Manager also manages, supervises and conducts the other affairs and business of
the Trust, furnishes office space and equipment, provides bookkeeping and
certain clerical services and pays all salaries, fees and expenses of officers
and Trustees of the Trust who are affiliated with the Manager. As indicated
under "Portfolio Transactions --Brokerage and Research Services," the Trust's
portfolio transactions may be placed with broker-dealers which furnish the
Manager, at no cost, certain research, statistical and quotation services of
value to the Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager's compensation will be
reduced to the extent that any Fund's annual expenses incurred in the operation
of the Fund (including the management fee but excluding brokerage commissions,
extraordinary expenses (including taxes), securities lending fees and expenses
and transfer taxes; and, in the case of the Japan Fund, Emerging Markets Fund,
Foreign Fund and Global Hedged Equity Fund, excluding custodial fees; and in the
case of the Global Hedged Equity Fund only, also excluding hedging transaction
fees) would exceed the percentage of the Fund's average daily net assets
described therein. Because the Manager's compensation is fixed at an annual rate
equal to this expense limitation, it is expected that the Manager will pay such
expenses (with the exceptions noted) as they arise. In addition, the Manager's
compensation under the Management Contract is subject to reduction to the extent
that in any year the expenses of the relevant Fund exceed the limits on
investment company expenses imposed by any statute or regulatory authority of
any jurisdiction in which shares of such Fund are qualified for offer and sale.
The term "expenses" is defined in the statutes or regulations of such
jurisdictions, and, generally speaking, excludes brokerage commissions, taxes,
interest and extraordinary expenses. No Fund is currently subject to any state
imposed limit on expenses.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and
duties.
Each Management Contract was approved by the Trustees of the Trust
(including the Trustee who is not an "interested person" of the Manager) and by
the relevant Fund's sole shareholder in connection with the organization of the
Trust and the establishment of the Funds. Each Management Contract will continue
in effect for a period more than two years from the date of its execution only
so long as its continuance is approved at least annually by (i) vote, cast in
person at a meeting called for that purpose, of a majority (or one, if there is
only one) of those Trustees who are not "interested persons" of the Manager or
the Trust, and by (ii) the majority vote of either the full Board of Trustees or
the vote of a majority of the outstanding shares of the relevant Fund. Each
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, each
Management Contract may be terminated on not more than 60 days' written notice
by the Manager to the Trust.
In the last three fiscal years the Funds have paid the following
amounts as Management Fees to the Manager pursuant to the relevant Management
Contract:
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Gross Reduction Net
CORE FUND
<S> <C> <C> <C>
Year ended 2/28/95 $10,703,745 $1,492,476 $ 9,211,269
Year ended 2/28/94 $ 9,872,383 $1,323,098 $ 8,549,285
Year ended 2/26/93 $12,080,377 $1,424,465 $10,655,912
INTERNATIONAL CORE FUND
Year ended 2/28/95 $19,964,039 $3,849,845 $16,114,194
Year ended 2/28/94 $12,131,276 $2,974,235 $ 9,157,041
Year ended 2/26/93 $ 4,498,002 $1,290,142 $ 3,207,860
GROWTH ALLOCATION FUND
Year ended 2/28/95 $ 1,063,102 $ 162,479 $ 900,623
Year ended 2/28/94 $ 732,330 $ 136,305 $ 596,025
Year ended 2/26/93 $ 1,009,458 $ 143,307 $ 866,151
SHORT-TERM INCOME FUND
Year ended 2/28/95 $ 32,631 $ 24,693 $ 7,938
Year ended 2/28/94 $ 25,648 $ 25,012 $ 636
Year ended 2/26/93 $ 31,464 $ 31,464 $ 0
JAPAN FUND
Year ended 2/28/95 $ 3,394,922 $ 113,442 $ 3,281,480
Year ended 2/28/94 $ 2,985,621 $ 116,523 $ 2,869,098
Year ended 2/26/93 $ 1,827,062 $ 120,816 $ 1,706,246
VALUE ALLOCATION FUND
Year ended 2/28/95 $ 3,144,806 $ 612,779 $ 2,532,027
Year ended 2/28/94 $ 7,860,120 $1,319,736 $ 6,540,384
Year ended 2/26/93 $ 6,383,292 $1,109,271 $ 5,274,021
TOBACCO-FREE CORE FUND
Year ended 2/28/95 $ 260,209 $ 140,422 $ 119,787
Year ended 2/28/94 $ 285,625 $ 123,056 $ 162,569
Year ended 2/26/93 $ 462,477 $ 144,724 $ 317,753
FUNDAMENTAL VALUE FUND
Year ended 2/28/95 $ 1,297,348 $ 118,250 $ 1,179,098
Year ended 2/28/94 $ 847,075 $ 131,219 $ 715,856
Year ended 2/26/93 $ 302,376 $ 119,657 $ 182,719
CORE II SECONDARIES FUND
Year ended 2/28/95 $ 865,852 $ 187,546 $ 678,306
Year ended 2/28/94 $ 626,163 $ 154,249 $ 471,914
Year ended 2/26/93 $ 414,388 $ 132,039 $ 282,349
INTERNATIONAL SMALL COMPANIES FUND
Year ended 2/28/95 $ 2,184,055 $1,368,080 $ 815,975
Year ended 2/28/94 $ 833,440 $ 625,615 $ 207,825
Year ended 2/26/93 $ 366,646 $ 320,728 $ 45,918
U.S. SECTOR ALLOCATION FUND
Year ended 2/28/95 $ 934,108 $ 179,986 $ 754,122
Year ended 2/28/94 $ 848,089 $ 141,400 $ 706,689
Commencement of
Operations $ 125,141 $ 61,672 $ 63,469
(1/04/93) - 2/26/93
INTERNATIONAL BOND FUND
Year ended 2/28/95 $ 345,558 $ 181,243 $ 164,315
Commencement of
Operations $ 23,776 $ 23,776 $ 0
(12/22/93) - 2/28/94
EMERGING MARKETS FUND
Year ended 2/28/95 $ 3,004,553 $ 0 $ 3,004,553
Commencement of
Operations $ 158,043 $ 18,574 $ 139,469
(12/8/93) - 2/28/94
EMERGING COUNTRY DEBT FUND
Commencement of
Operations $ 417,918 $ 174,820 $ 243,098
(4/19/94) - 2/28/95
GLOBAL HEDGED EQUITY FUND
Commencement of
Operations $ 324,126 $ 80,409 $ 243,717
(7/29/94) - 2/28/95
DOMESTIC BOND FUND
Commencement of
Operations $ 95,643 $ 68,732 $ 26,911
(8/18/94) - 2/28/95
CURRENCY HEDGED INTERNATIONAL BOND FUND
Commencement of
Operations $ 306,031 $ 173,302 $ 132,729
(9/30/94) - 2/28/95
</TABLE>
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), One
Lincoln Plaza, Boston, Massachusetts 02205, and Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109 serve as the Trust's
custodians on behalf of the Funds. As such, IBT or BBH holds in safekeeping
certificated securities and cash belonging to a Fund and, in such capacity, is
the registered owner of securities in book-entry form belonging to a Fund. Upon
instruction, IBT or BBH receives and delivers cash and securities of a Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. Each of IBT and
BBH also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of each
Fund on a daily basis. The Japan Fund pays its own custodial charges. The
Manager has voluntarily agreed with the Trust to reduce its management fees and
to bear certain expenses with respect to each Fund until further notice to the
extent that a Fund's total annual operating expenses (excluding brokerage
commissions, extraordinary expenses (including taxes), securities lending fees
and expenses and transfer taxes; and, in the case of the Foreign Fund, Japan
Fund, Emerging Markets Fund and Global Hedged Equity Fund, excluding custodial
fees; and, in the case of the Global Hedged Equity Fund only, also excluding
hedging transaction fees) would otherwise exceed the percentage of that Fund's
daily net assets specified in the Prospectus ("Schedule of Fees and Expenses").
Therefore so long as the Manager agrees so to reduce its fee and bear certain
expenses, total annual operating expenses (subject to such exclusions,) of the
Fund will not exceed this stated limitation. The Manager has also agreed with
respect to the Emerging Markets Fund that, until further notice, it will limit
its management fee with respect to this Fund to 0.98% regardless of the total
operating expenses of the Fund. Absent such agreement by the Manager to waive
its fees, management fees for each Fund and the annual operating expenses for
each Fund would be as stated in the Prospectus.
Independent Accountants. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts annual audits of the Trust's financial statements,
assists in the preparation of each Fund's federal and state income tax returns,
consults with the Trust as to matters of accounting and federal and state income
taxation and provides assistance in connection with the preparation of various
Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account's being
preferred over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash, will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the Domestic Funds with primary market makers unless better prices or
executions are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
During the three most recent fiscal years, the Trust paid, on behalf of
the Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
1993 1994 1995 TOTAL
<S> <C> <C> <C> <C>
Core Fund $2,470,801 $1,176,157 $4,641,334 $8,288,292
Growth Allocation Fund 222,747 159,018 211,476 $ 593,241
SAF Core Fund 249,717 158,642 --- $ 408,359
Value Allocation Fund 1,803,808 1,911,868 1,523,065 $5,238,741
Short-Term Income Fund --- --- --- ---
International Core Fund 1,505,681 2,911,201 4,518,970 $8,935,852
Japan Fund 447,978 138,019 1,038,223 $1,624,220
Tobacco-Free Core Fund 120,642 70,113 126,491 $ 317,246
Fundamental Value Fund 184,309 508,267 444,239 $1,136,815
International Small Companies Fund 54,565 279,639 470,900 $ 805,104
Bond Allocation Fund 3,046 34,238 29,533 $ 66,817
Core II Secondaries Fund 34,155 127,191 211,451 $ 372,797
U.S. Sector Allocation Fund 29,586 166,982 434,291 $ 630,859
International Bond Fund --- 1,340 3,251 $ 4,591
Emerging Markets Fund --- 423,879 2,668,508 $3,092,387
Emerging Country Debt Fund --- --- --- ---
Global Hedged Equity Fund --- --- 146,893 $ 146,893
Domestic Bond Fund --- --- --- ---
Currency Hedged International Bond --- --- --- ---
Fund
Total $7,127,035 $8,066,554 $16,468,625 $31,662,214
</TABLE>
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
twenty-four series: the Core Fund; the Value Allocation Fund; the Growth
Allocation Fund; the Pelican Fund; the Short-Term Income Fund; the Core II
Secondaries Fund; the Fundamental Value Fund, the Tobacco-Free Core Fund; the
U.S. Sector Allocation Fund; the Conservative Equity Fund; the International
Core Fund; the Japan Fund; the Core Emerging Country Debt Fund; the
International Bond Fund; the Emerging Markets Fund; the Emerging Country Debt
Fund; the Domestic Bond Fund; the Currency Hedged International Bond Fund; the
Global Hedged Equity Fund; the Currency Hedged International Core Fund; the
International Small Companies Fund; the REIT Fund; the Global Bond Fund and the
Foreign Fund. Interests in each portfolio (Fund) are represented by shares of
the corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial, transfer agency and servicing expenses, but
there is no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series of shares
with such dividend preferences and other rights as the Trustees may designate.
While the Trustees have no current intention to exercise this power, it is
intended to allow them to provide for an equitable allocation of the impact of
any future regulatory requirements which might affect various classes of
shareholders differently. The Trustees may also, without shareholder approval,
establish one or more additional separate portfolios for investments in the
Trust or merge two or more existing portfolios. Shareholders' investments in
such a portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
Voting Rights
As summarized in the Prospectus, shareholders are entitled to one vote
for each full share held (with fractional votes for fractional shares held) and
will vote (to the extent provided herein) in the election of Trustees and the
termination of the Trust and on other matters submitted to the vote of
shareholders. Shareholders vote by individual Fund on all matters except (i)
when required by the Investment Company Act of 1940, shares shall be voted in
the aggregate and not by individual Fund, and (ii) when the Trustees have
determined that the matter affects only the interests of one or more Funds, then
only shareholders of such Funds shall be entitled to vote thereon. Shareholders
of one Fund shall not be entitled to vote on matters exclusively affecting
another Fund, such matters including, without limitation, the adoption of or
change in the investment objectives, policies or restrictions of the other Fund
and the approval of the investment advisory contracts of the other Fund.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Beneficial Owners of 5% or More of the Fund's Shares
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Core Fund as of
October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Employee Retirement Plan of 201 Fourth Street 5.07
Safeway IN Oakland, CA 94660
NRECA Attn: Peter Morris 7.53
1800 Massachusetts Ave. NW
Washington, DC 20036
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the International
Core Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
RJR Nabisco Defined Benefits Attn: Sandy Breda 5.08
Master Trust - P.O. Box 3099
International Accounts Winston-Salem, NC 27150
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Growth Allocation Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Aerospace Corporation Attn: Mutual Funds 11.50
Retirement Plan P.O. Box 92956
Northern Trust Co. Chicago, IL 60675
John D. MacArthur & Attn: Lawrence L. Landry 8.42
Catherine T. MacArth 140 South Dearborn
Foundation Suite 1100
Chicago, IL 60603
Yale University 230 Prospect Street 13.95
Attn: Theodore D. Seides
New Haven, CT 06511
Surdna Foundation Inc. 1155 Avenue of the Americas 14.12
16th Floor
New York, NY 10036
Collins Group Trust I 840 Newport Center Dr. 11.31
Newport Beach, CA 92660
Duke University 2200 West Main St. 6.41
Long Term Endowment Suite 1000
Attn: Deborah Lane
Durham, NC 27705
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Japan Fund as
of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
International Monetary Staff 700 19th St., NW 44.91
Retirement Fund Attn: Hillary Boardman
Washington, DC 20431
SIMI Client #05 2000 K Street, NW 6.01
Suite 400
Washington, DC 20006
Gordon Family Trust c/o Strategic Investment Management 19.28
1001 19th Street North, 16th Floor
Arlington, VA 22209-1722
Brown University Investment Office - Box C 29.78
Attn: Robert J. Koyles, Jr.
164 Angell Street
Providence, RI 02912
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Short-Term
Income Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
MJH Foundation Attn: J. Michael Burris 41.48
Martha Jefferson Hospital 459 Locust Avenue
Charlottesville, VA 22902
Powers C. Hall c/o Warner & Stackpole 12.23
Profit Sharing Plan and Trust 75 State Street
U/A dated 6/1/79 as amended Boston, MA 02109
6/1/89
Timothy Hamilton Horkings 5 Hollywood Drive 5.43
Chestnut Hill, MA 02167
Dorothy D. Park - Fixed Income 205 Devon Road 24.68
Ithaca, NY 14850
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Value Allocation
Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Duke University Long Term Duke Management Co. 6.91
Endowment Fund 2200 West Main Street
Suite 1000
Durham, NC 27705
International Monetary Staff 700 19th St., NW 11.80
Retirement Fund Attn: Hillary Boardman
Washington, DC 20431
Leland Stanford Junior Stanford Management Company 23.25
University II 2770 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Fundamental
Value Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Princeton University Trustee Attn: John D. Sweeney 5.29
P.O. Box 35
Princeton, NJ 08544
Yale University 230 Prospect Street 29.71
Attn: Theodore D. Seides
New Haven, CT 06511
Berea College Box 2306 13.46
Attn: Mr. Leigh A. Jones
Berea, KY 40404
Leland Stanford Junior Stanford Management Company 32.33
University II 2770 Sand Hill Road
Menlo Park, CA 04025
Wachovia Bank Trustee P.O. Box 3099 19.12
RJR Nabisco Inc. 301 North Main Street
Defined Benefit/Master Winston-Salem, NC 27150
Trust - FVF
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Core II Secondaries Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
The Andrew W. Mellon Foundation 140 E. 62nd Street 13.18
Attn: Kenneth J. Herr, Treasurer
New York, NY 10021
Cheyne Walk Trust Pearce Investments Ltd. 7.83
Attn: Howard Reynolds
1325 Air Motive Way, Suite 262
Reno, NV 89502
John D. MacArthur & Catherine T. Attn: Lawrence L. Landry 10.19
MacArth Foundation 140 South Dearborn
Suite 1100
Chicago, IL 60603
Wachovia Bank Trustee Attn: Julie Haynes NC 31013 7.70
RJR Nabisco Inc. P.O. Box 3099
Defined Benefit/Master Winston-Salem, NC 27150
Trust
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 11.59
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company Trustee Attn: Geoffrey Mullen 17.80
GTE Service Corp Pension 280 Park Avenue - 13 East
Trust New York, NY 10017
William & Flora Hewlett Attn: William F. Nichols 7.85
525 Middlefield Rd #200
Menlo Park, CA 94025
NationsBank Trust Co. N.A. Attn: SAS 5.11
FBO Brookings Institution Acc't #: 45-16-161-7467244
P.O. Box 831575
Dallas, TX 75283
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the International
Small Companies Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Yale University 230 Prospect Street 7.57
Attn: Theodore D. Seides
New Haven, CT 06511
Bankers Trust Company Trustee Attn: Geoffrey Mullen 6.66
GTE Service Corp Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
International Monetary Fund Staff 700-19th Street NW IS2-281 5.16
Retirement Plan Washington, DC 20431
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Tobacco-Free
Core Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Dewitt Wallace-Reader's Digest 261 Madison Avenue 45.51
Fund, Inc. 24th Floor
New York, NY 10016
Lila Wallace-Reader's Digest 261 Madison Avenue 38.82
Fund, Inc. 24th Floor
New York, NY 10016
Tufts Associated HMO Inc. 353 Wyman Street 15.66
Waltham, MA 02254
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the U.S. Sector Allocation Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
John D. MacArthur & Catherine T. Attn: Lawrence L. Landry 54.50
MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
Trustees of Columbia University Columbia University 18.22
in the City of New York-Global 475 Riverside Drive, Suite 401
New York, NY 10115
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 10.93
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the International
Bond Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Catholic Bishop of Chicago 155 East Superior Street 6.41
Attn: John F. Benware
Chicago, IL 60611
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 8.19
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Saturn & Co. A/C 4600712 P.O. Box 1537 Top 57 12.96
c/o Investors Bank & Trust Co. Boston, MA 02205
FBO The John Hancock Mutual
Life Insurance Company Pension
Plan
Bankers Trust Company Trustee Attn: Geoffrey Mullen 23.57
GTE Service Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
Woods Hole Oceanographic Attn: Lawrence Ladd 5.19
Institute Woods Hole, MA 02543
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Emerging Markets Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Leland Stanford Jr. University II - 2770 Sand Hill Road 6.72
AA Stanford Management Company Menlo Park, CA 94025
Bankers Trust Company Trustee Attn: Geoffrey Mullen 13.54
GTE Service Corp. Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Domestic Bond
Fund as of October 13, 1995;
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 25.86
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company Trustee Attn: Geoffrey Mullen 43.28
GTE Service Corp. Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
Princeton University TR Attn: John D. Sweeney 5.51
P.O. Box 35
Princeton, NJ 08544
The Edna McConnell Clark Found. Attn: Laura Kielczewski 5.76
Ass't Financial Officer
250 Park Avenue
New York, NY 10177
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Currency Hedged International Bond Fund as of October
13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Princeton University Tr. Attn: John D. Sweeney 5.02
P.O. Box 35
Princeton, NJ 08544
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 13.16
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company Trustee Attn: Geoffrey Mullen 39.73
GTE Service Corp. Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
Park Foundation Inc. - Attn: Sharon Linderberry 7.19
Fixed Income Terrace Hill
P.O. Box 550
Ithaca, NY 14851
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Emerging Country Debt Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Yale University 230 Prospect Street 6.85
Attn: Theodore D. Seides
New Haven, CT 06511
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 7.53
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company Trustee Attn: Geoffrey Mullen 16.17
GTE Service Corp. Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
Regents of the Univ. Michigan 5032 Fleming Admin. Bldg. 12.56
Treasurer's Office Ann Arbor, MI 48109
Duke University Long Term 2200 W. Main Street 5.18
Endowment Po Suite 1000
Attn: Deborah Lane
Durham, NC 27705
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Global Hedged
Equity Fund as of October 13, 1995:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 6.66
P.O. Box 35
Princeton, NJ 08544
Bankers Trust Company TR Attn: Geoffrey Mullen 27.58
GTE Services Corp. Pension Trust 280 Park Avenue - 13 East
New York, NY 10017
Duke University Long Term 2200 W. Main Street 8.10
Endowment PO Suite 1000
Attn: Deborah Lane
Durham, NC 27705
</TABLE>
FINANCIAL STATEMENTS
The audited Financial Statements in this Statement of Additional
Information have been so included in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
GMO Trust
Specimen Price-Make-Up Sheet
Following are computations of the total offering price per share for
the Core Fund, the International Core Fund, the Growth Allocation Fund, the
Short-Term Income Fund, the Japan Fund, the Value Allocation Fund, the
Tobacco-Free Core Fund, the Core II Secondaries Fund, the International Small
Companies Fund, the U.S. Sector Allocation Fund, the International Bond Fund,
the Emerging Markets Fund, the Emerging Country Debt Fund, the Global Hedged
Equity Fund, the Domestic Bond Fund, the Currency Hedged International Bond
Fund, the Fundamental Value Fund and the Pelican Fund based upon their
respective net asset values and shares of beneficial interest outstanding at the
close of business on August 31, 1995.
<TABLE>
<S> <C>
Core Fund
Net Assets at Value (Equivalent to
$18.25 per share based on
158,659,078 shares of beneficial $2,895,123,678
interest outstanding)
Offering Price ($18.25 x 100/99.83)* $18.28
International Core Fund
Net Assets at Value (Equivalent to $23.65
per share based on 140,653,201 shares of
beneficial interest outstanding) $3,326,025,113
Offering Price ($23.65 x 100/99.25)* $23.83
------
Growth Allocation Fund
Net Assets at Value (Equivalent to $5.04
per share based on 67,350,475 shares of
beneficial interest outstanding) $339,184,306
Offering Price ($5.04 x 100/99.83)* $5.05
-----
Short-Term Income Fund
Net Assets at Value (Equivalent to $9.65
per share based on 697,949 shares of
beneficial interest outstanding) $6,732,609
Offering Price $9.65
Japan Fund
Net Assets at Value (Equivalent to $9.69
per share based on 10,333,221 shares of
beneficial interest outstanding) $100,134,319
Offering Price ($9.69 x 100/99.60)* $9.73
-----
Value Allocation Fund
Net Assets at Value (Equivalent to
$13.65 per share based on
22,8645,103 shares of beneficial
interest outstanding) $311,994,963
Offering Price ($13.65 x 100/99.85)* $13.67
------
Tobacco-Free Core Fund
Net Assets at Value (Equivalent to
$12.44 per share based on
4,451,076 shares of beneficial $55,374,239
interest outstanding)
Offering Price ($12.44 x 100/99.83)* $12.46
------
Core II Secondaries Fund
Net Assets at Value (Equivalent to $14.92
per share based on 10,171,408 shares
of beneficial interest outstanding) $151,752,564
Offering Price ($14.92 x 100/99.25)* $15.03
------
International Small Companies Fund
Net Assets at Value (Equivalent to $12.68
per share based on 15,691,530 shares of
beneficial interest outstanding) $199,024,013
Offering Price ($12.68 x 100/98.75)* $12.84
------
Fundamental Value Fund
Net Assets at Value (Equivalent to $14.02
per share based on 14,091,776 shares
of beneficial interest outstanding) $197,569,879
Offering Price ($14.02 x 100/99.85)* $14.04
------
U.S. Sector Allocation Fund
Net Assets at Value (Equivalent to $13.06
per share based on 18,053,484 shares
of beneficial interest outstanding) $235,791,887
Offering Price ($13.06 x 100/99.83)* $13.08
------
Emerging Markets Fund
Net Assets at Value (Equivalent to $10.53
per share based on 57,879,323 shares
of beneficial interest outstanding) $609,629,593
Offering Price ($10.53 x 100/98.4)* $10.70
------
International Bond Fund
Net Assets at Value (Equivalent to $10.69
per share based on 17,840,505 shares) $190,684,124
------------
Offering Price ($10.69 x 100/99.85)* $10.71
------
Emerging Country Debt Fund
Net Assets at Value (Equivalent to $10.91
per share based on 46,553,536 shares) $507,804,226
------------
Offering Price ($10.91 x 100/99.50)* $10.96
------
Global Hedged Equity Fund
Net Assets at Value (Equivalent to $10.50
per share based on 32,443,087 shares) $340,697,317
------------
Offering Price ($10.50 x 100/99.40)* $10.56
------
Domestic Bond Fund
Net Assets at Value (Equivalent to $10.63
per share based on 27,611,985 shares) $293,426,414
------------
Offering Price $10.63
Currency Hedged International Bond Fund
Net Assets at Value (Equivalent to $11.41
per share based on 19,619,510 shares) $223,926,075
------------
Offering Price ($11.41 x 100/99.85)* $11.43
------
Currency Hedged International Core Fund
Net Assets at Value (Equivalent to $10.80 per share $189,848,432
------------
based on 17,583,602 shares)
Offering Price ($10.80 x 100/99.25)* $10.88
------
Pelican Fund
Net Assets at Value (Equivalent to $13.58
per share based on 11,671,816 shares) $158,491,891
------------
Offering Price $13.58
- --------------
* Represents maximum offering price charged on certain
cash purchases. See "Purchase of Shares" in the Prospectus.
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information of GMO
Trust dated January 1, 1996 as amended and restated in the form of Prospectus
and Statement of Additional Information dated February 29, 1996 which is
incorporated by reference into this Prospectus/Proxy Statement on Form N-14 of
our reports dated April 10, 1995, April 14, 1995, and April 20, 1995, relating
to the financial statements and financial highlights of each series of GMO Trust
which appear in such Statement of Additional Information. We also consent to the
references to us under the headings "Independent Accountants" and "Financial
Statements" in such Statement of Additional Information and to the reference to
us under the heading "Financial Highlights" in the Prospectus which is also
incorporated by reference in to this Prospectus/Proxy Statement.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
May 14, 1996
