Filed pursuant to Rule 497(c)
GMO TRUST
GMO TRUST (the "Trust"), 40 Rowes Wharf, Boston, Massachusetts 02110, is an
open-end management investment company offering thirty (30) separate portfolios
with this Prospectus (collectively, the "FUNDS"). The Trust offers one
additional portfolio, the Pelican Fund, pursuant to a separate prospectus. Each
Fund has its own investment objective and strategies. GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO") is the investment manager of all
Funds. The Manager has a Consulting Agreement with Dancing Elephant, Ltd. (the
"Consultant") with respect to management of the GMO Emerging Markets Fund. The
Trust offers "diversified" and "non-diversified" portfolios, as defined in the
Investment Company Act of 1940 (the "1940 Act"). The definition and potential
risks of "non-diversified" portfolios are discussed under "Description and Risks
of Fund Investments -- Diversified and Non-Diversified Portfolios" on page 60. A
TABLE OF CONTENTS APPEARS ON PAGE 7 OF THIS PROSPECTUS. Brief descriptions of
the Funds begin on page 2.
GMO FUNDS
<TABLE>
<CAPTION>
DOMESTIC EQUITY FUNDS INTERNATIONAL EQUITY FUNDS FIXED INCOME FUNDS ASSET ALLOCATION FUNDS
<S> <C> <C> <C>
Core Fund International Core Fund Domestic Bond Fund International Equity
Tobacco-Free Core Fund Currency Hedged U.S. Bond/Global Alpha A Fund Allocation Fund
Value Fund International Core Fund U.S. Bond/Global Alpha B Fund World Equity Allocation
Growth Fund Foreign Fund International Bond Fund Fund
U.S. Sector Fund International Small Currency Hedged Global (U.S.+) Equity
Small Cap Value Fund Companies Fund International Bond Fund Allocation Fund
Small Cap Growth Fund Japan Fund Global Bond Fund Global Balanced Allocation
Fundamental Value Fund Emerging Markets Fund Emerging Country Debt Fund Fund
REIT Fund Global Properties Fund Short-Term Income Fund
Global Hedged Equity Fund
Inflation Indexed Bond Fund
</TABLE>
MULTIPLE CLASSES
Each Fund (except the Short-Term Income Fund) offers three CLASSES of
shares: CLASS I, CLASS II AND CLASS III. The Short-Term Income Fund offers only
Class III Shares. Eligibility for the classes is generally based on the total
amount of assets that a client has invested with GMO (with Class I requiring the
least total assets and Class III the most), all as described more fully herein.
See "Multiple Classes -- Eligibility for Classes" on page 76.
NOTE: CLASS III SHARES ARE THE CONTINUATION OF THE TRUST'S SINGLE CLASS OF
SHARES THAT EXISTED PRIOR TO JUNE 1, 1996, AND BEAR THE SAME TOTAL OPERATING
EXPENSES AS THAT ORIGINAL CLASS OF SHARES.
The classes differ solely with regard to (i) whether GMO or the GMO FUNDS
DIVISION provides client service and reporting to shareholders of the class and
(ii) the level of SHAREHOLDER SERVICE FEE borne by the class. These differences
are described briefly below and in more detail elsewhere in this Prospectus. ALL
CLASSES OF A FUND HAVE AN INTEREST IN THE SAME UNDERLYING ASSETS, ARE MANAGED BY
GMO, AND PAY THE SAME INVESTMENT MANAGEMENT FEE.
INVESTMENT MANAGER
GMO
Grantham, Mayo, Van Otterloo & Co. LLC
<TABLE>
<CAPTION>
CLIENT SERVICE PROVIDER SHAREHOLDER SERVICE FEE
<S> <C>
GMO GMO FUNDS DIVISION The level of Shareholder Service Fee for each class
is set forth at the bottom of the following page and
CLASS III SHARES CLASS I AND CLASS II SHARES described more fully under "Multiple Classes --
Tel.: (617) 330-7500 Tel.: (617) 790-5000 Shareholder Service Fees" on page 75.
Fax: (617) 439-4192 Fax: (617) 439-4290
</TABLE>
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 June 30, 1997, as
revised from time to time, is available free of charge by writing to GMO Funds
Division, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling (617)
790-5000. 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 into this Prospectus.
THE EMERGING COUNTRY DEBT FUND MAY INVEST WITHOUT LIMIT, THE INTERNATIONAL
BOND, INFLATION INDEXED BOND, CURRENCY HEDGED INTERNATIONAL BOND, U.S.
BOND/GLOBAL ALPHA A AND U.S. BOND/GLOBAL ALPHA B FUNDS MAY INVEST UP TO 25% OF
THEIR NET ASSETS AND THE DOMESTIC BOND, REIT, CURRENCY HEDGED INTERNATIONAL
CORE, GLOBAL PROPERTIES 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 INVESTMENTS
- -- 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 JUNE 30, 1997
GMO MUTUAL FUNDS
The Funds offered by this Prospectus are described briefly below and in more
detail throughout this Prospectus. The Funds can generally be classified as
Domestic Equity Funds, International Equity Funds and Fixed Income Funds. The
Trust also offers four Asset Allocation Funds that invest in varying amounts in
other Funds of the Trust.
DOMESTIC EQUITY FUNDS
The Trust offers the following nine domestic equity portfolios which are
collectively referred to as the "DOMESTIC EQUITY FUNDS."
GMO CORE FUND (the "CORE FUND") is a diversified portfolio that seeks a
total return greater than that of the Standard & Poor's 500 Stock Index (the
"S&P 500") through investment of substantially all of its assets in common
stocks chosen from the Wilshire 5000 Index (the "Wilshire 5000") and primarily
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") is a diversified
portfolio that seeks a total return greater than that of the S&P 500 through
investment of substantially all of its assets in common stocks chosen from the
Wilshire 5000 and primarily 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 FUND (the "VALUE FUND") is a non- diversified portfolio that seeks
a total return greater than that of the S&P 500 through investment of
substantially all of its assets in common stocks chosen from the Wilshire 5000
and primarily 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 ongoing business value of the
underlying company.
GMO GROWTH FUND (the "GROWTH FUND") is a non- diversified portfolio that
seeks long-term growth of capital through investment of substantially all of its
assets in common stocks chosen from the Wilshire 5000 and primarily in the
equity securities of companies chosen from the Large Cap 1200. Current income is
only an incidental consideration.
GMO U.S. SECTOR FUND (the "U.S. SECTOR FUND") is a non-diversified portfolio
that seeks a total return greater than that of the S&P 500 through investment in
common stocks, either directly or through investment in other Funds of the
Trust. Substantially all of its assets will be invested in or exposed to equity
securities chosen from the Wilshire 5000 and primarily 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, and/or
shares of other Domestic Equity Funds.
GMO SMALL CAP VALUE FUND (the "SMALL CAP VALUE FUND") (formerly the GMO Core
II Secondaries Fund) is a diversified portfolio that seeks long-term growth of
capital through investment primarily in companies whose equity capitalization
ranks in the lower two-thirds of the 1,800 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 SMALL CAP GROWTH FUND (the "SMALL CAP GROWTH FUND") is a non-diversified
portfolio that seeks long-term growth of capital through investment primarily in
companies whose equity capitalization ranks in the lower two-thirds of the 1,800
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") is a diversified
portfolio that seeks long- term capital growth through investment primarily in
equity securities. Consideration of current income is secondary to this
principal objective.
GMO REIT FUND (the "REIT FUND") is a non- diversified portfolio that seeks
maximum total return through investment primarily in real estate investment
trusts ("REITs").
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") is a diversified
portfolio that seeks maximum total return through investment in a portfolio of
common stocks of non-U.S. issuers.
- --------------------------------------------------------------------------------
CLASSES AND FEES
<TABLE>
<CAPTION>
ALL FUNDS (EXCEPT ELIGIBILITY SHAREHOLDER
ASSET ALLOCATION FUNDS) REQUIREMENT* SERVICE FEE**
- ----------------------- ------------ -------------
<S> <C> <C>
Class I $1 million 0.28%
Class II $10 million 0.22%
Class III $35 million 0.15%
ASSET ALLOCATION FUNDS ONLY
- ---------------------------
Class I $1 million 0.13%***
Class II $10 million 0.07%***
Class III $35 million 0.00%***
</TABLE>
- --------
* More detailed explanation of eligibility criteria is provided on page 4 and
under "Multiple Classes -- Eligibility for Classes."
** As noted above, all classes of shares of a Fund pay the same investment
management fee.
*** The Asset Allocation Funds will indirectly bear an additional Shareholder
Service Fee of 0.15%. Thus, the total Shareholder Service Fee borne by Class
I, Class II and Class III Shares of the Asset Allocation Funds is the same
as that borne by Class I, Class II or Class III Shares, respectively, of the
other Funds. See "Investment Objectives and Policies -- Asset Allocation
Funds."
2
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") is a diversified portfolio that 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 PROPERTIES FUND (the "GLOBAL PROPERTIES FUND") is a
non-diversified portfolio that seeks long term capital growth primarily through
investment in securities of issuers throughout the world which are engaged in or
related to the real estate industry or which own significant real estate assets.
Consideration of current income is secondary to this principal objective.
FIXED INCOME FUNDS
The Trust offers the following ten 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 U.S. BOND/GLOBAL ALPHA A FUND (the "U.S. BOND/GLOBAL ALPHA A FUND") is a
non-diversified portfolio that seeks high total return primarily through
investment in investment-grade bonds (including convertible bonds) issued by the
U.S. government, its agencies and instrumentalities, as well as those issued by
a wide range of private U.S. issuers. The Fund also expects to invest in debt
securities (bonds and loans) of Emerging Countries and foreign bonds, and may
hedge some or all of its exposure to domestic or foreign markets including
foreign currency exposure.
GMO U.S. BOND/GLOBAL ALPHA B FUND (the "U.S. BOND/GLOBAL ALPHA B
FUND") is a non-diversified portfolio with the same investment objective
and policies as the U.S. Bond/Global Alpha A Fund except that the U.S.
Bond/Global Alpha B Fund will not invest in debt securities of Emerging
Countries.
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 and Africa, as well as any country located in Europe which is not in the
European Community ("Emerging Countries").
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 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, either directly or through investment in
other Funds of the Trust.
3
GMO INFLATION INDEXED BOND FUND (the "INFLATION INDEXED BOND FUND") is a
non-diversified portfolio that seeks maximum total return by investing primarily
in foreign and U.S. government bonds that are indexed or otherwise linked to
general measures of inflation in the country of issue. The availability of such
bonds is currently limited to a small number of countries.
ASSET ALLOCATION FUNDS
The Trust offers the following four asset allocation portfolios (the
"ALLOCATION FUNDS"). The Allocation Funds operate as "funds of funds" in that,
pursuant to management provided by the Manager, these Funds make investments in
other Funds of the Trust.
GMO INTERNATIONAL EQUITY ALLOCATION FUND (the "INTERNATIONAL EQUITY
ALLOCATION FUND") is a diversified portfolio that seeks a total return greater
than the return of the EAFE-Lite Extended benchmark. The Fund will pursue its
objective by investing to varying extents primarily in Class III Shares of the
various International Equity Funds of the Trust. The Fund may also invest up to
15% of its net assets in Class III Shares of the various Fixed Income Funds of
the Trust.
GMO WORLD EQUITY ALLOCATION FUND (the "WORLD EQUITY ALLOCATION FUND") is a
diversified portfolio that seeks a total return greater than the return of the
World- Lite Extended benchmark. The Fund will pursue its objective by investing
to varying extents primarily in Class III Shares of the various Domestic Equity
and International Equity Funds of the Trust. The Fund may also invest up to 15%
of its net assets in Class III Shares of the various Fixed Income Funds of the
Trust.
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (the "GLOBAL (U.S.+) EQUITY
ALLOCATION FUND") is a diversified portfolio that seeks a total return greater
than the return of the GMO Global (U.S.+) Equity benchmark, which has a greater
weighting of U.S. stocks (S&P 500) than the World-Lite Extended benchmark. The
Fund will pursue its objective by investing to varying extents primarily in
Class III Shares of the various Domestic Equity and International Equity Funds
of the Trust. The Fund may also invest up to 15% of its net assets in Class III
Shares of the various Fixed Income Funds of the Trust.
GMO GLOBAL BALANCED ALLOCATION FUND (the "GLOBAL BALANCED ALLOCATION FUND")
is a diversified portfolio that seeks a total return greater than the return of
the GMO Global Balanced benchmark. The Fund will pursue its objective by
investing to varying extents primarily in Class III Shares of the various
Domestic Equity, International Equity and Fixed Income Funds
of the Trust.
- --------------------------------------------------------------------------------
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
"Description and Risks of Fund Investments."
- --------------------------------------------------------------------------------
CLASS ELIGIBILITY
- ------------------
For full details of the class eligibility criteria summarized below and an
explanation of how conversions between classes will occur, see "Multiple Classes
- -- Eligibility for Classes" and "Multiple Classes -- Conversions Between
Classes."
CLASS I AND CLASS II SHARES:
Recognizing that institutional and individual investors with assets under
GMO's management totalling less than $35 million have different service and
reporting needs than larger client relationships, GMO has created the GMO Funds
Division. GMO Funds Division delivers institutional-quality client services to
clients investing between $1 million and $35 million. These services include
professional and informative reporting, and access to meaningful analysis and
explanation.
Class I Shares. Class I Shares are available to any investor who commits
(after May 31, 1996) assets to GMO management to establish a "Total Investment"
(as defined) with GMO of between $1 million and $10 million. In addition, all
defined contribution retirement or pension plans are eligible only for Class I
shares regardless of the size of their investment. Class I Shares will receive
client service and reporting from GMO Funds Division and will bear a Shareholder
Service Fee of 0.28%.
Class II Shares. Class II Shares are available to any investor who (i) has
less than $7 million (but more than $0) under the management of GMO as of May
31, 1996, or (ii) commits (after May 31, 1996) assets to GMO management to
establish a "Total Investment" (as defined) with GMO of between $10 million and
$35 million. Class II Shares will receive client service and reporting from GMO
Funds Division and will bear a Shareholder Service Fee of 0.22%.
Purchasers of Class I and Class II Shares should follow purchase
instructions for such classes described under "Purchase of Shares" and direct
questions to the Trust at (617) 790-5000.
CLASS III SHARES:
GMO provides direct client service and reporting to owners of Class III
Shares. These clients generally must have a "Total Investment" (as defined) with
GMO of at least $35 million. Class eligibility requirements for existing clients
of GMO as of May 31, 1996 are governed by special rules described in this
Prospectus.
Class III Shares. Class III Shares are available to any investor who (i) has
at least $7 million under the management of GMO as of May 31, 1996, or (ii)
commits (after May 31, 1996) assets to GMO management to establish a "Total
Investment" (as defined) with GMO of at least $35 million. Class III Shares of
the Short-Term Income Fund are available to any investor with a "Total
Investment" of at least $1 million. Class III Shares will receive client service
and reporting directly from GMO, and will bear a Shareholder Service Fee of
0.15% of average net assets. Note: Class III Shares are a redesignation of the
single class of
4
shares that has been offered by each Fund since inception. Class III Shares bear
the same rate of total operating expenses as they did before the redesignation.
Purchasers of Class III Shares should follow purchase instructions described
under "Purchase of Shares" and direct questions to the Trust at (617) 330-7500.
BENCHMARKS AND INDEXES
As is evident throughout this Prospectus, many of the Funds are managed
and/or meant to be measured relative to a specified index or benchmark. Some
general information about these benchmarks and indexes is provided in the table
below. While Funds may be managed or measured relative to these benchmarks or
indexes, it is important to note that none of the Funds is managed as an "index
fund" or "index-plus fund," and the actual composition of a Fund's portfolio may
and will differ substantially from that of its benchmark. It is also important
to note that the Manager may change a Fund's specified index or benchmark from
time to time.
NOTE: Some Funds are managed against currency hedged versions of some of the
indexes below. In such cases, the benchmark is calculated with the assumption
that any gains or losses incurred due to changes in the value of the foreign
currencies in which the securities comprising the index are denominated relative
to the U.S. dollar are offset by gains and losses on fully effective currency
hedging transactions. While these Funds expect to be measured against such an
index, the Funds (including those identified as "currency hedged") will take
active currency positions relative to the hedged benchmark. Such positions may
be created directly, through currency or forward currency positions, or
indirectly, by overweighting the investment in securities denominated in that
currency without a corresponding increase in the level of currency hedging.
<TABLE>
<CAPTION>
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
------------ --------- -------------------- -----------
<S> <C> <C> <C>
S&P 500 Standard & Poor's 500 Standard & Poor's Well-known, independently
Stock Index Corporation maintained and published U.S.
large capitalization stock index
Wilshire 5000 Wilshire 5000 Stock Wilshire Associates, Independently maintained and
Index Inc. published broadly populated U.S.
stock index
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently
Government Government Bond Index maintained and published
government bond index, regularly
used as a comparative fixed
income benchmark
EAFE Morgan Stanley Capital Morgan Stanley Well-known, independently
International Europe, Capital maintained and published large
Australia and Far International capitalization international
East Index stock index
EAFE-Lite GMO EAFE-Lite Index GMO A modification of EAFE where GMO
reduces the market capitalization
of Japan by 40% relative to EAFE
EAFE-Lite Extended GMO EAFE-Lite GMO A modification of EAFE-Lite where
Extended Index GMO adds those additional
countries represented in the IFC
Investable Index
MSCI World Morgan Stanley Capital Morgan Stanley An independently maintained and
International World Capital published global (including U.S.)
Index International equity index
World-Lite Extended GMO World-Lite GMO A modification of MSCI World where Extended Index GMO
reduces the market capitalization of Japan by 40%
relative to MSCI World and adds those additional
countries represented in the IFC Investable Index
GMO Global (U.S. +) GMO Global (U.S.+) GMO A composite benchmark computed by
Equity Index Equity Index GMO and comprised 75% by S&P 500
and 25% by EAFE-Lite Extended
GMO Global Balanced GMO Global Balanced GMO A composite benchmark computed by
Index Index GMO and comprised 48.75% by S&P
500, 16.25% by EAFE-Lite Extended
and 35% by Lehman Brothers
Government
MSRI Morgan Stanley REIT Morgan Stanley & Well-known, independently
Index Co., Inc. maintained and published equity
real estate
index.
</TABLE>
5
<TABLE>
<CAPTION>
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
------------ --------- -------------------- -----------
<S> <C> <C> <C>
Salomon 3 Month T-Bill Index Salomon 3 Month Salomon Brothers Independently maintained and
Treasury-Bill Index published short-term bill index.
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and
Government Bond Index Government Bond published index composed of
Index non-U.S. government bonds with
maturities of one year or more.
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and
Government Bond Index Government Bond published index composed of
(Hedged) Index (Hedged) non-U.S. government bonds with
maturities of one year or more
that are currency-hedged into
U.S. dollars.
J.P. Morgan Global J.P. Morgan Global J.P. Morgan Independently maintained and
Government Bond Index Government Bond published index composed of
Index government bonds of 14 developed countries,
including the U.S., with maturities of
one year or more.
J.P. Morgan Emerging J.P. Morgan Emerging J.P. Morgan Independently maintained and
Markets Bond Index+ Market Bond Index Plus published index composed of debt
securities of 14 countries, which includes Brady
bonds, sovereign debt, local debt and Eurodollar
debt, all of which are dollar denominated.
Lehman Brothers Aggregate Lehman Brothers Aggregate Lehman Brothers Well-known, independently
Bond Index Bond Index maintained and published index
comprised of fixed rate debt issues, having a
maturity of at leas one year, rated investment
grade or higher by Moody's Investors Service,
Standard & Poor's Corporation, or Fitch Investors
Service.
GPR LIFE Index Global Property Research/ Global Property Independently maintained and
Limberg Institute of Research BV published broadly populated
Financial Economics global real estate stock index.
Global Real Estate Includes companies exceeding $50
Securities Index million in market capitalization in 26 countries.
Russell 1000 Growth Russell 1000 Growth Frank Russell Independently maintained and
Index Index Company published index composed of the
1,000 largest U.S. companies
based on total market
capitalization with higher
price-to-book ratios and higher
forecasted growth values.
Russell 1000 Value Index Russell 1000 Value Index Frank Russell Independently maintained and
Company published index composed of the
1,000 largest U.S. companies
based on total market
capitalization with lower
price-to-book ratios and lower
forecasted growth values.
Russell 2000 Growth Index Russell 2000 Growth Index Frank Russell Independently maintained and
Company published index composed of the
bottom two-thirds of the 3,000
largest U.S. companies based on
total market capitalization with
higher price- to-book ratios and
higher forecasted growth values.
Russell 2000 Value Index Russell 2000 Value Index Frank Russell Independently maintained and
Company published index composed of the
bottom two-thirds of the 3,000
largest U.S. companies based on
total market capitalization with
lower price- to-book ratios and
lower forecasted growth values.
IFC Investable IFC Investable International Independently maintained and
Composite Index Finance Corporation published emerging market stock
index.
MSCI Japan MSCI Japan Index Morgan Stanley Independently maintained and
Capital published equity index that
International attempts to capture 60% of the
market capitalization in Japan.
Lehman Brothers Treasury Lehman Brothers Lehman Brothers Independently maintained and
Inflation Notes Index Treasury Inflation published index of
Notes Index inflation-indexed linked U.S.
Treasury securities.
</TABLE>
6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE OF FEES AND EXPENSES 8
FINANCIAL HIGHLIGHTS 16
INVESTMENT OBJECTIVES AND POLICIES 34
DOMESTIC EQUITY FUNDS 34
Core Fund 34
Tobacco-Free Core Fund 34
Value Fund 35
Growth Fund 36
U.S. Sector Fund 36
Small Cap Value Fund 37
Small Cap Growth Fund 38
Fundamental Value Fund 38
REIT Fund 39
INTERNATIONAL EQUITY FUNDS 40
International Core Fund 40
Currency Hedged International Core Fund 41
Foreign Fund 42
International Small Companies Fund 43
Japan Fund 43
Emerging Markets Fund 44
Global Properties Fund 45
FIXED INCOME FUNDS 46
Domestic Bond Fund 47
U.S. Bond/Global Alpha A Fund 47
U.S. Bond/Global Alpha B Fund 48
International Bond Fund 49
Currency Hedged International Bond Fund 50
Global Bond Fund 51
Emerging Country Debt Fund 52
Short-Term Income Fund 52
Global Hedged Equity Fund 53
Inflation Indexed Bond Fund 56
ASSET ALLOCATION FUNDS 57
International Equity Allocation Fund 58
World Equity Allocation Fund 58
Global (U.S.+) Equity Allocation Fund 59
Global Balanced Allocation Fund 59
DESCRIPTION AND RISKS OF FUND
INVESTMENTS 59
Portfolio Turnover 59
Diversified and Non-Diversified Portfolios 60
Certain Risks of Foreign Investments 60
General 60
Emerging Markets 60
Direct Investment in Russian Securities 61
Securities Lending 61
Depository Receipts 61
Convertible Securities 61
Futures and Options 61
Options 62
Writing Covered Options 62
Futures 63
Index Futures 64
Interest Rate Futures 64
Options on Futures Contracts 64
Uses of Options, Futures and Options on Futures 65
Risk Management 65
Hedging 65
Investment Purposes 65
Synthetic Sales and Purchases 66
Swap Contracts and Other Two-Party Contracts 66
Swap Contracts 66
Interest Rate and Currency Swap Contracts 66
Equity Swap Contracts and Contracts for
Differences 66
Interest Rate Caps, Floors and Collars 67
Foreign Currency Transactions 68
Repurchase Agreements 69
Debt and Other Fixed Income Securities
Generally 69
Temporary High Quality Cash Items 69
U.S. Government Securities and Foreign
Government Securities 69
Mortgage-Backed and Other Asset-Backed
Securities 70
Collateralized Mortgage Obligations
("CMOs"); Strips and Residuals 70
Adjustable Rate Securities 70
Lower Rated Securities 71
Brady Bonds 71
Zero Coupon Securities 71
Indexed Securities 71
Firm Commitments 72
Loans, Loan Participations and Assignments 72
Reverse Repurchase Agreements and Dollar
Roll Agreements 73
Illiquid Securities 73
Special Asset Allocation Fund Considerations 73
ADDITIONAL INVESTMENT RESTRICTIONS 73
Fundamental Restrictions 73
Non-Fundamental Restrictions 75
MULTIPLE CLASSES 75
Shareholder Service Fees 75
Client Service -- GMO and GMO Funds Division 76
Eligibility for Classes 76
Conversions Between Classes 76
PURCHASE OF SHARES 77
Purchase Procedures 78
REDEMPTION OF SHARES 78
DETERMINATION OF NET ASSET VALUE 79
DISTRIBUTIONS 80
TAXES 80
Withholding on Distributions to Foreign Investors 81
Foreign Tax Credits 81
Tax Implications of Certain Investments 82
Loss of Regulated Investment Company Status 82
MANAGEMENT OF THE TRUST 82
ORGANIZATION AND CAPITALIZATION OF THE TRUST 84
CERTAIN FINANCIAL INFORMATION
RELATING TO THE GMO FOREIGN FUND 84
APPENDIX A 86
RISKS AND LIMITATIONS OF OPTIONS,
FUTURES AND SWAPS 86
Limitations on the Use of Options and Futures
Portfolio Strategies 86
Risk Factors in Options Transactions 86
Risk Factors in Futures Transactions 86
Risk Factors in Swap Contracts, OTC Options and
other Two-Party Contracts 87
Additional Regulatory Limitations on the Use of
Futures and Related Options, Interest Rate
Floors, Caps and Collars and Interest Rate and
Currency Swap Contracts 87
APPENDIX B 89
COMMERCIAL PAPER AND CORPORATE
DEBT RATINGS 89
Commercial Paper Ratings 89
Corporate Debt Ratings 89
Standard & Poor's Corporation 89
Moody's Investors Service, Inc. 89
</TABLE>
7
SCHEDULE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER
GMO FUND NAME TRANSACTION EXPENSES ANNUAL OPERATING EXPENSES
CASH PURCHASE REDEMPTION INV.
PREMIUM (AS A FEES (AS A MGMT. SHARE-
PERCENTAGE PERCENTAGE FEES AFTER HOLDER TOTAL
OF AMOUNT OF AMOUNT FEE SERVICE OTHER OPERATING
INVESTED)1 REDEEMED)1 WAIVER FEE EXPENSES EXPENSES
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC EQUITY FUNDS
CORE FUND
CLASS I .14%3 NONE .31%9,18 .28%2,18 .02%9 .61%9
CLASS II .14%3 NONE .31%9,18 .22%2,18 .02%9 .55%9
CLASS III .14%3 NONE .31%9,18 .15%2,18 .02%9 .48%9
TOBACCO-FREE
CORE FUND
CLASS I .14%3 NONE .15%9,18 .28%2,18 .18%9 .61%9
CLASS II .14%3 NONE .15%9,18 .22%2,18 .18%9 .55%9
CLASS III .14%3 NONE .15%9,18 .15%2,18 .18%9 .48%9
VALUE FUND
CLASS I .14%3 NONE .42%9,18 .28%2,18 .04%9 .74%9
CLASS II .14%3 NONE .42%9,18 .22%2,18 .04%9 .68%9
CLASS III .14%3 NONE .42%9,18 .15%2,18 .04%9 .61%9
GROWTH FUND
CLASS I .14%3 NONE .28%9,18 .28%2,18 .05%9 .61%9
CLASS II .14%3 NONE .28%9,18 .22%2,18 .05%9 .55%9
CLASS III .14%3 NONE .28%9,18 .15%2,18 .05%9 .48%9
U.S. SECTOR FUND
CLASS I .27%3,14 NONE .27%15 .28%17 .06%15 .61%15
CLASS II .27%3,14 NONE .27%15 .22%17 .06%15 .55%15
CLASS III .27%3,14 NONE .27%15 .15%17 .06%15 .48%15
SMALL CAP VALUE FUND
CLASS I .50%3 .50%3 .28%9,18 .28%2,18 .05%9 .61%9
CLASS II .50%3 .50%3 .28%9,18 .22%2,18 .05%9 .55%9
CLASS III .50%3 .50%3 .28%9,18 .15%2,18 .05%9 .48%9
SMALL CAP GROWTH FUND
CLASS I .50%3 .50%3 .27%9 .28%2 .06%9,10 .61%9
CLASS II .50%3 .50%3 .27%9 .22%2 .06%9,10 .55%9
CLASS III .50%3 .50%3 .27%9 .15%2 .06%9,10 .48%9
EXAMPLES
YOU WOULD PAY THE
FOLLOWING EXPENSES
ON A $1,000 INVESTMENT YOU WOULD PAY THE
ASSUMING 5% ANNUAL FOLLOWING EXPENSES ON
RETURN WITH REDEMPTION THE SAME INVESTMENT
AT THE END OF ASSUMING
EACH TIME PERIOD: NO REDEMPTION:
1 YR. 3 YR. 5 YR. 10 YR. 1 YR. 3 YR. 5 YR. 10 YR.
<C> <C> <C> <C> <C> <C> <C> <C>
$ 8 $21 $35 $78 $ 8 $ 21 $35 $78
$ 7 $19 $32 $70 $ 7 $ 19 $32 $70
$ 6 $17 $28 $62 $ 6 $ 17 $28 $62
$ 8 $21 $35 $78 $ 8 $ 21 $35 $78
$ 7 $19 $32 $70 $ 7 $ 19 $32 $70
$ 6 $17 $28 $62 $ 6 $ 17 $28 $62
$ 9 $25 $42 $93 $ 9 $ 25 $42 $93
$ 8 $23 $39 $86 $ 8 $ 23 $39 $86
$ 8 $21 $35 $78 $ 8 $ 21 $35 $78
$ 8 $21 $35 $78 $ 8 $ 21 $35 $78
$ 7 $19 $32 $70 $ 7 $ 19 $32 $70
$ 6 $17 $28 $62 $ 6 $ 17 $28 $62
$ 9 $22 $37 $79 $ 9 $ 22 $37 $79
$ 8 $20 $33 $71 $ 8 $ 20 $33 $71
$ 8 $18 $30 $63 $ 8 $ 18 $30 $63
$16 $30 $45 $88 $11 $ 24 $39 $81
$16 $28 $42 $81 $11 $ 23 $36 $74
$15 $26 $38 $73 $10 $ 20 $32 $65
$16 $30 $11 $ 24
$16 $28 $11 $ 23
$15 $26 $10 $20
</TABLE>
FOOTNOTES BEGIN ON PAGE 13 AND ARE IMPORTANT TO UNDERSTANDING THIS TABLE.
UNLESS OTHERWISE NOTED, ANNUAL OPERATING EXPENSES SHOWN ARE BASED ON ACTUAL
EXPENSES FOR THE YEAR ENDED FEBRUARY 28, 1997.
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 TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. 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").
8
<TABLE>
<CAPTION>
SHAREHOLDER
GMO FUND NAME TRANSACTION EXPENSES ANNUAL OPERATING EXPENSES
CASH PURCHASE REDEMPTION INV.
PREMIUM (AS A FEES (AS A MGMT. SHARE-
PERCENTAGE PERCENTAGE FEES AFTER HOLDER TOTAL
OF AMOUNT OF AMOUNT FEE SERVICE OTHER OPERATING
INVESTED)1 REDEEMED)1 WAIVER FEE EXPENSES EXPENSES
<S> <C> <C> <C> <C> <C> <C>
FUNDAMENTAL VALUE
FUND
CLASS I .15%5 NONE .55%9,18 .28%2,18 .05%9 .88%9
CLASS II .15%5 NONE .55%9,18 .22%2,18 .05%9 .82%9
CLASS III .15%5 NONE .55%9,18 .15%2,18 .05%9 .75%9
REIT FUND
CLASS I .50%3 .50%3 .48%9 .28%2 .06%9,10 .82%9
CLASS II .50%3 .50%3 .48%9 .22%2 .06%9,10 .76%9
CLASS III .50%3 .50%3 .48%9 .15%2 .06%9,10 .69%9
INTERNATIONAL
EQUITY FUNDS
INTERNATIONAL CORE
FUND
CLASS I .60%3 NONE .46%9,18 .11%2,18 .10%9 .84%9
CLASS II .60%3 NONE .46%9,18 .11%2,18 .10%9 .78%9
CLASS III .60%3 NONE .46%9,18 .11%2,18 .10%9 .71%9
CURRENCY HEDGED
INTERNATIONAL
CORE FUND
CLASS I .60%3 NONE .28%9,18 .28%2,18 .29%9 .85%9
CLASS II .60%3 NONE .28%9,18 .22%2,18 .29%9 .79%9
CLASS III .60%3 NONE .28%9,18 .15%2,18 .29%9 .72%9
FOREIGN FUND
CLASS I NONE NONE .43%9 .28%2 .18%9,10 .89%9
CLASS II NONE NONE .43%9 .22%2 .18%9,10 .83%9
CLASS III NONE NONE .43%9 .15%2 .18%9,10 .76%9
EXAMPLES
YOU WOULD PAY THE
FOLLOWING EXPENSES
ON A $1,000 INVESTMENT YOU WOULD PAY THE
ASSUMING 5% ANNUAL FOLLOWING EXPENSES ON
RETURN WITH REDEMPTION THE SAME INVESTMENT
AT THE END OF ASSUMING
EACH TIME PERIOD: NO REDEMPTION:
1 YR. 3 YR. 5 YR. 10 YR. 1 YR. 3 YR. 5 YR. 10 YR.
<C> <C> <C> <C> <C> <C> <C> <C>
$10 $30 $50 $110 $10 $30 $50 $110
$10 $28 $47 $103 $10 $28 $47 $103
$ 9 $25 $43 $ 94 $ 9 $25 $43 $ 94
$19 $37 $13 $31
$18 $35 $13 $29
$17 $33 $12 $27
$15 $33 $52 $109 $15 $33 $52 $109
$14 $31 $49 $102 $14 $31 $49 $102
$13 $29 $45 $ 94 $13 $29 $45 $ 94
$15 $33 $53 $110 $15 $33 $53 $110
$14 $31 $50 $103 $14 $31 $50 $103
$13 $29 $46 $ 95 $13 $29 $46 $ 95
$ 9 $28 $ 9 $28
$ 8 $26 $ 8 $26
$ 8 $24 $ 8 $24
</TABLE>
FOOTNOTES BEGIN ON PAGE 13 AND ARE IMPORTANT TO UNDERSTANDING THIS TABLE.
UNLESS OTHERWISE NOTED, ANNUAL OPERATING EXPENSES SHOWN ARE BASED ON ACTUAL
EXPENSES FOR THE YEAR ENDED FEBRUARY 28, 1997.
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 TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. 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").
9
<TABLE>
<CAPTION>
SHAREHOLDER
GMO FUND NAME TRANSACTION EXPENSES ANNUAL OPERATING EXPENSES
CASH PURCHASE REDEMPTION INV.
PREMIUM (AS A FEES (AS A MGMT. SHARE-
PERCENTAGE PERCENTAGE FEES AFTER HOLDER TOTAL
OF AMOUNT OF AMOUNT FEE SERVICE OTHER OPERATING
INVESTED)1 REDEEMED)1 WAIVER FEE EXPENSES EXPENSES
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
CLASS I 1.00%3 .60%3 .42%9,18 .28%2,18 .19%9 .89%9
CLASS II 1.00%3 .60%3 .42%9,18 .22%2,18 .19%9 .83%9
CLASS III 1.00%3 .60%3 .42%9,18 .15%2,18 .19%9 .76%9
JAPAN FUND
CLASS I .40%5 .61%5 .37%9,18 .28%2,18 .18%9 .83%9
CLASS II .40%5 .61%5 .37%9,18 .22%2,18 .18%9 .77%9
CLASS III .40%5 .61%5 .37%9,18 .15%2,18 .18%9 .70%9
EMERGING MARKETS
FUND
CLASS I 1.60%4 .40%4,7 .79%9,18 .28%2,18 .30%9 1.37%9
CLASS II 1.60%4 .40%4,7 .79%9,18 .22%2,18 .30%9 1.31%9
CLASS III 1.60%4 .40%4,7 .79%9,18 .15%2,18 .30%9 1.24%9
GLOBAL PROPERTIES
FUND
CLASS I .60%13 .30%13 .48%9 .28%2 .24%9,10 1.00%9
CLASS II .60%13 .30%13 .48%9 .22%2 .24%9,10 .94%9
CLASS III .60%13 .30%13 .48%9 .15%2 .24%9,10 .87%9
FIXED INCOME FUNDS
DOMESTIC BOND FUND
CLASS I NONE NONE .06%9,18 .28%2,18 .04%9 .38%9
CLASS II NONE NONE .06%9,18 .22%2,18 .04%9 .32%9
CLASS III NONE NONE .06%9,18 .15%2,18 .04%9 .25%9
EXAMPLES
YOU WOULD PAY THE
FOLLOWING EXPENSES
ON A $1,000 INVESTMENT YOU WOULD PAY THE
ASSUMING 5% ANNUAL FOLLOWING EXPENSES ON
RETURN WITH REDEMPTION THE SAME INVESTMENT
AT THE END OF ASSUMING
EACH TIME PERIOD: NO REDEMPTION:
1 YR. 3 YR. 5 YR. 10 YR. 1 YR. 3 YR. 5 YR. 10 YR.
<C> <C> <C> <C> <C> <C> <C> <C>
$25 $45 $66 $127 $19 $38 $59 $119
$25 $43 $63 $120 $18 $36 $56 $112
$24 $41 $59 $112 $18 $34 $52 $103
$19 $37 $57 $115 $12 $30 $50 $106
$18 $35 $54 $108 $12 $29 $47 $ 99
$17 $33 $50 $100 $11 $26 $43 $ 91
$34 $63 $95 $184 $30 $59 $90 $178
$33 $61 $91 $177 $29 $57 $87 $171
$33 $59 $88 $169 $28 $55 $83 $164
$19 $41 $16 $38
$19 $39 $16 $36
$18 $37 $15 $34
$ 4 $12 $21 $ 48 $ 4 $12 $21 $ 48
$ 3 $10 $18 $ 41 $ 3 $10 $18 $ 41
$ 3 $ 8 $14 $ 32 $ 3 $ 8 $14 $ 32
</TABLE>
FOOTNOTES BEGIN ON PAGE 13 AND ARE IMPORTANT TO UNDERSTANDING THIS TABLE.
UNLESS OTHERWISE NOTED, ANNUAL OPERATING EXPENSES SHOWN ARE BASED ON ACTUAL
EXPENSES FOR THE YEAR ENDED FEBRUARY 28, 1997.
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 TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. 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").
10
<TABLE>
<CAPTION>
SHAREHOLDER
GMO FUND NAME TRANSACTION EXPENSES ANNUAL OPERATING EXPENSES
CASH PURCHASE REDEMPTION INV.
PREMIUM (AS A FEES (AS A MGMT. SHARE-
PERCENTAGE PERCENTAGE FEES AFTER HOLDER TOTAL
OF AMOUNT OF AMOUNT FEE SERVICE OTHER OPERATING
INVESTED)1 REDEEMED)1 WAIVER FEE EXPENSES EXPENSES
<S> <C> <C> <C> <C> <C> <C>
U.S. BOND/GLOBAL
ALPHA A FUND
CLASS I .15%4 NONE .15%9 .28%2 .10%9,10 .53%9
CLASS II .15%4 NONE .15%9 .22%2 .10%9,10 .47%9
CLASS III .15%4 NONE .15%9 .15%2 .10%9,10 .40%9
U.S. BOND/GLOBAL
ALPHA B FUND
CLASS I .15%4 NONE .10%9 .28%2 .10%9,10 .48%9
CLASS II .15%4 NONE .10%9 .22%2 .10%9,10 .42%9
CLASS III .15%4 NONE .10%9 .15%2 .10%9,10 .35%9
INTERNATIONAL BOND
FUND
CLASS I .15%4 NONE .13%9,18 .28%2,18 .12%9 .53%9
CLASS II .15%4 NONE .13%9,18 .22%2,18 .12%9 .47%9
CLASS III .15%4 NONE .13%9,18 .15%2,18 .12%9 .40%9
CURRENCY HEDGED
INTERNATIONAL
BOND FUND
CLASS I .15%4 NONE .15%9,18 .28%2,18 .10%9 .53%9
CLASS II .15%4 NONE .15%9,18 .22%2,18 .10%9 .47%9
CLASS III .15%4 NONE .15%9,18 .15%2,18 .10%9 .40%9
GLOBAL BOND FUND
CLASS I .15%4 NONE .00%9,18 .28%2,18 .19%9 .47%9
CLASS II .15%4 NONE .00%9,18 .22%2,18 .19%9 .41%9
CLASS III .15%4 NONE .00%9,18 .15%2,18 .19%9 .34%9
EMERGING COUNTRY
DEBT FUND
CLASS I .50%4 .25%4,8 .30%9,18 .28%2,18 .12%9 .70%9
CLASS II .50%4 .25%4,8 .30%9,18 .22%2,18 .12%9 .64%9
CLASS III .50%4 .25%4,8 .30%9,18 .15%2,18 .12%9 .57%9
EXAMPLES
YOU WOULD PAY THE
FOLLOWING EXPENSES
ON A $1,000 INVESTMENT YOU WOULD PAY THE
ASSUMING 5% ANNUAL FOLLOWING EXPENSES ON
RETURN WITH REDEMPTION THE SAME INVESTMENT
AT THE END OF ASSUMING
EACH TIME PERIOD: NO REDEMPTION:
1 YR. 3 YR. 5 YR. 10 YR. 1 YR. 3 YR. 5 YR. 10 YR.
<C> <C> <C> <C> <C> <C> <C> <C>
$ 7 $18 $ 7 $18
$ 6 $17 $ 6 $17
$ 6 $14 $ 6 $14
$ 6 $17 $ 6 $17
$ 6 $15 $ 6 $15
$ 5 $13 $ 5 $13
$ 7 $18 $31 $68 $ 7 $18 $31 $ 68
$ 6 $17 $28 $61 $ 6 $17 $28 $ 61
$ 6 $14 $24 $52 $ 6 $14 $24 $ 52
$ 7 $18 $31 $68 $ 7 $18 $31 $ 68
$ 6 $17 $28 $61 $ 6 $17 $28 $ 61
$ 6 $14 $24 $52 $ 6 $14 $24 $ 52
$ 6 $17 $28 $61 $ 6 $17 $28 $ 61
$ 6 $15 $24 $53 $ 6 $15 $24 $ 53
$ 5 $12 $21 $45 $ 5 $12 $21 $ 45
$15 $30 $47 $95 $12 $27 $44 $ 92
$14 $28 $44 $88 $12 $25 $41 $ 84
$13 $26 $40 $80 $11 $23 $37 $ 76
</TABLE>
FOOTNOTES BEGIN ON PAGE 13 AND ARE IMPORTANT TO UNDERSTANDING THIS TABLE.
UNLESS OTHERWISE NOTED, ANNUAL OPERATING EXPENSES SHOWN ARE BASED ON ACTUAL
EXPENSES FOR THE YEAR ENDED FEBRUARY 28, 1997.
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 TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. 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").
11
<TABLE>
<CAPTION>
SHAREHOLDER
GMO FUND NAME TRANSACTION EXPENSES ANNUAL OPERATING EXPENSES
CASH PURCHASE REDEMPTION INV.
PREMIUM (AS A FEES (AS A MGMT. SHARE-
PERCENTAGE PERCENTAGE FEES AFTER HOLDER TOTAL
OF AMOUNT OF AMOUNT FEE SERVICE OTHER OPERATING
INVESTED)1 REDEEMED)1 WAIVER FEE EXPENSES EXPENSES
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM INCOME
FUND
CLASS III NONE NONE .00%9,18 .15%2,18 .05%9 .20%9
GLOBAL HEDGED
EQUITY FUND
CLASS I .37%3,14 1.40%6 .45%16 .28%17 .31%16 1.04%16
CLASS II .37%3,14 1.40%6 .45%16 .22%17 .31%16 .98%16
CLASS III .37%3,14 1.40%6 .45%16 .15%17 .31%16 .91%16
INFLATION INDEXED
BOND FUND
CLASS I .10%4 .10%4 .00%9 .28%2 .10%9,10 .38%9
CLASS II .10%4 .10%4 .00%9 .22%2 .10%9,10 .32%9
CLASS III .10%4 .10%4 .00%9 .15%2 .10%9,10 .25%9
ASSET ALLOCATION
FUNDS12
INTERNATIONAL
EQUITY
ALLOCATION FUND
CLASS I .80%11 .11%11 .00%9,12 .13%12 .00%9,12 .13%9,12
CLASS II .80%11 .11%11 .00%9,12 .07%12 .00%9,12 .07%9,12
CLASS III .80%11 .11%11 .00%9,12 .00%12 .00%9,12 .00%9,12
WORLD EQUITY
ALLOCATION FUND
CLASS I .66%11 .15%11 .00%9,12 .13%12 .00%9,12 .13%9,12
CLASS II .66%11 .15%11 .00%9,12 .07%12 .00%9,12 .07%9,12
CLASS III .66%11 .15%11 .00%9,12 .00%12 .00%9,12 .00%9,12
GLOBAL (U.S.+)
EQUITY
ALLOCATION FUND
CLASS I .47%11 .15%11 .00%9,12 .13%12 .00%9,12 .13%9,12
CLASS II .47%11 .15%11 .00%9,12 .07%12 .00%9,12 .07%9,12
CLASS III .47%11 .15%11 .00%9,12 .00%12 .00%9,12 .00%9,12
GLOBAL BALANCED
ALLOCATION FUND
CLASS I .35%11 .11%11 .00%9,12 .13%12 .00%9,12 .13%9,12
CLASS II .35%11 .11%11 .00%9,12 .07%12 .00%9,12 .07%9,12
CLASS III .35%11 .11%11 .00%9,12 .00%12 .00%9,12 .00%9,12
EXAMPLES
YOU WOULD PAY THE
FOLLOWING EXPENSES
ON A $1,000 INVESTMENT YOU WOULD PAY THE
ASSUMING 5% ANNUAL FOLLOWING EXPENSES ON
RETURN WITH REDEMPTION THE SAME INVESTMENT
AT THE END OF ASSUMING
EACH TIME PERIOD: NO REDEMPTION:
1 YR. 3 YR. 5 YR. 10 YR. 1 YR. 3 YR. 5 YR. 10 YR.
<C> <C> <C> <C> <C> <C> <C> <C>
$ 2 $ 6 $11 $ 26 $ 2 $ 6 $11 $ 26
$29 $52 $78 $151 $14 $37 $61 $130
$28 $51 $75 $144 $14 $35 $58 $123
$27 $48 $71 $136 $13 $33 $54 $115
$ 6 $14 $ 5 $13
$ 5 $12 $ 4 $11
$ 5 $10 $ 4 $ 9
$10 $13 $ 9 $12
$10 $12 $ 9 $10
$ 9 $ 9 $ 8 $ 8
$ 9 $12 $ 8 $11
$ 9 $11 $ 7 $ 9
$ 8 $ 8 $ 7 $ 7
$ 8 $11 $ 6 $ 9
$ 7 $ 9 $ 5 $ 7
$ 6 $ 6 $ 5 $ 5
$ 6 $ 9 $ 5 $ 8
$ 5 $ 7 $ 4 $ 6
$ 5 $ 5 $ 4 $ 4
</TABLE>
FOOTNOTES BEGIN ON PAGE 13 AND ARE IMPORTANT TO UNDERSTANDING THIS TABLE.
UNLESS OTHERWISE NOTED, ANNUAL OPERATING EXPENSES SHOWN ARE BASED ON ACTUAL
EXPENSES FOR THE YEAR ENDED FEBRUARY 28, 1997.
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 TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. 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").
12
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums and redemption fees apply only to cash transactions as set
forth under "Purchase of Shares" and "Redemption of Shares" respectively.
These fees are paid to and retained by the Fund itself and are designed to
allocate transaction costs caused by shareholder activity to the shareholder
generating the activity, rather than to the Fund as a whole. As described in
greater detail in footnotes below, for certain Funds the Manager may reduce
purchase premiums and/or redemption fees if the Manager determines there are
minimal brokerage and/or other transaction costs caused by a particular
purchase or redemption. However, the instances in which such fees may be
properly waived are extremely limited. 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 up to 0.10%, and the Emerging Markets Fund may
charge a premium of up to 0.20%, on in-kind purchases.
2. Shareholder Service Fee ("SSF") paid to GMO for providing client services
and reporting services. For Class III Shares, the SSF is 0.15% of daily net
assets. Class III Shares are a redesignation of the single class of shares
that has been offered by each Fund since inception. Total Operating Expenses
for Class III Shares are capped at the same levels as for the single class
of shares that existed prior to such redesignation and the creation of
additional classes. The expense caps are detailed in footnote 9 below. The
level of SSF is the sole economic distinction between the various classes of
Fund shares. A lower SSF for larger investments reflects that the cost of
servicing client accounts is lower for larger accounts when expressed as a
percentage of the account. See "Multiple Classes -- Shareholder Service
Fees" for more information.
3. The purchase premium and/or redemption fee for this Fund may generally not
be waived due to offsetting transactions, and may be waived in only rare
circumstances. The premium or fee will only be waived for this Fund (i) if
the purchase or redemption is part of a transfer from or to another Fund
where the Manager is able to transfer securities among the Funds to effect
the transaction, (ii) during periods (expected to exist only rarely) when
the Manager determines that the Fund is either substantially overweighted or
underweighted with respect to its cash position so that a redemption or
purchase will not require a securities transaction, or (iii) in certain
other instances (not including offsetting transactions) where it is
compelling to the Manager that the purchase or redemption will not result in
transaction costs to the Fund. Any waiver with respect to this Fund must be
arranged in advance with the Manager. Prior to May 31, 1996, the premium or
fee would generally be waived if, usually due to offsetting transactions, a
purchase or redemption resulted in minimal brokerage and/or other
transaction costs. After May 31, 1996, the Fund discontinued the policy of
waiving these charges due to general offsetting transactions. Accordingly,
the amount of the stated purchase premium and/or redemption fee is lower
than the premium or fee charged prior to May 31, 1996, reflecting the
savings of occasional offsetting transactions. The new approach allows all
purchasers or sellers to benefit proportionately by offsetting transactions
and other common circumstances that mitigate transaction costs, rather than
identifying the savings by reference to the particular buyers and sellers in
particular transactions.
4. The stated purchase premium and/or redemption fee for this Fund will always
be charged in full except that the relevant purchase premium or redemption
fee will be reduced by 50% with respect to any portion of a purchase or
redemption that is offset by a corresponding redemption or purchase,
respectively, occurring on the same day. The Manager examines each purchase
and redemption of shares eligible for such treatment to determine if
circumstances exist to waive a portion of the purchase premium or redemption
fee. Absent a clear determination that transaction costs will be reduced or
absent for the purchase or redemption, the full premium or fee will be
charged.
5. The Manager may waive or reduce purchase premiums and/or redemption fees for
this Fund if there are minimal brokerage and transaction costs incurred in
connection with a transaction due to offsetting transactions or otherwise.
6. May be eliminated if it is not necessary to incur costs relating to the
early termination of hedging transactions to meet redemption requests.
7. 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).
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. 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 Shareholder
Service Fees, brokerage commissions and other investment-related costs,
hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses and
transfer taxes; and, in the case
13
of the Emerging Markets Fund, Emerging Country Debt Fund, Global Hedged
Equity Fund and Global Properties Fund, also excluding custodial fees; and,
in the case of the Asset Allocation Funds, U.S. Sector Fund and Global
Hedged Equity Fund, also excluding expenses indirectly incurred by
investment in other Funds of the Trust) would otherwise exceed the
percentage of that Fund's daily net assets specified below. Therefore, so
long as the Manager agrees to reduce its fees and bear certain expenses,
total annual operating expenses (subject to such exclusions) of the Fund
will not exceed these stated limitations. Absent such undertakings,
management fees for each Fund and the annual operating expenses for each
class would be as shown below.
<TABLE>
<CAPTION>
MANAGEMENT
VOLUNTARY FEE
EXPENSE (ABSENT TOTAL CLASS
FUND LIMIT WAIVER) OPERATING EXPENSES (ABSENT WAIVER)
---- ----- ------- ----------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C> <C> <C>
Core Fund .33% .525% .828% .768% .698%
Tobacco-free Core Fund .33% .50% .96% .90% .83%
Value Fund .46% .70% 1.02% .96% .89%
Growth Fund .33% .50% .83% .77% .70%
U.s. Sector Fund .33% .49% .83% .77% .70%
Small Cap Value Fund .33% .50% .83% .77% .70%
Small Cap Growth Fund .33% .50% .84% .78% .71%
Fundamental Value Fund .60% .75% 1.08% 1.02% .95%
Reit Fund .54% .75% 1.09% 1.03% .96%
International Core Fund .54% .75% 1.13% 1.07% 1.00%
Currency Hedged International Core Fund .54% .75% 1.32% 1.26% 1.19%
Foreign Fund .60% .75% 1.21% 1.15% 1.08%
International Small Companies Fund .60% 1.25% 1.72% 1.66% 1.59%
Japan Fund .54% .75% 1.21% 1.15% 1.08%
Emerging Markets Fund .81% 1.00% 1.58% 1.52% 1.45%
Global Properties Fund .60% .75% 1.27% 1.21% 1.14%
Domestic Bond Fund .10% .25% .57% .51% .44%
U.s. Bond/global Alpha A Fund .25% .40% .78% .72% .65%
U.s. Bond/global Alpha B Fund .20% .40% .78% .72% .65%
International Bond Fund .25% .40% .80% .74% .67%
Currency Hedged International Bond Fund .25% .50% .88% .82% .75%
Global Bond Fund .19% .35% .88% .82% .75%
Emerging Country Debt Fund .35% .50% .90% .84% .77%
Short-term Income Fund .05% .25% -- -- .56%
Global Hedged Equity Fund .50% .65% 1.24% 1.18% 1.11%
Inflation Indexed Bond Fund .10% .25% .66% .60% .53%
International Equity Allocation Fund .00% .00% .18% .12% .05%
World Equity Allocation Fund .00% .00% .22% .16% .09%
Global (U.s.+) Equity Allocation Fund .00% .00% .23% .17% .10%
Global Balanced Allocation Fund .00% .00% .20% .14% .07%
</TABLE>
10. Based on estimated amounts for the Fund's first fiscal year.
11. Effective October 16, 1996, each of the Asset Allocation Funds began
charging purchase premiums and redemption fees for cash transactions. This
is done to ensure that the cost of purchase premiums or redemption fees
paid to underlying Funds caused by shareholder transactions in the Asset
Allocation Funds is paid by the shareholders generating the transactions,
rather than by the other Asset Allocation Fund shareholders. This is
consistent with the purpose of all of the Trust's purchase premiums and
redemption fees. Each of the Asset Allocation Funds invests in various
other Funds with different levels of purchase premiums and redemption fees,
which reflect the trading costs of different asset classes. Therefore, the
purchase premium and redemption fee of each Asset Allocation Fund has been
computed as the weighted average of the premiums and fees, respectively, of
the underlying Funds in which the Asset Allocation Fund is invested, based
on actual investments by each Asset Allocation Fund. The amount of purchase
premium and redemption fee for each Asset Allocation Fund is adjusted
approximately annually based on underlying Funds owned by each Asset
Allocation Fund during the prior year. The Manager may, but is not
obligated to, adjust the purchase premium and/or redemption fee for an
Asset Allocation Fund more frequently if the Manager believes in its
discretion that circumstances warrant. For more information concerning
which underlying Funds a particular Asset Allocation Fund may invest in,
see "Investment Objectives and Policies -- Asset Allocation Funds."
14
12. Asset Allocation Funds invest primarily in other Funds of the Trust
(referred to here as "underlying Funds"). Therefore, in addition to the
fees and expenses directly incurred by the Asset Allocation Funds (which
are shown in the Schedule of Fees and Expenses), the Asset Allocation Funds
will also incur fees and expenses indirectly as shareholders of the
underlying Funds. Because the underlying Funds have varied expense and fee
levels and the Allocation Funds may own different proportions of underlying
Funds at different times, the amount of fees and expenses indirectly
incurred by the Asset Allocation Funds will vary. The Manager believes
that, under normal market conditions, the total amount of fees and expenses
that will be indirectly incurred by the Asset Allocation Funds because of
investment in underlying Funds will fall within the ranges set forth below:
<TABLE>
<CAPTION>
FUND LOW TYPICAL HIGH
---- --- ------- ----
<S> <C> <C> <C>
International Equity Allocation Fund .72% .81% .89%
World Equity Allocation Fund .69% .73% .85%
Global (U.S.+) Equity Allocation Fund .53% .62% .74%
Global Balanced Allocation Fund .48% .57% .72%
</TABLE>
13. It is expected that the purchase premiums and redemption fees for this Fund
will be eliminated once the net assets of the Fund exceed $100 million.
However, even thereafter, the Fund will reserve the right to charge a
purchase premium of up to 0.60% and a redemption fee of up to 0.30% on
purchases or redemptions of amounts that are equal to or greater than 5% of
the Fund's net assets.
14. The Fund invests in various other Funds with different levels of purchase
premiums which reflect the trading costs of different asset classes.
Therefore, the Fund's purchase premium has initially been computed as the
weighted average of the purchase premiums of other GMO Funds in which the
Fund is invested and/or which hold securities of the same asset class
and/or sector as securities owned directly by the Fund. The amount of
purchase premium for the Fund will be adjusted approximately annually based
on underlying Funds owned by the Fund during the prior year. The Manager
may, but is not obligated to, adjust the purchase premium for the Fund more
frequently if the Manager believes in its discretion that circumstances
warrant. For more information about the Fund's investment in underlying
Funds, see the description of the Fund set forth in "Investment Objectives
and Policies."
15. The Fund invests in other Funds of the Trust ("underlying Funds") and
invests directly in other instruments. Therefore, the Fund will incur fees
and expenses indirectly as a shareholder of the underlying Funds. Because
the underlying Funds have varied expense and fee levels and because the
Fund may invest to varied extents and in varied proportions in underlying
Funds, the amount of fees and expenses incurred indirectly by the Fund will
also vary. However, the Manager has voluntarily undertaken to reduce the
management fee (but not below zero) it charges the Fund until further
notice to the extent that the sum of (i) the Fund's total annual operating
expenses (excluding Shareholder Service Fees and the following expenses:
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and
transfer taxes ("Fund Expenses")), plus (ii) the amount of fees and
expenses (excluding Shareholder Service Fees and Fund Expenses (as defined
above)) incurred indirectly by the Fund through investment in underlying
Funds, would otherwise exceed 0.33% of the Fund's daily net assets. Because
the Manager will not waive the management fees below zero, and because the
amount of fees and expenses incurred indirectly by the Fund will vary, the
total operating expenses (excluding Shareholder Service Fees and Fund
Expenses) incurred indirectly by the Fund through investment in underlying
Funds may exceed 0.33% of the Fund's daily net assets.
16. The Fund invests in other Funds of the Trust ("underlying Funds") and
invests directly in other instruments. Therefore, the Fund will incur fees
and expenses indirectly as a shareholder of the underlying Funds. Because
the underlying Funds have varied expense and fee levels and because the
Fund may invest to varied extents and in varied proportions in underlying
Funds, the amount of fees and expenses incurred indirectly by the Fund will
also vary. However, the Manager has voluntarily undertaken to reduce the
management fee (but not below zero) it charges the Fund until further
notice to the extent that the sum of (i) the Fund's total annual operating
expenses (excluding Shareholder Service Fees, custodial fees, and the
following expenses: brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain
other unusual expenses (including taxes), securities lending fees and
expenses, transfer taxes ("Fund Expenses")), plus (ii) the amount of fees
and expenses (excluding Shareholder Service Fees and Fund Expenses (as
defined above)) incurred indirectly by the Fund through investment in
underlying Funds, would otherwise exceed 0.50% of the Fund's daily net
assets.
17. The Fund will always invest in the class of shares of each underlying Fund
being offered that bears the lowest Shareholder Service Fee. Like the
management fee, the Shareholder Service Fee of each class of the Fund's
shares will be waived (but not below zero) to the extent of the indirect
Shareholder Service Fees paid in connection with the Fund's investment in
shares of underlying Funds. Investors should refer to "Multiple Classes"
herein for greater detail concerning the eligibility requirements and other
differences among the classes.
18. Figure based on actual expenses for the fiscal year ended February 28,
1997, but restated to give effect to a reduction in the expense limitation
and the imposition of a Shareholder Service Fee for each Fund, which
changes were effective as of June 1, 1996.
15
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
DOMESTIC EQUITY FUNDS
CORE FUND
CLASS I SHARES CLASS II SHARES CLASS III SHARES
-------------- --------------- ----------------
PERIOD FROM PERIOD FROM
JULY 2, 1996 JUNE 7, 1996
(COMMENCEMENT (COMMENCEMENT YEAR ENDED FEBRUARY 28/29,
OF OPERATIONS) TO OF OPERATIONS) TO ------------------------------------------------------------
FEBRUARY 28, 1997 FEBRUARY 28, 1997 1997 1996 1995 1994 1993
----------------- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
NET asset value, beginning of
period $ 18.97 $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 15.73 $ 15.96
------- ------- ---------- ---------- ---------- ------- --------
Income (loss) from
investment
operations:
Net investment income 0.20 0.25 0.36 0.41 0.41 0.42 0.45
Net realized and
unrealized gain (loss) on
investments 2.88 2.92 3.58 5.49 0.66 1.59 1.13
------- ------- ---------- ---------- ---------- ------- --------
Total from investment
operations 3.08 3.17 3.94 5.90 1.07 2.01 1.58
------- ------- ---------- ---------- ---------- ------- --------
Less distributions to
shareholders:
From net investment income (0.19) (0.30) (0.39) (0.42) (0.39) (0.43) (0.46)
From net realized gains (1.74) (2.89) (2.89) (1.47) (1.01) (1.53) (1.35)
------- ------- ---------- ---------- ---------- ------- --------
Total distributions (1.93) (3.19) (3.28) (1.89) (1.40) (1.96) (1.81)
------- ------- ---------- ---------- ---------- ------- --------
Net asset value, end of
period $ 20.12 $ 20.10 $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 15.73
======= ======= ========== ========== ========== ======= ========
Total Return2 16.84% 17.46% 22.05% 39.08% 7.45% 13.36% 10.57%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $ 9,104 $64,763 $3,051,344 $3,179,314 $2,309,248 $1,942,005 $1,892,955
Net expenses to average
daily net assets 0.61%4 0.55%4 0.48% 0.48% 0.48% 0.48% 0.49%
Net investment income to
average daily net assets 1.55%4 1.63%4 1.78% 2.25% 2.63% 2.56% 2.79%
Portfolio turnover rate 107% 107% 107% 77% 99% 40% 54%
Average commission rate
paid3 $0.0297 $0.0297 $ 0.0297 N/A N/A N/A N/A
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the
following per share
amounts $ 0.02 $ 0.03 $ 0.04 $ 0.01 $ 0.01 $ 0.01 $ 0.01
</TABLE>
1 The per share amounts have been restated to reflect a ten for one split
effective December 31, 1990.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
4 Annualized.
<TABLE>
<CAPTION>
TOBACCO-FREE CORE FUND Class III Shares
------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
1997 1996 1995 1994 1993 19921
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.93 $ 10.65 $ 11.07 $ 11.35 $ 10.50 $ 10.00
Income from investment operations:
Net investment income 0.24 0.28 0.23 0.34 0.31 0.12
Net realized and unrealized gain on investments 2.41 3.71 0.50 1.18 0.84 0.44
Total from investment operations 2.65 3.99 0.73 1.52 1.15 0.56
Less distributions to shareholders:
From net investment income (0.24) (0.25) (0.28) (0.35) (0.30) (0.06)
From net realized gains (2.36) (1.46) (0.87) (1.45) -- --
Total distributions (2.60) (1.71) (1.15) (1.80) (0.30) (0.06)
Net asset value, end of period $ 12.98 $ 12.93 $ 10.65 $ 11.07 $ 11.35 $ 10.50
Total Return2 22.76% 38.64% 7.36% 14.12% 11.20% 5.62%
Ratios/Supplemental Data:
Net assets, end of period (000's) $66,260 $57,485 $47,969 $55,845 $85,232 $75,412
Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.49% 0.49%4
Net investment income to average daily net
assets 1.83% 2.25% 2.52% 2.42% 2.88% 3.77%4
Portfolio turnover rate 131% 81% 112% 38% 56% 0%
Average commission rate paid3 $0.0259 N/A N/A N/A N/A N/A
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts $ 0.04 $ 0.03 $ 0.03 $ 0.03 $ 0.02 $ 0.01
</TABLE>
1 For the period from the commencement of operations, October 31, 1991 to
February 29, 1992.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
4 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
16
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------------
1992 19911 19901 19891 19881
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$ 15.13 $ 13.90 $ 14.47 $ 13.43 $ 15.24
0.43 0.43 0.65 0.54 0.45
1.55 1.74 2.43 0.96 (0.92)
1.98 2.17 3.08 1.50 (0.47)
(0.42) (0.51) (0.70) (0.46) (0.38)
(0.73) (0.43) (2.95) -- (0.96)
(1.15) (0.94) (3.65) (0.46) (1.34)
$ 15.96 $ 15.13 $ 13.90 $ 14.47 $ 13.43
13.62% 16.52% 21.19% 11.49% (3.20)%
$2,520,710 $1,613,945 $1,016,965 $1,222,115 $1,010,014
0.50% 0.50% 0.50% 0.50% 0.52%
2.90% 3.37% 3.84% 4.02% 3.23%
39% 55% 72% 51% 46%
N/A N/A N/A N/A N/A
$ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01
</TABLE>
17
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
VALUE FUND
CLASS III SHARES
-----------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 19911
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.25 $ 12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25 $ 10.00
-------- -------- -------- -------- ---------- -------- --------
Income from investment operations:
Net investment income 0.31 0.39 0.41 0.43 0.38 0.40 0.12
Net realized and unrealized gain on
investments 2.47 3.71 0.32 1.27 0.98 1.11 2.16
-------- -------- -------- -------- ---------- -------- --------
Total from investment operations 2.78 4.10 0.73 1.70 1.36 1.51 2.28
-------- -------- -------- -------- ---------- -------- --------
Less distributions to shareholders:
From net investment income (0.32) (0.39) (0.45) (0.40) (0.38) (0.41) (0.03)
From net realized gains (1.86) (1.51) (1.71) (1.32) (0.42) (0.41) --
-------- -------- -------- -------- ---------- -------- --------
Total distributions (2.18) (1.90) (2.16) (1.72) (0.80) (0.82) (0.03)
-------- -------- -------- -------- ---------- -------- --------
Net asset value, end of period $ 14.85 $ 14.25 $ 12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25
======== ======== ======== ======== ========== ======== ========
Total Return2 21.26% 35.54% 6.85% 13.02% 11.01% 12.96% 22.85%
Ratios/Supplemental Data:
Net assets, end of period (000's) $469,591 $317,612 $350,694 $679,532 $1,239,536 $644,136 $190,664
Net expenses to average daily net
assets 0.61% 0.61% 0.61% 0.61% 0.62% 0.67% 0.70%4
Net investment income to average
daily net assets 2.17% 2.66% 2.86% 2.70% 3.15% 3.75% 7.89%4
Portfolio turnover rate 84% 65% 77% 35% 50% 41% 23%
Average commission rate paid3 $ 0.0457 N/A N/A N/A N/A N/A N/A
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts $ 0.04 $ 0.02 $ 0.02 $ 0.02 $ 0.01 $ 0.01 $ 0.01
</TABLE>
1 For the period from the commencement of operations, November 14, 1990 to
February 28, 1991.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
4 Annualized.
<TABLE>
<CAPTION>
GROWTH FUND
CLASS III SHARES
------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 19891
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 5.65 $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49 $ 10.00
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Income from investment
operations:
Net investment income 0.07 0.08 0.06 0.06 0.07 0.19 0.25 0.26 0.03
Net realized and
unrealized gain
on investments 1.03 1.54 0.38 0.11 0.17 1.63 2.61 2.40 0.46
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Total from investment
operations 1.10 1.62 0.44 0.17 0.24 1.82 2.86 2.66 0.49
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Less distributions to
shareholders:
From net investment income (0.08) (0.07) (0.06) (0.06) (0.08) (0.23) (0.25) (0.23) --
From net realized gains (1.49) (0.35) (0.07) (0.52) (1.43) (10.31) (0.71) (0.28) --
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Total distributions (1.57) (0.42) (0.13) (0.58) (1.51) (10.54) (0.96) (0.51) --
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Net asset value, end of
period $ 5.18 $ 5.65 $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $10.49
======== ======== ======== ======== ======== ======== ========== ======== ======
Total Return3 21.64% 37.77% 10.86% 4.13% 3.71% 20.47% 24.24% 25.35% 4.90%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $244,183 $391,366 $239,006 $230,698 $168,143 $338,439 $1,004,345 $823,891 $291,406
Net expenses to average
daily net assets 0.48% 0.48% 0.48% 0.48% 0.49% 0.50% 0.50% 0.50% 0.08%
Net investment income to
aver-
age daily net assets 1.21% 1.54% 1.50% 1.38% 1.15% 1.38% 1.91% 2.34% 0.52%
Portfolio turnover rate 100% 76% 139% 57% 36% 46% 45% 57% 0%
Average commission rate
paid4 $ 0.0281 N/A N/A N/A N/A N/A N/A N/A N/A
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the
following per share
amounts $ 0.01 --2 --2 --2 --2 --2 --2 --2 --2
</TABLE>
1 For the period from the commencement of operations, December 28, 1988 to
February 28, 1989.
2 Fees and expenses voluntarily waived or borne by the Manager of less than $.01
per share for each period presented.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
18
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
U.S. SECTOR FUND
<TABLE>
<CAPTION>
CLASS I SHARES CLASS III SHARES
------------------ -------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
PERIOD FROM -------------------------------------------------------
SEPTEMBER 3, 1996
(COMMENCEMENT OF
OPERATIONS) TO
FEBRUARY 28, 1997 1997 1996 1995 1994 19931
----------------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.78 $ 13.63 $ 11.06 $ 11.26 $ 10.38 $ 10.00
------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.12 0.26 0.29 0.28 0.29 0.05
Net realized and unrealized gain on investments 2.10 2.20 3.90 0.49 1.21 0.33
------- -------- -------- -------- -------- --------
Total from investment operations 2.22 2.46 4.19 0.77 1.50 0.38
------- -------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.09) (0.22) (0.29) (0.27) (0.30) --
From net realized gains (0.88) (2.84) (1.33) (0.70) (0.32) --
------- -------- -------- -------- -------- --------
Total distributions (0.97) (3.06) (1.62) (0.97) (0.62) --
------- -------- -------- -------- -------- --------
Net asset value, end of period $ 13.03 $ 13.03 $ 13.63 $ 11.06 $ 11.26 $ 10.38
======= ======== ======== ======== ======== ========
Total Return2 19.25% 20.88% 38.90% 7.56% 14.64% 3.80%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 1,357 $226,711 $211,319 $207,291 $167,028 $169,208
Net expenses to average daily net assets 0.61%4 0.48% 0.48% 0.48% 0.48% 0.48%4
Net investment income to average daily net
assets 1.97%4 1.99% 2.27% 2.61% 2.56% 3.20%4
Portfolio turnover rate 104% 104% 84% 101% 53% 9%
Average commission rate paid3 $0.0270 $ 0.0270 N/A N/A N/A N/A
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts $ 0.01 $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.01
</TABLE>
1 For the period from the commencement of operations, December 31, 1992 to
February 28, 1993.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
4 Annualized.
<TABLE>
<CAPTION>
SMALL CAP VALUE FUND*
CLASS I SHARES CLASS III SHARES
-------------- ----------------
PERIOD FROM
JANUARY 2, 1997
(COMMENCMENT OF YEAR ENDED FEBRUARY 28/29,
OPERATIONS) TO --------------------------------------------------------------
FEBRUARY 28, 1997 1997 1996 1995 1994 1993 19921
----------------- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.34 $ 13.89 $ 13.61 $ 14.31 $ 12.68 $ 11.12 $ 10.00
------- ----- ----- ----- ----- ----- -------
Income from investment operations:
Net investment income 0.05 0.28 0.23 0.20 0.21 0.22 0.04
Net realized and unrealized gain 0.50 2.32 3.20 0.34 2.14 1.59 1.08
------- ----- ----- ----- ----- ----- -------
Total from investment operations 0.55 2.60 3.43 0.54 2.35 1.81 1.12
------- ----- ----- ----- ----- ----- -------
Less distributions to shareholders:
From net investment income -- (0.27) (0.23) (0.20) (0.22) (0.21) --
From net realized gains -- (0.33) (2.92) (1.04) (0.50) (0.04) --
------- ----- ----- ----- ----- ----- -------
Total distributions -- (0.60) (3.15) (1.24) (0.72) (0.25) 0.00
------- ----- ----- ----- ----- ----- -------
Net asset value, end of period $ 15.89 $ 15.89 $ 13.89 $ 13.61 $ 14.31 $ 12.68 $ 11.12
======= ======== ======== ======== ======== ======== =======
Total Return2 3.52% 19.12% 27.18% 4.48% 18.97% 16.46% 11.20%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 1,391 $655,373 $231,533 $235,781 $151,286 $102,232 $58,258
Net expenses to average daily net assets 0.61%4 0.48% 0.48% 0.48% 0.48% 0.49% 0.49%4
Net investment income to average daily
net assets 1.87%4 2.15% 1.67% 1.55% 1.66% 2.02% 2.19%4
Portfolio turnover rate 58% 58% 135% 54% 30% 3% 0%
Average commission rate paid3 $0.0271 $ 0.0271 N/A N/A N/A N/A N/A
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts --5 $ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 0.02 $ 0.01
</TABLE>
1 For the period from commencement of operations, December 31, 1991 to
February 29, 1992.
2 Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during the
periods shown.
3 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
4 Annualized.
5 Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
* Effective December 1, 1996, the "GMO Core II Secondaries Fund" has been
renamed the "GMO Small Cap Value Fund."
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
19
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------
PERIOD FROM DECEMBER 31, 1996
(COMMENCEMENT OF OPERATIONS)
TO FEBRUARY 28, 1997
--------------------
<S> <C>
Net asset value, beginning of period $ 10.00
--------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized gain (loss) (0.19)
-----
Total from investment operations (0.18)
-----
Net asset value, end of period $ 9.82
========
Total Return1 (1.80)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $159,898
Net expenses to average daily net assets 0.48%2
Net investment income to average daily net assets 0.70%2
Portfolio turnover rate 13%
Average broker commission rate per equity share $ .0344
Fees and expenses voluntarily waived or borne by the Manager consisted of
the following per share amount $ 0.01
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
2 Annualized
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE FUND
CLASS III SHARES
-------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------------
1997 1996 1995 1994 1993 19921
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82 $ 10.00
-------- -------- -------- -------- ------- -------
Income from investment operations:
Net investment income 0.33 0.37 0.34 0.27 0.30 0.11
Net realized and unrealized gain on
investments 2.53 3.26 0.55 1.64 1.32 0.77
-------- -------- -------- -------- ------- -------
Total from investment operations 2.86 3.63 0.89 1.91 1.62 0.88
-------- -------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income (0.32) (0.37) (0.32) (0.28) (0.30) (0.06)
From net realized gains (1.25) (0.76) (0.52) (0.85) (0.43) --
-------- -------- -------- -------- ------- -------
Total distributions (1.57) (1.13) (0.84) (1.13) (0.73) (0.06)
-------- -------- -------- -------- ------- -------
Net asset value, end of period $ 16.33 $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82
======== ======== ======== ======== ======= =======
Total Return2 20.03% 29.95% 7.75% 16.78% 15.66% 8.87%
Ratios/Supplemental Data:
Net assets, end of period (000's) $232,583 $212,428 $182,871 $147,767 $62,339 $32,252
Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.75% 0.73% 0.62%4
Net investment income to average daily
net assets 2.15% 2.61% 2.84% 2.32% 2.77% 3.43%4
Portfolio turnover rate 25% 34% 49% 65% 83% 33%
Average commission rate paid3 $ 0.0590 N/A N/A N/A N/A N/A
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.03 $ 0.03
</TABLE>
1 For the period from the commencement of operations, October 31, 1991 to
February 29, 1992.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
4 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
20
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
REIT FUND
<TABLE>
<CAPTION>
CLASS I SHARES CLASS III SHARES
----------------------------- ------------------------
PERIOD FROM DECEMBER 31, 1996 PERIOD FROM MAY 31, 1996
(COMMENCEMENT OF OPERATIONS) (COMMENCEMENT OF OPERATIONS)
TO FEBRUARY 28, 1997 TO FEBRUARY 28, 1997
-------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 12.58 $ 10.00
------- --------
Income from investment operations:
Net investment income 0.03 0.24
Net realized and unrealized gain 0.01 2.60
---- ----
Total from investment operations 0.04 2.84
---- ----
Less distributions to shareholders:
From net investment income -- (0.17)
From net realized gains -- (0.05)
------- --------
Total distributions -- (0.22)
------- --------
Net asset value, end of period $ 12.62 $ 12.62
======= ========
Total Return1 0.32% 28.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 41 $260,929
Net expenses to average daily net assets 0.82%3 0.69%3
Net investment income to average daily net assets 3.17%3 4.72%3
Portfolio turnover rate 21% 21%
Average broker commission rate per equity share $0.0323 $ 0.0323
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amount --2 $ 0.02
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
2 Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
3 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
21
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
CLASS I SHARES CLASS II SHARES CLASS III SHARES
-------------- --------------- ------------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 10, 1996 SEPTEMBER 26, 1996
(COMMENCEMENT OF (COMMENCEMENT OF YEAR ENDED FEBRUARY 28/29,
OPERATIONS) TO OPERATIONS) TO ------------------------------------------------------
FEBRUARY 28, 1997 FEBRUARY 28, 1997 1997 1996 1995 1994
----------------- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 24.17 $ 24.60 $ 24.62 $ 22.32 $ 25.56 $ 18.51
------- ------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income 0.14 0.14 0.59 0.36 0.27 0.29
Net realized and unrealized
gain (loss) on investments 1.38 0.96 1.02 3.09 (1.57) 7.44
------- ------- ---------- ---------- ---------- ----------
Total from investment
operations 1.52 1.10 1.61 3.45 (1.30) 7.73
------- ------- ---------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.26) (0.27) (0.33) (0.39) (0.35) (0.27)
From net realized gains (1.07) (1.07) (1.53) (0.76) (1.59) (0.41)
------- ------- ---------- ---------- ---------- ----------
Total distributions (1.33) (1.34) (1.86) (1.15) (1.94) (0.68)
------- ------- ---------- ---------- ---------- ----------
Net asset value, end of
period $ 24.36 $ 24.36 $ 24.37 $ 24.62 $ 22.32 $ 25.56
======= ======= ========== ========== ========== ==========
Total Return2 6.38% 4.51% 6.72% 15.72% (5.31)% 42.10%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $ 208 $25,302 $4,232,937 $4,538,036 $2,591,646 $2,286,431
Net expenses to average
daily net assets 0.85%3,6 0.80%5,6 0.71%4 0.71%4 0.70% 0.71%4
Net investment income to
average
daily net assets 1.12%6 0.98%6 2.34% 1.93% 1.48% 1.48%
Portfolio turnover rate 97% 97% 97% 14% 53% 23%
Average commission rate
paid7 $0.0062 $0.0062 $ 0.0062 N/A N/A N/A
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the following
per share amounts $ 0.04 $ 0.05 $ 0.06 $ 0.03 $ 0.03 $ 0.03
</TABLE>
1 For the period from the commencement of operations, April 7, 1987 to February
29, 1988.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .03% of average daily net assets.
4 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
5 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .04% of average daily net assets.
6 Annualized.
7 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged. The average broker commission rate will vary
depending on the markets in which trades are executed.
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL CORE FUND Class III Shares
---------------------------------------
YEAR ENDED PERIOD ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 19961
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period $ 11.54 $ 10.00
-------- --------
Income from investment operations:
Net investment income 0.22 0.23
Net realized and unrealized gain on investments 1.63 1.44
-------- --------
Total from investment operations 1.85 1.67
-------- --------
Less distributions to shareholders from:
Net investment income (0.28) (0.06)
Net realized gains (0.43) (0.07)
-------- --------
Total distributions (0.71) (0.13)
-------- --------
Net asset value, end of period $ 12.68 $ 11.54
======== ========
Total Return2 16.55% 16.66%
Ratios/Supplemental Data:
Net assets, end of period (000's) $581,099 $407,227
Net expenses to average daily net assets 0.72%3 0.69%4
Net investment income to average daily net assets 2.25% 1.89%4
Portfolio turnover rate 84% 7%
Average commission rate paid5 $ 0.0067 N/A
Fees and expenses voluntarily waived or borne by the Manager consisted of
the following per share amounts $ 0.04 $ 0.05
</TABLE>
1 Period from June 30, 1995 (commencement of operations) to February 29, 1996.
2 Calculation excludes purchase premiums. 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 approximates .03% of average daily net assets.
4 Annualized.
5 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged. The average broker commission rate will vary
depending on the markets in which trades are executed.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
22
<TABLE>
<CAPTION>
Class III Shares
---------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------------------
1993 1992 1991 1990 1989 19881
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
$ 18.80 $ 18.73 $ 18.79 $ 17.22 $ 14.76 $ 15.00
-------- -------- -------- -------- ------- -------
0.29 0.29 0.55 0.49 0.45 0.18
(0.04) 0.22 0.69 1.93 3.37 (0.03)
-------- -------- -------- -------- ------- -------
0.25 0.51 1.24 2.42 3.82 0.15
-------- -------- -------- -------- ------- -------
(0.20) (0.28) (0.54) (0.55) (0.45) (0.05)
(0.34) (0.16) (0.76) (0.30) (0.91) (0.34)
-------- -------- -------- -------- ------- -------
(0.54) (0.44) (1.30) (0.85) (1.36) (0.39)
-------- -------- -------- -------- ------- -------
$ 18.51 $ 18.80 $ 18.73 $ 18.79 $ 17.22 $ 14.76
======== ======== ======== ======== ======= =======
1.43% 2.84% 7.44% 13.99% 26.35% 1.07%
$918,332 $414,341 $173,792 $101,376 $35,636 $11,909
0.70% 0.70% 0.78% 0.80% 0.88% 0.70%6
2.36% 2.36% 3.32% 3.17% 3.19% 1.27%6
23% 35% 81% 45% 37% 129%
N/A N/A N/A N/A N/A N/A
$ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 0.05 $ 0.08
</TABLE>
23
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
FOREIGN FUND*
GMO POOL PERFORMANCE INFORMATION**
CLASS I SHARES CLASS II SHARES CLASS III SHARES (UNAUDITED)
-------------- --------------- ---------------- -------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
JULY 10, 1996 SEPTEMBER 30, 1996 JUNE 28, 1996
(COMMENCEMENT OF (COMMENCEMENT OF (COMMENCEMENT OF YEAR ENDED JUNE 30,(A)
OPERATIONS) TO OPERATIONS) TO OPERATIONS) TO -------------------------------------
FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 9.88 $ 10.02 $ 10.00 $ 8.90 $ 8.52 $ 6.88 $ 6.72
--------- --------- --------- ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income 0.06 0.06 0.08 0.27(b) 0.27(b) 0.15(b) 0.23(b)
Net realized and
unrealized gain (loss)
on investments 0.78 0.65 0.66 1.07 0.37 1.65 0.15
--------- --------- --------- ------ ------ ------ ------
Total from investment
operations 0.84 0.71 0.74 1.34 0.64 1.80 0.38
--------- --------- --------- ------ ------ ------ ------
Less distributions to
shareholders:
From net investment
income (0.07) (0.08) (0.08) (0.24) (0.26) (0.16) (0.22)
--------- --------- --------- ------ ------ ------ ------
Net asset value, end of
period $ 10.65 $ 10.65 $ 10.66 $10.00 $ 8.90 $ 8.52 $ 6.88
========= ========= ========= ====== ====== ====== ======
Total Return 8.53%1 7.08%1 7.37%1 14.25%(c) 6.82%(c) 25.43%(c) 5.10%(c)
Ratios/Supplemental Data:
Net assets, end of period
(000's) $ 4,891 $ 21,957 $ 671,829 N/A N/A N/A N/A
Net expenses to average
daily net assets 0.89%2,3 0.84%2,4 0.76%2,3 N/A N/A N/A N/A
Net investment income to
average daily net
assets 0.98%2 0.83%2 1.24%2 N/A N/A N/A N/A
Portfolio turnover rate 13% 13% 13% N/A N/A N/A N/A
Average commission rate
paid $0.02045 $0.02045 $0.02045 N/A N/A N/A N/A
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the
following per share
amounts $0.02 $0.02 $0.02 N/A N/A N/A N/A
</TABLE>
1 The total return would have been lower had certain expenses not been waived
during the period shown.
2 Annualized.
3 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
4 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
5 The average broker commission rate will vary depending on the markets in
which trades are executed.
(a) The fiscal year end of the GMO Pool was June 30.
(b) Expenses for the GMO Pool were paid directly by its unitholders.
(c) Net of annual total GMO Pool expenses of 0.83% paid directly by
unitholders.
* The GMO Foreign Fund (the "Foreign Fund") commenced operations on June 28,
1996 subsequent to a transaction involving, in essence, the reorganization of
the GMO International Equities Pool of The Common Fund for Nonprofit
Organizations (the "GMO Pool") as the Foreign Fund. For more information, see
"Certain Financial Information Relating to the GMO Foreign Fund."
** All information relating to the time periods prior to June 28, 1996 relates
to the GMO Pool. Total return figures are based on historical earnings but
past performance data is not necessarily indicative of future performance of
the Foreign Fund. The per unit information for the GMO Pool has been restated
to conform to the Foreign Fund's initial net asset value of $10.00 per share
on such date. The GMO Pool was not a registered investment company as it was
exempt from registration under the 1940 Act and therefore was not subject to
certain investment restrictions imposed by the 1940 Act. If the GMO Pool had
been registered under the 1940 Act, its performance may have been adversely
affected. The GMO Pool's performance information is also presented as the
performance of the Foreign Fund for periods prior to June 28, 1996 by
including the total return of the GMO Pool; such information does not
constitute the financial highlights of the Foreign Fund. For more information
relating to the GMO Pool and the reorganization of the Foreign Fund, see
"Certain Financial Information Relating to the GMO Foreign Fund."
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. The information relating to the period
ending February 28, 1997 should be read in conjunction with the financial
statements and related notes which are included in the Foreign Fund's Annual
Report, and which are incorporated by reference in the Trust's Statement of
Additional Information. The GMO Pool had only one class of outstanding units.
Expenses charged to GMO Pool unitholders were fixed at a level below that of the
Foreign Fund's Class I Shares and above that of its Class II and Class III
Shares.
24
<TABLE>
<CAPTION>
GMO POOL PERFORMANCE INFORMATION**
(UNAUDITED)
---------------------------------------------------------------------------
YEAR ENDED JUNE 30,(A)
---------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 5.94 $ 7.04 $ 5.71 $ 5.05 $ 5.10 $ 3.83 $ 2.12
------ ------- ------ ------ ------ ------ ------
0.21(b) 0.29(b) 0.29(b) 0.23(b) 0.18(b) 0.14(b) 0.12(b)
0.79 (1.09) 1.32 0.66 (0.04) 1.27 1.71
---- ----- ---- ---- ----- ---- ----
1.00 (0.80) 1.61 0.89 0.14 1.41 1.83
---- ----- ---- ---- ---- ---- ----
(0.22) (0.30) (0.28) (0.23) (0.19) (0.14) (0.12)
----- ----- ----- ----- ----- ----- -----
$ 6.72 $ 5.94 $ 7.04 $ 5.71 $ 5.05 $ 5.10 $ 3.83
====== ======= ====== ====== ====== ====== ======
16.22%(c) (11.99)%(c) 27.53%(c) 17.04%(c) 1.96%(c) 36.38%(c) 86.92%(c)
N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A
</TABLE>
25
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
INTERNATIONAL SMALL COMPANIES FUND
CLASS III SHARES
---------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------
1997 1996 1995 1994 1993 19921
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.95 $ 11.95 $ 14.45 $ 8.91 $ 9.62 $ 10.00
-------- -------- -------- -------- ------- -------
Income (loss) from investment operations:
Net investment income 0.23 0.18 0.18 0.15 0.35 0.06
Net realized and unrealized gain (loss) on
investments 0.55 1.16 (1.52) 5.59 (0.68) (0.43)
-------- -------- -------- -------- ------- -------
Total from investment operations 0.78 1.34 (1.34) 5.74 (0.33) (0.37)
-------- -------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income (0.07) (0.17) (0.20) (0.12) (0.38) (0.01)
In excess of net investment income -- (0.02) -- -- -- --
From net realized gains (0.20) (0.15) (0.96) (0.08) -- --
-------- -------- -------- -------- ------- -------
Total distributions (0.27) (0.34) (1.16) (0.20) (0.38) (0.01)
-------- -------- -------- -------- ------- -------
Net asset value, end of period $ 13.46 $ 12.95 $ 11.95 $ 14.45 $ 8.91 $ 9.62
======== ======== ======== ======== ======= =======
Total Return2 5.99% 11.43% (9.66)% 64.67% (3.30)% (3.73)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $235,653 $218,964 $186,185 $132,645 $35,802 $24,467
Net expenses to average daily net assets 0.76%3 0.76%3 0.76%3 0.75% 0.75% 0.85%5
Net investment income to average daily net
assets 1.75% 1.84% 1.45% 1.50% 4.02% 1.91%5
Portfolio turnover rate 13% 13% 58% 38% 20% 1%
Average commission rate paid4 $0.0015 N/A N/A N/A N/A N/A
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts $ 0.10 $ 0.07 $ 0.08 $ 0.09 $ 0.09 $ 0.05
</TABLE>
1 For the period from the commencement of operations, October 15, 1991 to
February 29, 1992.
2 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
3 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
4 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged. The average broker commission rate will vary
depending on the markets in which trades are executed.
5 Annualized.
<TABLE>
<CAPTION>
JAPAN FUND Class III Shares
------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 19911
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.52 $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48 $ 10.00
-------- -------- ------- -------- -------- --------- -------
Income (loss) from investment
operations:
Net investment income (loss) -- 2 (0.01)2 -- 2 -- 0.01 -- (0.01)
Net realized and unrealized gain
(loss) on investments (1.50) 0.79 (1.08) 3.94 (0.36) (1.74) (0.39)
-------- -------- ------- -------- -------- --------- -------
Total from investment operations (1.50) 0.78 (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 (0.00) -- -- (0.01) -- -- --
From net realized gains -- (1.38) (0.93) (0.17) -- -- --
From paid-in capital4 -- -- -- -- -- (0.01) (0.12)
-------- -------- ------- -------- -------- --------- -------
Total distributions (0.00) (1.38) (0.93) (0.18) (0.01) (0.01) (0.12)
-------- -------- ------- -------- -------- --------- -------
Net asset value, end of period $ 7.02 $ 8.52 $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48
======== ======== ======= ======== ======== ======== =======
Total Return5 (17.69)% 8.29% (10.62)% 53.95% (4.49)% (18.42)% (3.79)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $218,797 $126,107 $60,123 $450,351 $306,423 $129,560 $60,509
Net expenses to average daily net
assets 0.70%3 0.92% 0.83% 0.87% 0.88% 0.93% 0.95%8
Net investment income to average
daily net assets 0.01% (0.13)% (0.02)% (0.01)% 0.12% (0.11)% (0.32)%8
Portfolio turnover rate 4% 23% 60% 8% 17% 25% 11%
Average commission rate paid6 $ 0.0066 N/A N/A N/A N/A N/A N/A
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts $ 0.03 $ 0.01 --7 $ $ 0.01 $ 0.01 $ 0.01 $ 0.01
</TABLE>
1 For the period from the commencement of operations, June 8, 1990 to February
28, 1991.
2 Based on average month-end shares outstanding.
3 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .01% of average daily net assets.
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 purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
6 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged.
7 Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
8 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
26
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
CLASS I SHARES CLASS II SHARES CLASS III SHARES
-------------- --------------- -------------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, 1997 NOVEMBER 29, 1996 DECEMBER 9, 1993
(COMMENCEMENT OF (COMMENCEMENT OF YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO OPERATIONS) TO
FEBRUARY 28, 1997 FEBRUARY 4, 19979 1997 1996 1995 FEBRUARY 28, 1994
----------------- ----------------- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.86 $ 10.77 $ 10.54 $ 9.52 $ 12.13 $ 10.00
------- ------- ---------- -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.01 0.05 0.13 0.10 0.05 0.02
Net realized and unrealized gain
(loss) on investments 1.61 1.07 1.96 1.06 (2.37) 2.11
---- ---- ---- ---- ----- ----
Total from investment operations 1.62 1.12 2.09 1.16 (2.32) 2.13
---- ---- ---- ---- ----- ----
Less distributions to shareholders:
From net investment income -- (0.07) (0.14) (0.01) (0.07) (0.00)1
From net realized gains -- -- -- (0.13) (0.22) --
---- ---- ---- ---- ----- ----
Total distributions -- -- (0.14) (0.14) (0.29) (0.00)
Net asset value, end of period $ 12.48 $ 11.82 $ 12.49 $ 10.54 $ 9.52 $ 12.13
======= ======= ========== ======== ======== ========
Total Return2 14.92% 10.42% 19.98% 12.24% (19.51%) 21.35%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 1,748 $ -- $1,725,651 $907,180 $384,259 $114,409
Net expenses to average daily net
assets 1.45%4,8 1.33%4,7 1.24%6 1.35% 1.58% 1.64%4
Net investment income to average
daily net assets 0.77%4 6.14%4 1.40% 1.31% 0.85% 0.87%4
Portfolio turnover rate 41% 41% 41% 35% 50% 2%
Average commission rate paid5 $0.0004 $0.0004 $ 0.0004 N/A N/A N/A
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts --3 --3 $ 0.02 --3 -- --3
</TABLE>
1 The per share income distribution was $0.004.
2 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
3 Fees and expenses voluntarily waived by the Manager were less than $0.01 per
share.
4 Annualized.
5 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged. The average broker commission rate will vary
depending on the markets in which trades are executed.
6 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .06% of average daily net assets.
7 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .07% of average daily net assets.
8 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .20% of average daily net assets.
9 All Class II shares of the Fund were exchanged for Class III shares on
February 4, 1997.
GLOBAL PROPERTIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------
PERIOD FROM
DECEMBER 20, 1996
(COMMENCEMENT OF
OPERATIONS) TO
FEBRUARY 28, 1997
-----------------
<S> <C>
Net asset value, beginning of period $ 10.00
-------
Income from investment operations:
Net investment income 0.04
Net realized and unrealized gain on investments 0.023
-----
Total from investment operations 0.06
----
Net asset value, end of period $ 10.06
=======
Total Return1 0.60%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 9,464
Net expenses to average daily net assets 1.98%4
Net investment income to average daily net assets 2.39%4
Portfolio turnover rate 0%
Average broker commission rate2 $0.0062
Fees and expenses voluntarily waived or borne by the Manager consisted of the
following per share amount $ 0.05
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
2 The average broker commission rate will vary depending on the markets in which
trades are executed.
3 The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1997 due to the timing of purchases and redemptions
of Fund shares in relation to fluctuating market values of the investments of
the Fund.
4 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
27
<TABLE>
<CAPTION>
FIXED INCOME FUNDS
- ------------------
DOMESTIC BOND FUND
CLASS I SHARES CLASS III SHARES
-------------- ------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 10, 1996 AUGUST 18, 1994
(COMMENCEMENT OF YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
OPERATIONS) TO ---------------------------- OPERATIONS) TO
FEBRUARY 28, 1997 1997 1996 FEBRUARY 28, 1995
----------------- ---- ---- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.01 $ 10.40 $ 10.13 $ 10.00
------ -------- -------- --------
Income from investment operations:
Net investment income 0.36 0.58 0.66 0.24
Net realized and unrealized gain on
investments 0.13 (0.09) 0.58 0.07
------ -------- -------- --------
Total from investment operations 0.49 (0.49) 1.24 0.31
------ -------- -------- --------
Less distributions to shareholders:
From net investment income (0.29) (0.60) (0.60) (0.18)
From net realized gains (0.03) (0.08) (0.37) --
In excess of net realized gains (0.02) (0.03) -- --
------ -------- -------- --------
Total distributions (0.34) (0.71) (0.97) (0.18)
------ -------- -------- --------
Net asset value, end of period $10.16 $ 10.18 $ 10.40 $ 10.13
====== ======== ======== ========
Total Return1 4.93% 4.93% 12.50% 3.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) $3,630 $570,862 $310,949 $209,377
Net expenses to average daily net assets 0.38%2 0.25% 0.25% 0.25%2
Net investment income to average daily net
assets 5.83%2 6.15% 6.52% 6.96%2
Portfolio turnover rate 25% 25% 70% 65%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts $ 0.01 $ 0.02 $ 0.01 $ 0.01
</TABLE>
1 The total returns would have been lower had certain expenses not been waived
during the periods shown.
2 Annualized.
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND
CLASS III SHARES
------------------------------------------------------
PERIOD FROM
DECEMBER 22, 1993
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------- OPERATIONS) TO
1997 1996 1995 FEBRUARY 28, 1994
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.92 $ 9.64 $ 9.96 $ 10.00
-------- -------- -------- -------
Income (loss) from investment operations:
Net investment income 0.71 0.62 0.98 0.08
Net realized and unrealized gain (loss) on
investments 0.65 1.55 (0.21) (0.12)
-------- -------- -------- -------
Total from investment operations 1.36 2.17 0.77 (0.04)
-------- -------- -------- -------
Less distributions to shareholders:
From net investment income (0.81) (0.59) (0.75) --
From net realized gains (0.54) (0.30) (0.34) --
In excess of net realized gains (0.15) -- -- --
-------- -------- -------- -------
Total distributions (1.50) (0.89) (1.09) --
-------- -------- -------- -------
Net asset value, end of period $ 10.78 $ 10.92 $ 9.64 $ 9.96
======== ======== ======== =======
Total Return1 12.39% 22.72% 8.23% (0.40)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $235,783 $193,920 $151,189 $39,450
Net expenses to average daily net assets 0.40% 0.40% 0.40% 0.40%2
Net investment income to average daily net
assets 6.93% 8.17% 7.51% 5.34%2
Portfolio turnover rate 95% 99% 141% 14%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts $ 0.02 $ 0.01 $ 0.02 $ 0.01
</TABLE>
1 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
2 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
28
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL BOND FUND
CLASS I SHARES CLASS III SHARES
----------------- -------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 2, 1997 SEPTEMBER 30, 1994
(COMMENCEMENT OF YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
OPERATIONS) TO ------------------------------ OPERATIONS) TO
FEBRUARY 28, 1997 1997 1996 FEBRUARY 28, 1995
----------------- ---- ---- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.75 $ 10.92 $ 9.99 $ 10.00
------ -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.11 0.66 1.05 0.24
Net realized and unrealized gain (loss) on
investments 0.30 2.07 1.62 (0.09)
------ -------- -------- --------
Total from investment operations 0.41 2.73 2.67 0.15
------ -------- -------- --------
Less distributions to shareholders:
From net investment income -- (0.60) (1.04) (0.16)
From net realized gains -- (0.45) (0.42) --
In excess of net realized gains -- (0.44) (0.28) --
------ -------- -------- --------
Total distributions -- (1.49) (1.74) (0.16)
------ -------- -------- --------
Net asset value, end of period $12.16 $ 12.16 $ 10.92 $ 9.99
====== ======== ======== ========
Total Return1 3.49% 25.57% 27.36% 1.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,162 $468,979 $236,162 $238,664
Net expenses to average daily net assets 0.53%2 0.40% 0.40% 0.40%2
Net investment income to average daily net
assets 5.91%2 6.86% 8.54% 8.46%2
Portfolio turnover rate 90% 90% 85% 64%
Fees and expenses voluntarily waived or borne
by the
Manager consisted of the following per share
amounts $ 0.01 $ 0.03 $ 0.03 $ 0.01
</TABLE>
1 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
2 Annualized.
<TABLE>
<CAPTION>
GLOBAL BOND FUND
CLASS I SHARES CLASS III SHARES
-------------- -----------------------------------
PERIOD FROM PERIOD FROM
JANUARY 6, 1997 DECEMBER 28, 1995
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS TO YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 29,1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.29 $ 9.89 $ 10.00
------ ------- -------
Income (loss) from investment operations:
Net investment income 0.09 0.61 0.05
Net realized and unrealized gain (loss) on investments (0.23) 0.59 (0.16)
------ ------- -------
Total from investment operations (0.14) 1.20 (0.11)
------ ------- -------
Less distributions to shareholders:
From net investment income -- (0.57) --
From net realized gains -- (0.36) --
------ ------- -------
Total distributions -- (0.93) --
------ ------- -------
Net asset value, end of period $10.15 $ 10.16 $ 9.89
====== ======= =======
Total Return1 (1.36)% 12.01% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 646 $70,768 $31,072
Net expenses to average daily net assets 0.47%2 0.34% 0.34%2
Net investment income to average daily net assets 6.05%2 6.31% 6.16%2
Portfolio turnover rate 72% 72% 0%
Fees and expenses voluntarily waived or borne by the Manager consisted
of the following per share amounts $ 0.01 $ 0.04 $ 0.01
</TABLE>
1 Calculation excludes purchase premiums. The total return would have been lower
had certain expenses not been waived during the period shown.
2 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
29
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
EMERGING COUNTRY DEBT FUND
CLASS I SHARES CLASS III SHARES
----------------- ------------------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 31, 1996 APRIL 19, 1994
(COMMENCEMENT OF YEAR ENDED FEBRUARY 28/29, (COMMENCMENT OF
OPERATIONS) TO ----------------------------- OPERATIONS) TO
FEBRUARY 28, 1997 1997 1996 FEBRUARY 28, 1995
----------------- ---- ---- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.87 $ 11.76 $ 8.39 $ 10.00
------ -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.10 1.48 1.35 0.48
Net realized and unrealized gain (loss) on
investments 1.11 6.40 3.84 (1.59)
------ -------- -------- --------
Total from investment operations 1.21 7.88 5.19 (1.11)
------ -------- -------- --------
Less distributions to shareholders:
From net investment income -- (1.58) (1.17) (0.40)
From net realized gains -- (3.97) (0.65) --
In excess of net realized gains -- -- -- (0.10)
------ -------- -------- --------
Total distributions -- (5.55) (1.82) (0.50)
------ -------- -------- --------
Net asset value, end of period $14.08 $ 14.09 $ 11.76 $ 8.39
====== ======== ======== ========
Total Return1 9.40% 74.32% 63.78% (11.65%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 36 $555,452 $615,485 $243,451
Net expenses to average daily net assets 0.71%2 0.57% 0.50% 0.50%2
Net investment income to average daily net
assets 6.06%2 8.35% 12.97% 10.57%2
Portfolio turnover rate 152% 152% 158% 104%
Fees and expenses voluntarily waived or borne
by the
Manager consisted of the following per share
amounts $ 0.00 $ 0.03 $ 0.02 $ 0.01
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
2 Annualized.
SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------
1997 1996 1995 1994 1993 19923 19911,2,3
---- ---- ---- ---- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.77 $ 9.56 $ 9.79 $10.05 $ 10.11 $10.00 $ 10.00
------- ------- ------ ------ ------- ------ -------
Income (loss) from investment
operations:
Net investment income4 0.47 0.57 0.63 0.44 0.46 0.56 0.67
Net realized and unrealized gain
(loss) on investments 0.06 0.20 (0.28) (0.09) 0.30 0.11 --
------- ------- ------ ------ ------- ------ -------
Total from investment operations 0.53 0.77 0.35 0.35 0.76 0.67 0.67
------- ------- ------ ------ ------- ------ -------
Less distributions to shareholders:
From net investment income (0.52) (0.56) (0.58) (0.46) (0.38) (0.56) (0.67)
From net realized gains -- -- -- (0.15) (0.44) -- --
------- ------- ------ ------ ------- ------ -------
Total distributions (0.52) (0.56) (0.58) (0.61) (0.82) (0.56) (0.67)
------- ------- ------ ------ ------- ------ -------
Net asset value, end of period $ 9.78 $ 9.77 $ 9.56 $ 9.79 $ 10.05 $10.11 $ 10.00
======= ======= ====== ====== ======= ====== =======
Total Return4 5.62% 8.32% 3.78% 3.54% 8.25% 11.88% 3.83%
Ratios/Supplemental Data:
Net assets, end of period (000's) $40,937 $11,066 $8,193 $8,095 $10,499 $9,257 $40,850
Net expenses to average daily net
assets4 0.20% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%5
Net investment income to average
daily net assets4 5.88% 6.49% 5.02% 4.35% 4.94% 5.83% 7.88%5
Portfolio turnover rate 287% 139% 335% 243% 649% 135% --
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts $ 0.03 $ 0.03 $ 0.02 $ 0.02 $ 0.03 $ 0.03 $ 0.09
</TABLE>
1 For the period from the commencement of operations, April 17, 1990 to February
28, 1991.
2 The per share amounts 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 The total returns would have been lower had certain expenses not been waived
during the periods shown.
5 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
30
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
GLOBAL HEDGED EQUITY FUND
CLASS III SHARES
------------------------------------------------
PERIOD FROM
JULY 29, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
------------------------------ OPERATIONS) TO
1997 1996 FEBRUARY 28, 1995
---- ---- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.64 $ 10.12 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income 0.24 0.21 0.11
Net realized and unrealized gain on investments 0.01 0.55 0.08
-------- -------- --------
Total from investment operations 0.25 0.76 0.19
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.20) (0.24) (0.07)
-------- -------- --------
Net asset value, end of period $ 10.69 $ 10.64 $ 10.12
======== ======== ========
Total Return1 2.34% 7.54% 1.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $296,702 $382,934 $214,638
Net expenses to average daily net assets 0.91%2 0.78% 0.92%3
Net investment income to average daily net assets 1.99% 2.44% 2.85%3
Portfolio turnover rate 463% 214% 194%
Average commission rate paid4 $ 0.0084 N/A N/A
Fees and expenses voluntarily waived or borne by the
Manager
consisted of the following per share amounts $ 0.02 $ 0.005 $ 0.006
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
2 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .02% of average daily net assets.
3 Annualized.
4 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on which
commissions are charged. The average broker commission rate will vary
depending on the markets in which trades are executed.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
31
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY ALLOCATION FUND
CLASS II SHARES CLASS III SHARES
--------------- ----------------
PERIOD FROM PERIOD FROM
DECEMBER 23, 1996 OCTOBER 11, 1996
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO
FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 10.10 $ 10.00
------- -------
Income from investment operations:
Net investment income -- 2 0.102
Net realized and unrealized gain 0.41 0.41
------- -------
Total from investment operations 0.41 0.51
------- -------
Less distributions to shareholders:
From net investment income (0.07) (0.07)
From net realized gains (0.03) (0.03)
------- -------
Total distributions (0.10) (0.10)
------- -------
Net asset value, end of period $ 10.41 $ 10.41
======= =======
Total Return1 4.07 5.11%
Ratios/Supplemental Data:
Net assets, end of period (000's) $15,490 $30,459
Net expenses to average daily net assets 0.07%3 0.01%3
Net investment income to average daily net assets (0.07)%2,3 3.60%2,3
Portfolio turnover rate 0% 0%
Fees and expenses voluntarily waived or borne by the Manager consisted of
the following $ --
per share amounts 4 $ 0.01
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
2 Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
3 Annualized.
4 Fee and expenses waived or borne by the Manager were less than $0.01 per
share.
<TABLE>
<CAPTION>
WORLD EQUITY ALLOCATION FUND
CLASS I SHARES CLASS II SHARES CLASS III SHARES
-------------- --------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 28, 1996 JUNE 28, 1996 OCTOBER 22, 1996
(COMMENCEMENT OF (COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO OPERATIONS) TO
FEBRUARY 28, 1997 OCTOBER 16, 1996 FEBRUARY 28, 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $ 10.07
------ ------ -------
Income from investment operations:
Net investment income 0.092 0.042 0.112
Net realized and unrealized gain 0.72 0.02 0.63
------ ------ -------
Total from investment operations 0.81 0.06 0.74
------ ------ -------
Less distributions to shareholders:
From net investment income (0.11) -- (0.11)
In excess of net investment income (0.00) -- (0.00)
From net realized gains (0.18) -- (0.18)
------ ------ -------
Total distributions (0.29) -- (0.29)
------ ------ -------
Net asset value, end of period $10.52 $10.06 $ 10.52
====== ====== =======
Total Return1 8.23% .60% 7.51%
Ratios/Supplemental Data:
Net assets, end of period (000's) $9,424 $ -- $36,746
Net expenses to average daily net assets 0.16%3 0.12%3 0.00%3
Net investment income to average daily net assets 1.80%2,3 1.55%2,3 0.91%2,3
Portfolio turnover rate 31% 31% 31%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts $ 0.01 $ 0.01 $ 0.03
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
2 Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
3 Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
32
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------
PERIOD FROM
NOVEMBER 25, 1996
(COMMENCEMENT OF
OPERATIONS) TO
FEBRUARY 28, 1997
-----------------
<S> <C>
Net asset value, beginning of period $ 10.00
-------
Income from investment operations:
Net investment income 0.12
Net realized and unrealized gain 0.38
----
Total from investment operations 0.50
----
Less distributions to
shareholders:
From net investment income (0.12)
From net realized gains (0.08)
-----
Total disbtibutions (0.20)
-----
Net asset value, end of period $ 10.30
=======
Total Return1 5.09%
Ratios/Supplemental Data:
Net assets, end of period (000's) $30,787
Net expenses to average daily net assets 0.00%2
Net investment income to average daily net assets 3.21%2
Portfolio turnover rate 10%
Fees and expenses voluntarily waived or borne by the Manager consisted of the
following per share amount $ 0.01
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
2 Annualized.
<TABLE>
<CAPTION>
GLOBAL BALANCED ALLOCATION FUND
CLASS I SHARES CLASS II SHARES
-------------- ---------------
PERIOD FROM PERIOD FROM
JULY 29, 1996 DECEMBER 31, 1996
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO
FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $10.00 $ 10.86
------ -------
Income from investment operations:
Net investment income 0.222 -- 2
Net realized and unrealized gain 1.35 0.33
---- ----
Total from investment operations 1.57 0.33
---- ----
Less distributions to shareholders:
From net investment income (0.22) --
In excess of net investment income (0.00) --
From net realized gains (0.16) --
-----
Total distributions (0.38) --
-----
Net asset value, end of period $11.19 $ 11.19
====== =======
Total Return1 15.85% 3.04%
Ratios/Supplemental Data:
Net assets, end of period (000's) $6,848 $14,359
Net expenses to average daily net assets 0.15%3 0.07%3
Net investment income to average daily net assets 2.75%2,3 (0.07)%2,3
Portfolio turnover rate 33% 33%
Fees and expenses voluntarily waived or borne by the Manager consisted of
the following
per share amounts $ 0.03 $ 0.01
</TABLE>
1 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
2 Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests. 3
Annualized.
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 Annual
Reports, which are incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each Fund, and class of
shares thereof, of the Trust which had investment operations during the
reporting periods. Information regarding Class III Shares of each Fund reflects
the operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
Investors in Class I or Class II Shares should be aware that the above financial
highlight tables reflect performance based on Class III expense ratios. In the
future, investors in Class I and Class II Shares will experience slightly lower
total returns than investors in Class III Shares of the same Fund as a result of
higher overall expense ratios for Class I and Class II Shares. The Manager's
discussion of the performance of each Fund in fiscal 1997, as well as a
comparison of each Fund's performance over the life of the Fund with that of a
benchmark securities index selected by the Manager, is included in each Fund's
Annual Report for the fiscal year ended February 28, 1997. Copies of the Annual
Reports are available upon request without charge.
33
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the Core Fund, the Value Fund, the
Growth 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. Unless specifically noted herein, the investment policies of the Funds
may be changed without shareholder approval. There can be no assurance that the
investment objective of any Fund will be achieved.
As noted in the following Fund descriptions, many of the Funds seek total
returns greater than, or select securities that are represented in, certain
benchmarks or indexes. These benchmarks or indexes may be commercially developed
and published, modifications of commercially available indexes maintained by the
Manager, or composite benchmarks maintained by the Manager that blend
commercially available indexes. A description of the various benchmarks and
indexes is set forth on pages 5 and 6.
DOMESTIC EQUITY FUNDS
CORE FUND
CURRENT BENCHMARK: S&P 500
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 or exposed to the equity securities of at least 125
companies chosen from among the Wilshire 5000 Index (the "WILSHIRE 5000") and
that it will be invested primarily in 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 purchase interests in real estate investment trusts ("REITs"),
which are described under the description of the GMO REIT Fund in this
Prospectus. 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 indexes 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 domestic 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 assets will be exposed to 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 and domestic equity derivatives. The Fund does not
expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
TOBACCO-FREE CORE FUND
CURRENT BENCHMARK: S&P 500
The Tobacco-Free Core Fund seeks a total return greater than that of the S&P
500 through investment in common stocks. Substantially all of the Fund's assets
will be invested in or exposed to equity securities chosen from among the
Wilshire 5000 and selected primarily from Large Cap 1200 issuers which are not
Tobacco Producing Issuers (as defined below). The Tobacco-Free Core Fund expects
that substantially all of its assets will be invested in the securities of at
least 125 companies. The Tobacco-Free 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 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.
34
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.
Because of its name, 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. This policy does
not affect the Manager's overall goal to not invest 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 purchase interests in REITs, which are described under the
description of the GMO REIT Fund in this Prospectus. The Fund may 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 indexes 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 assets will be exposed to 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 and domestic equity derivatives. The Fund does not
expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
VALUE FUND
CURRENT BENCHMARK: Russell 1000 Value Index
The Value Fund seeks a total return greater than that of the Russell 1000
Value Index through investment in a broadly diversified and liquid portfolio of
common stocks. Substantially all of the Fund's assets will be invested in or
exposed to equity securities chosen from among the Wilshire 5000 and primarily
from among 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 Russell 1000 Value Index. 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 Russell 1000 Value Index, at times the total
return of the Value Fund may be more or less than the total return of the
Russell 1000 Value Index.
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 purchase interests in REITs, which are described under the
description of the GMO REIT Fund. 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 indexes 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 assets will be
35
exposed to 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 and domestic equity
derivatives. The Fund does not expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GROWTH FUND
CURRENT BENCHMARK: Russell 1000 Growth Index
The Growth Fund seeks long-term growth of capital. Current income is only an
incidental consideration. The Growth 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 substantially all of the Fund's assets will be
invested in or exposed to equity securities chosen from among the Wilshire 5000,
and 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. 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 purchase interests in REITs, which are described under the
description of the GMO REIT Fund in this Prospectus. The Fund may 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 indexes 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 assets will be exposed to 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 and domestic equity derivatives. The Fund does not
expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
U.S. SECTOR FUND
CURRENT BENCHMARK: S&P 500
The U.S. Sector Fund seeks a total return greater than that of the S&P 500
through investment in common stocks, either directly or through investment in
other Funds of the Trust ("underlying Funds"). Substantially all of the Fund's
assets will be invested in or exposed to equity securities chosen from among the
Wilshire 5000 and primarily from among the 1,800 companies with the largest
equity capitalization whose securities are listed on United States national
securities exchanges, and/or in shares of the Core Fund, Growth Fund, Value
Fund, Small Cap Growth Fund, Small Cap Value Fund and REIT Fund. The underlying
Funds also invest substantially in common stocks, but may focus on particular
sectors and hold higher amounts of smaller companies.
Using such investments, the Fund will allocate its assets, either directly
or through investment in underlying Funds and as directed by the Manager, among
major U.S. sectors (including 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 or particular underlying Funds may invest in
companies with smaller equity capitalization than the companies whose securities
are purchased by the Value Fund and the Growth 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 Fund
may be more or less than the total return of the S&P 500.
In pursuing its objective, the Fund may invest without limit in shares of
the underlying Funds. The Fund may also invest in securities of foreign issuers
traded principally on U.S. securities exchanges, invest without
36
limit in depository receipts of foreign issuers, and purchase convertible
securities. The Fund may also purchase interests in REITs. The Fund may 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 and the underlying Funds may purchase index futures on
the S&P 500 and other domestic indexes for hedging (including anticipatory
hedging), investment, and risk management and to effect synthetic sales and
purchases. They 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 Funds 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 (both directly and
indirectly through investments in underlying Funds) 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 assets will be exposed to 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. Because of its name, the Fund will at all times, either directly or
indirectly through its investment in underlying Funds, invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
Investors in the Fund should consider the risks associated with an
investment in the underlying Funds as well as the Fund itself. Investors should
carefully review disclosure in this Prospectus relating to each of the
underlying Funds in considering an investment in the Fund. For a detailed
description of the objectives and policies of each underlying Fund, see
"Investment Objectives and Policies" herein. For a detailed description of the
investment practices referred to therein and in the preceding paragraphs, and
the risks associated with these practices, see "Description and Risks of Fund
Investments."
The Fund is able to invest without limit in underlying Funds notwithstanding
Sections 12(d)(1), 17(a), and other provisions of the 1940 Act because of an SEC
exemptive order obtained by the Trust. In addition, the Fund may invest directly
in stocks and financial instruments. Thus, an investor in the Fund receives
investment management within each of the underlying Funds and receives
management for the Fund's direct investments.
Because the Fund may invest to varying extents in underlying Funds and in
stocks and financial instruments, the Manager charges a management fee to the
Fund for managing its assets. The management fee will be waived (but not below
zero) to the extent of indirect fees incurred due to investment in underlying
Funds. For a detailed description of the Fund's fee and expense structure, see
"Schedule of Fees and Expenses" and the notes thereto in this Prospectus.
SMALL CAP VALUE FUND
CURRENT BENCHMARK: Russell 2000 Value Index
The investment objective of the Small Cap Value Fund (formerly the GMO Core
II Secondaries Fund) is long-term growth of capital. Current income is only an
incidental consideration. The Small Cap Value Fund attempts to achieve its
objective by selecting its investments primarily from domestic second tier
companies. For these purposes "SECOND TIER COMPANIES" are those companies whose
equity capitalization at the time of investment by the Small Cap Value Fund
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. Among these companies, the Manager will primarily select
issuers which, in the opinion of the Manager, represent favorable values
relative to their market prices.
The Small Cap Value 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. Because of the
Fund's name, under normal market conditions, at least 65% of the Fund's total
assets will be invested in or exposed to the securities of issuers with market
capitalizations believed to be equal to or less than $1.5 billion on the date of
this Prospectus. 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 purchase interests in REITs, which are described under the
description of the GMO REIT Fund in this Prospectus. The Fund may 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 indexes 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 option on futures contracts for hedging and risk
management. The Fund may also use equity swap contracts and contracts for
differences for these purposes.
37
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 assets will be exposed to 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 and domestic equity derivatives. The Fund does not
expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
SMALL CAP GROWTH FUND
CURRENT BENCHMARK: Russell 2000 Growth Index
The investment objective of the Small Cap Growth Fund is long-term growth of
capital. Current income is only an incidental consideration. The Small Cap
Growth Fund attempts to achieve its objective by selecting its investments
primarily from domestic second tier companies. Among these companies, the
Manager will primarily select stocks that it believes have above average
prospects for growth.
The Small Cap Growth Fund primarily invests in or is exposed to common
stocks, although the Fund may on rare occasions hold securities convertible into
common stocks such as convertible bonds, convertible preferred stocks and
warrants. Because of its name, under normal market conditions at least 65% of
the Fund's total assets will be invested in or exposed to the securities of
issuers with market capitalizations believed to be equal to or less than $1.5
billion on the date of this Prospectus. 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 purchase interests in REITs, which are described in the
description of the GMO REIT Fund in this Prospectus. The Fund may 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 indexes 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 assets will be exposed to 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 and domestic equity derivatives. The Fund does not
expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
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,
38
international stock market indexes, 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
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 indexes 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 assets will be exposed to 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 and domestic equity derivatives. The Fund does not
expect that it will 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 paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
REIT FUND
CURRENT BENCHMARK: MSRI
The investment objective of the REIT Fund is to maximize total return
primarily through investment in or exposure to real estate investment trusts
("REITS"), which are managed vehicles that invest in real estate or real
estate-related assets. The Fund seeks a total return greater than that of the
MSRI. REITs purchased by the Fund will include equity REITs, which own real
estate directly, mortgage REITs, which make construction, development or
long-term mortgage loans, and hybrid REITs, which share characteristics of
equity REITs and mortgage REITs. Equity REITs will be affected by, among other
things, changes in the value of the underlying property owned by the REITs,
while mortgage REITs will be affected by, among other things, the value of the
properties to which they have extended credit.
Since the Fund's investments are concentrated in real estate-related
securities, the value of its shares can be expected to change in light of
factors affecting the real estate industry, and may fluctuate more widely than
the value of shares of a portfolio that invests in a broader range of
industries. Factors affecting the performance of real estate may include excess
supply of real property in certain markets, changes in zoning laws, completion
of construction, changes in real estate value and property taxes, sufficient
level of occupancy, adequate rent to cover operating expenses, and local and
regional markets for competing assets. The performance of real estate may also
be affected by changes in interest rates, prudent management of insurance risks
and social and economic trends. Also, REITs are dependent upon the skill of each
REIT's management.
The Fund could under certain circumstances own real estate directly as a
result of a default on debt securities it owns or from an in-kind distribution
of real estate from a REIT. Risks associated with such own-
39
ership could include potential liabilities under environmental laws and the
costs of other regulatory compliance. If the Fund has rental income or income
from the direct disposition of real property, the receipt of such income may
adversely affect its ability to retain its tax status as a regulated investment
company and thus its ability to avoid taxation on its income and gains
distributed to its shareholders. REITs are also subject to substantial cash flow
dependency, defaults by borrowers, self-liquidation and the risk of failing to
qualify for tax-free pass-through of income under the Internal Revenue Code
and/or to maintain exempt status under the 1940 Act. By investing in REITs
indirectly through the Fund, investors bear not only a proportionate share of
the expenses of the Fund, but also, indirectly, expenses of the REITs.
Because of its name, the REIT Fund is required to have a policy that, under
normal circumstances, at least 65% of the Fund's total assets will be invested
in or exposed to securities of REITs, although the Fund generally intends to
invest a greater portion of its assets in REIT securities. The Fund may also
invest in common and preferred stock, fixed income securities including
lower-rated fixed income securities (commonly known as "junk bonds"), invest in
securities principally traded in foreign markets and foreign currency exchange
transactions. The Fund may lend portfolio securities valued at up to one-third
of total assets, 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
non-government issuers, including collateralized 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 indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities. The Fund may hold a portion of its assets
in high quality money market instruments.
The Fund may buy and sell options and enter into futures contracts and
options on futures contracts for hedging, investment and risk management. In
particular, the Fund may purchase futures contracts on the S&P 500 and interest
rate futures contracts for anticipatory hedging purposes and otherwise to
provide investment exposure for cash balances. In addition, the Fund may use
interest rate and currency swap contracts, contracts for differences and
interest rate caps, floors and collars for hedging and for risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
CURRENT BENCHMARK: EAFE-Lite
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 be primarily invested in or exposed to 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
"Description and Risks of Fund Investments -- 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 at least 65% of the Fund's
total assets will be invested in or exposed to securities principally 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, investment, 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 the EAFE-Lite 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 Investments -- 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, to
the extent
40
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 to 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 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
assets will be exposed to 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 indexes) is limited such that the time 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 indexes), 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
CURRENCY HEDGED INTERNATIONAL CORE FUND
CURRENT BENCHMARK: Currency hedged EAFE-Lite
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, investment, and for
currency risk management. While the Fund will not hedge currency risk in the
aggregate in an amount greater than the total value of its securities
denominated in foreign currencies, because the Fund will generally hedge
currency based on benchmark weightings rather than Fund investments, the Fund
will sometimes have a net short position with respect to certain foreign
currencies. This will generally be those countries where the Fund's equity
position is underweight relative to the benchmark. The Fund's incurrence of such
net short positions using forward contracts, futures or swap contracts -- to the
extent the Fund has not segregated liquid assets against such obligations -- 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 and forward contracts and related options and to
the amount of a Fund's net payment obligation that is not segregated against in
the case of swap contracts. The put and call options on currency futures written
by the Fund will always be covered. For more information on foreign currency
transactions, see "Description and Risks of Fund Investments -- 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 primarily invest in or be exposed to 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
"Description and Risks of Fund Investments -- 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.
41
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, 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 to 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, 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 exposed to 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 indexes) is limited such that the time 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 indexes), 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
FOREIGN FUND
CURRENT BENCHMARK: EAFE
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
"Description and Risks of Fund Investments -- 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 other than the United States, although under normal market conditions
at least 65% of the Foreign Fund's total assets will be invested in securities
principally traded in the securities markets of at least three countries other
than the United States. 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 and currency futures
contracts 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 will not buy and sell
foreign currencies for investment purposes, but may hold foreign currencies
pending investments consistent with the Fund's investment program. The Fund may
invest in options on foreign currencies.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, 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 to 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 10% 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.
42
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 may write options in connection with buy-and-write
transactions and use index futures.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
INTERNATIONAL SMALL COMPANIES FUND
CURRENT BENCHMARK: EAFE
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, the
International Small Companies Fund's investment objectives and policies are the
same as those of the International Core Fund.
It is currently expected that at least 65% of the International Small
Companies Fund's assets will be invested in or exposed to 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 may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, 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 to its service providers.
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 into 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 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 assets will be exposed
to 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 indexes) is limited such that the time 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 indexes), 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, investment, 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
JAPAN FUND
CURRENT BENCHMARK: MSCI Japan Index
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 at least 90% of the net assets
of the Japan Fund will be invested in or exposed to "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
primarily invest in or be exposed to 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
43
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 generally
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 Depository Receipts and other similar securities
convertible into securities of foreign issuers. The Fund may also enter into
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 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 assets will be invested in such high
quality cash items.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, 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 to its service providers.
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 indexes) is limited such that the time 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 indexes), 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, investment, 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
EMERGING MARKETS FUND
CURRENT BENCHMARK: IFC Investable Index
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 and exposure to 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 Consultant to the Fund.
The Consultant's efforts focus on asset allocation among the selected
emerging markets. (See "Description and Risks of Fund Investments -- Certain
Risks of Foreign Investments.") In addition to considerations relating to a
particular market's investment restrictions and tax barriers, 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, Republic of Korea,
Malaysia, Mauritius, Myanmar, Mongolia, Pakistan,
Philippines, Sri Lanka, Republic of China (Taiwan),
Thailand, Vietnam
Latin
America:
Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Ecuador, Jamaica, Mexico, Peru, Trinidad and Tobago,
Uruguay, Venezuela
Europe/
Middle East/
Africa:
Botswana, Bulgaria, Croatia, Czech Republic, Egypt, Estonia,
Ghana, Greece, Hungary, Israel, Ivory Coast, Jordan, Kazakhstan,
Kenya, Latvia, Lebanon, Lithuania, Morocco, Namibia, Nigeria,
Poland, Portugal, Romania, Russia, Slovakia, Slovenia, South
Africa, Tunisia, Turkey, Ukraine, Zimbabwe
44
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 markets. 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 assets will
be exposed to 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 indexes, 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 into 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 indexes) is limited such that the time 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 indexes), 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, investment, 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GLOBAL PROPERTIES FUND
CURRENT BENCHMARK: GPR LIFE Index
The Global Properties Fund seeks long-term growth of capital. The Fund
pursues its objective by investing primarily in securities of issuers throughout
the world which are principally engaged in or related to the real estate
industry or which own significant real estate assets ("REAL ESTATE COMPANIES").
The Fund will seek to provide a total return greater than that of the GPR LIFE
Index, or alternative indexes such as the property composite of Salomon
Brothers' World Equity Index or the real estate stock composite of the Morgan
Stanley Capital International World Index. The Fund will not invest directly in
real estate. A Real Estate Company is principally engaged in or related to the
real estate industry if at least 50% of its assets, gross income or net profits
are attributable to ownership, construction, management or sale of residential,
commercial or industrial real estate, or to products or services that are
related to the real estate industry. For these purposes, Real Estate Companies
whose products or services are related to the real estate industry include
manufacturers and distributors of building supplies and financial institutions
which issue or service mortgages. Real Estate Companies may also include: equity
real estate investment trusts, which own real estate directly; mortgage real
estate investment trusts, which make construction, development or long-term
mortgage loans; real estate brokers or developers; and issuers with substantial
real estate holdings.
The Manager has responsibility for allocating the Fund's assets among the
various securities markets of the world. In making these allocations, the
Manager will consider such factors as the condition and growth potential of the
various economic and securities markets,
45
currency and taxation considerations and other pertinent financial, social,
national and political factors. The Manager anticipates that the Fund will give
particular consideration to investments in the United Kingdom, Western Europe,
Australia, Canada, the Far East (including Japan, Hong Kong, Singapore, Malaysia
and Thailand) and the United States. The percentage of the Fund's assets
invested in particular geographic regions will shift from time to time in
accordance with the judgment of the Manager. Because of its name, under normal
market conditions, the Fund will invest at least 65% of its total assets in
securities of Real Estate Companies principally traded in the securities markets
of at least three countries (one of which may be the United States). A
substantial portion of the assets of the Fund will be denominated or traded in
foreign currencies.
Although the Fund generally invests in common stocks, it may also invest in
preferred stocks, convertible securities and fixed income securities including
lower- rated fixed income securities (commonly known as "junk bonds"). Where
lower-rated debt securities are secured by real estate assets, it is conceivable
that the Fund could, in the event of default, end up holding the underlying real
estate directly. Risks associated with such ownership could include potential
liabilities under environmental laws and the costs of other regulatory
compliance. If the Fund has rental income or income from the direct disposition
of real property, the receipt of such income may adversely affect its ability to
retain its tax status as a regulated investment company and thus its ability to
avoid taxation on its income and gains distributed to its shareholders. See
"Taxes" below.
As indicated, the Fund expects to invest in securities of foreign issuers
traded on U.S. exchanges and securities traded abroad, and may also invest in
depository receipts and foreign exchange transactions. The Fund may also invest
in adjustable rate securities, zero coupon securities and mortgage-backed and
other asset-backed securities issued by the U.S. government, its agencies and by
non- government issuers, including collateralized mortgage obligations
("CMO's"), strips and residuals. The Fund may lend portfolio securities valued
at up to one-third of total assets and enter into repurchase agreements, reverse
repurchase agreements and dollar roll agreements. 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 indexes, 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 net assets in illiquid securities.
The Fund may use forward foreign currency contracts, currency futures
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.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, 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 to its service providers.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
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 "Description and Risks of Fund Investments
- -- Uses of Options, Futures and Options on Futures -- Investment Purposes.")
Under normal market conditions, each of the 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. The Global Hedged Equity Fund is referred to as a "Fixed Income
Fund" despite its substantial investment in equity securities because, as
described more fully in the description of that Fund, the Global Hedged Equity
Fund attempts to hedge the general equity market risk of its equity investments,
producing a theoretical fixed income return, plus or minus the performance of
the Fund's equity holdings relative to equity markets generally.
GLOBAL BOND STRATEGIES: Each of the International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, U.S. Bond/Global Alpha A Fund and
U.S. Bond/Global Alpha B Fund (collectively the "GLOBAL FIXED INCOME FUNDS")
utilizes the following techniques in implementing its bond and currency
strategies. Each of these Funds will take active over-weighted and under-
weighted positions with respect to particular bond markets and currencies
relative to the Fund's respective performance benchmark. Often these active
positions will be achieved using long and short derivative positions and
combinations of such positions to create synthetic securities. The aggregate net
exposure (assuming complete offset of over-weighted and under-weighted positions
across all markets) created by such active positions will generally be small
relative to a Fund's benchmark -- less than 20% for example. However, the total
of the exposures may be quite large. The total of the absolute values of all
deviations from the benchmark (that is, without regard to sign and allowing no
netting of positions) may exceed 100% of the value of the Fund for both bonds
and currencies, which are generally considered separately. The risk of the Funds
relative to their benchmarks, however, is expected to be significantly
46
less than this since many markets are correlated, so that overweighted and
under-weighted positions will often offset each other. This means that losses
relative to the benchmark from a declining bond or currency market that is
over-weighted will often be offset by losses from a correlated bond or currency
market that is under-weighted. The Funds' managers control total expected risk
by incorporating the assumption that there exist various levels of correlations
of bond markets and currency markets. For example, if two currencies were
perfectly correlated (based on the Managers' assessment), over- and
under-weighted positions of equal size would be considered to completely offset
one another and would not introduce any additional benchmark risk to the
portfolio. However, the lower the correlation, the less likely that one position
will offset another, and this is considered by the managers in assessing the
risk of the Fund. Of course, the measures of correlation used in these analyses
may not be accurate predictors of future correlation. Due to the size of the
bond and currency exposures versus the benchmark, a decline in correlation can
have a significant effect on the volatility and return of the Funds. In fact, in
extreme situations where the correlations between various bond markets and
currency markets change from positive to negative, that is, in situations in
which markets were expected to move in the same direction move in opposite
directions, the Fund could experience significant unexpected gains or losses.
Please see "Description and Risks of Fund Investments" for more information
regarding the risks of using derivative instruments to achieve exposures.
DOMESTIC BOND FUND
CURRENT BENCHMARK: Lehman Brothers Government Index
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 the Lehman Brothers Government Index. 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 earlier) 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 indexes, 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 net 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 indexes) is limited such that the time 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
U.S. BOND/GLOBAL ALPHA A FUND
CURRENT BENCHMARK: Lehman Brothers Aggregate Bond Index
The U.S. Bond/Global Alpha A Fund seeks to earn a high total return
primarily through investment in investment-grade bonds (including convertible
bonds) issued by the U.S. government, its agencies and instrumentalities, as
well as those issued by a wide range of private U.S. issuers. The Fund will seek
to provide a total return greater than that generally provided by the U.S.
investment-grade bond market as measured by indexes such as the Lehman Brothers
Aggregate Bond Index, the Salomon Brothers Broad Investment-Grade Bond Index and
the Merrill Lynch Domestic Master Bond Index. The Fund intends to invest in debt
securities (bonds, including convertible bonds and loans) of Emerging Countries.
The Fund also intends to invest in foreign bonds and may hedge some or all of
the Fund's exposure to domestic or foreign markets, including foreign currency
exposure. Under ordinary market conditions, up to 25% of the Fund may be
invested in foreign bonds that are not hedged against foreign market and
currency risk and in debt securities of Emerging Countries. However, the hedging
of foreign bond positions will allow the Fund to seek positive return relative
to foreign bond indexes to a greater extent than might be indicated by the
Fund's unhedged foreign bond exposure.
47
To the extent that the Fund seeks positive return through foreign bond positions
hedged against the relevant index, the domestic portion of the Fund will
generally be indexed to a domestic bond index. Thus the Fund will typically
consist of (1) unhedged foreign bonds, (2) debt securities of Emerging
Countries, (3) foreign bonds hedged against the relevant foreign bond index, (4)
an equal amount of domestic bonds selected to mirror a domestic index and (5)
domestic bonds selected based on the Manager's judgment that they will
outperform the domestic index, with the sum of items (1), (2), (4) and (5)
representing approximately 100% of the Fund's assets. This means that even
though the Fund generally will be managed to have not more than 25% of the
Fund's net asset value exposed (without hedging) to foreign interest rate and/or
currency movements, long and short positions in foreign bonds could account for
up to 100% of the Fund's exposure relative to benchmark indexes.
The U.S. Bond/Global Alpha A Fund may invest in fixed income securities of
any maturity, although under normal market conditions at least 65% of the Fund's
total assets will be comprised of "bonds" of U.S. issuers (as such term is
defined above). Because of its name, under normal market conditions, the Fund
will also invest at least 65% of its total assets in securities principally
traded in at least three different countries (one of which may be the United
States). However, up to 100% of the Fund's assets may be denominated in U.S.
dollars, and for temporary defensive purposes, the Fund may invest as much as
100% of its assets in issuers from one or two countries, which may include the
United States. 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. To the extent permitted
by the 1940 Act, the Fund may also invest in securities of other investment
companies. As a shareholder of an investment company, the Fund may indirectly
bear service fees which are in addition to the fees the Fund pays to its own
service providers.
The Fund may lend portfolio securities valued at up to one-third of total
assets 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 indexes, 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 net 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 indexes) is
limited such that the time 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 indexes 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
U.S. BOND/GLOBAL ALPHA B FUND
CURRENT BENCHMARK: Lehman Brothers Aggregate
Bond Index
The GMO U.S. Bond/Global Alpha B Fund seeks to earn a high total return
primarily through investment in investment-grade bonds (including convertible
bonds) issued by the U.S. government, its agencies and instrumentalities, as
well as those issued by a wide range of private U.S. issuers. The Fund will seek
to provide a total return greater than that generally provided by the U.S.
investment-grade bond market as measured by indexes such as the Lehman Brothers
Aggregate Bond Index, the Salomon Brothers Broad Investment-Grade Bond Index and
the Merrill Lynch Domestic Master Bond Index. Unlike the U.S. Bond/Global Alpha
A Fund, the U.S. Bond/Global Alpha B Fund will not invest in debt securities of
Emerging Countries. The Fund intends to invest in other foreign bonds and may
hedge some or all of the Fund's exposure to domestic or foreign markets,
including foreign currency exposure. Under ordinary market conditions, up to 25%
of the Fund may be invested in foreign bonds that are not hedged against foreign
market and currency risk. However, the hedging of foreign bond positions will
allow the Fund to seek positive return relative to foreign bond indexes to a
greater extent than might be indicated by the Fund's unhedged foreign bond
exposure. To the extent that the Fund seeks positive return through foreign bond
positions hedged against the relevant index, the domestic portion of the Fund
will generally be indexed to a domestic bond index. Thus the Fund will typically
48
consist of (1) unhedged foreign bonds, (2) foreign bonds hedged against the
relevant foreign bond index, (3) an equal amount of domestic bonds selected to
mirror a domestic index and (4) domestic bonds selected based on the Manager's
judgment that they will outperform the domestic index, with the sum of items
(1), (3) and (4) representing approximately 100% of the Fund's assets. This
means that even though the Fund generally will be managed to have not more than
25% of the Fund's net asset value exposed (without hedging) to foreign interest
rate and/or currency movements, long and short positions in foreign bonds could
account for up to 100% of the Fund's exposure relative to benchmark indexes.
The Fund may invest in fixed income securities of any maturity, although
under normal market conditions at least 65% of the Fund's total assets will be
comprised of "bonds" of U.S. issuers. As used herein, "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 "Description and Risks of Fund Investments -- Uses of Options,
Futures and Options on Futures -- Investment Purposes.") Because of its name,
under normal market conditions, the Fund will also invest at least 65% of its
total assets in securities principally traded in at least three different
countries (one of which may be the United States). However, up to 100% of the
Fund's assets may be denominated in U.S. dollars, and for temporary defensive
purposes, the Fund may invest as much as 100% of its assets in issuers from one
or two countries, which may include the United States. 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. To the extent permitted
by the 1940 Act, the Fund may also invest in securities of other investment
companies. As a shareholder of an investment company, the Fund may indirectly
bear service fees which are in addition to the fees the Fund pays to its own
service providers.
The Fund may lend portfolio securities valued at up to one-third of total
assets 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 indexes, 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 net 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 indexes) is
limited such that the time 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 indexes 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 above and
the risks associated with them, see "Description and Risks of Fund Investments."
INTERNATIONAL BOND FUND
CURRENT BENCHMARK: J.P. Morgan Non-U.S.
Government Bond Index
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 the J.P. Morgan Non-U.S. Government Bond Index. 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
Fund's portfolio securities are denominated.
The Fund may invest in fixed income securities of any maturity, although
under normal market conditions at least 65% of the Fund's 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
49
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 securities of other investment
companies. As a shareholder of an investment company, the Fund may indirectly
bear service fees which are in addition to the fees the Fund pays to its own
service providers.
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 indexes, 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 net 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 indexes) is
limited such that the time 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 indexes 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
CURRENCY HEDGED INTERNATIONAL BOND FUND
CURRENT BENCHMARK: J.P. Morgan Non-U.S. Govern ment Bond Index (Hedged)
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 the J.P. Morgan Non-U.S. Government Bond Index (Hedged).
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
under normal market conditions at least 65% of the Fund's 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 securities of other investment
companies. As a shareholder of an investment company, the Fund may indirectly
bear service fees which are in addition to the fees the Fund pays to its own
service providers.
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 indexes, 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 net assets in
illiquid securities.
50
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 indexes) is
limited such that the time 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 indexes 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GLOBAL BOND FUND
CURRENT BENCHMARK: J.P. Morgan Global Government Bond Index
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 the J.P. Morgan Global
Government Bond Index. 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 securities of
other investment companies. As a shareholder of an investment company, the Fund
may indirectly bear service fees which are in addition to the fees the Fund pays
to its own service providers.
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 indexes, 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 net 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 indexes) is
limited such that the time 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 indexes 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.
For a more detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
51
EMERGING COUNTRY DEBT FUND
CURRENT BENCHMARK: J.P. Morgan Emerging Markets
Bond Index+
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, Deutschmark, 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 the J.P. Morgan Emerging Markets Bond Index Plus.
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
"Description and Risks of Fund Investments -- 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 indexes, 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 net 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 indexes) is
limited such that the time 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 indexes 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
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
SHORT-TERM INCOME FUND
CURRENT BENCHMARK: Salomon 3 Month T-Bill Index
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. The Fund will attempt to provide a total
return greater than that generally provided by the short-term fixed income
market as measured by the Salomon 3 Month T-Bill Index. 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
52
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.
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 "Description and Risks of Fund Investments -- 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
total assets.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GLOBAL HEDGED EQUITY FUND
CURRENT BENCHMARK: Salomon 3 Month T-Bill Index
The Global Hedged Equity Fund seeks total return consistent with minimal
exposure to general equity market risk. Although at least 65% of the Fund's
total assets will be invested in equity securities either directly or indirectly
through investment in other Funds of the Trust as described below ("underlying
Funds"), as a result of the Fund's hedging techniques, the Fund expects to
create a return more similar to that received by an investment in fixed income
securities. The Fund will pursue its investment objective by investing
substantially all of its assets in a combination of (i) equity securities, (ii)
shares of the Core Fund, International Core Fund, Value Fund, Small Cap Growth
Fund, Small Cap Value Fund, Emerging Markets Fund, Growth Fund and International
Small Companies Fund, (iii) derivative instruments intended to hedge the value
of the Fund's equity securities held directly or through investment in
underlying Funds 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 indexes used to hedge general equity market risk and (iv) long interest
rate futures contracts intended to adjust the
53
duration of the theoretical fixed income security embedded in the pricing of the
derivatives used for hedging the Fund's equity exposure (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 held directly or through investment in underlying
Funds, relative to the relevant equity market indexes (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 held directly or through investment in underlying Funds relative to
broad market indexes, including changes in overweighted currencies relative to
the currency weighting of those indexes.
The Fund has a fundamental policy that, under normal market conditions, at
least 65% of its total assets will be invested in or exposed to equity
securities including indirectly through investment in underlying Funds. In
addition, under normal market conditions, the Fund will invest in securities
principally traded in the securities markets of at least three countries. The
Fund will generally invest in at least 125 different common stocks chosen from
among (i) U.S. stocks in which the Core Fund is permitted to invest and (ii)
stocks traded primarily outside of the United States in which the International
Core Fund is permitted to invest. The Fund may invest up to 20% of its assets
directly or through investment in underlying Funds in securities of issuers in
newly industrializing countries of the type invested in by the Emerging Markets
Fund. In seeking to fulfill these policies, the Fund may also invest in
underlying Funds. 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
direct and indirect 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 indexes ("MODIFIED GLOBAL INDEXES"), which are
maintained by the Manager, 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 directly and
through investment in underlying Funds 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 mirror the country market weightings represented by the Fund's
equity holdings, there will be an imperfect correlation between the Fund's
equity holdings 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 holdings 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 holdings 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
54
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. 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.
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
"Description and Risks of Fund Investments -- 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
55
(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 directly or through investment in underlying Funds 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 either directly or through investment in underlying Funds
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 Fund's 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 addition to the practices described above, in order to pursue its
objective the Fund may invest without limit in underlying Funds. The Fund may
also 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 invest up to 15% of its net assets in illiquid
securities and temporarily invest up to 50% of its net 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 into 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.
Investors in the Fund should consider the risks associated with an
investment in the underlying Funds as with the Fund itself. Investors should
carefully review disclosure in this Prospectus relating to each of the
underlying Funds in considering an investment in the Fund. For a detailed
description of the objectives and policies of each underlying Fund, see
"Investment Objectives and Policies" herein. For a detailed description of the
investment practices referred to therein and in the preceding paragraphs, and
the risks associated with these practices, see "Description and Risks of Fund
Investments."
The Fund is able to invest without limit in underlying Funds notwithstanding
Sections 12(d)(1), 17(a), and other provisions of the 1940 Act because of an SEC
exemptive order obtained by the Trust. In addition, the Fund may invest directly
in equity securities and financial instruments. Thus, an investor in the Fund
receives investment management within each of the underlying Funds and receives
management for the Fund's direct investments.
Because the Fund may invest to varying extents in underlying Funds and in
equity securities and financial instruments, the Manager charges a management
fee to the Fund for managing its assets. The management fee will be waived (but
not below zero) to the extent of indirect fees incurred due to investment in
underlying Funds. For a detailed description of the Fund's fee and expense
structure, see "Schedule of Fees and Expenses" and the notes thereto earlier in
this Prospectus.
INFLATION INDEXED BOND FUND
CURRENT BENCHMARK: Lehman Brothers Treasury
Inflation Notes Index
The Inflation Indexed Bond Fund seeks maximum total return through
investment primarily in foreign and U.S. government bonds that are indexed or
otherwise linked to general measures of inflation in the country of issue. The
Fund will invest in fixed income securities of both the United States and
foreign issuers. The availability of inflation indexed bonds is currently
limited to a small number of countries. A bond will be deemed to be "linked" to
general measures of inflation if, by such bond's terms, principal or interest
components change with general movements of inflation in the country of issue.
Inflation indexed securities issued by the U.S. Treasury are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is fixed at issuance, but over
the life of the bond this interest may be paid on an increasing or decreasing
principal value which has been adjusted for inflation.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Fund may also invest in other
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
The value of inflation indexed bonds is expected to fluctuate in response to
changes in real interest rates, which are in turn tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of inflation
indexed bonds. In contrast, if nominal interest rates increased at a faster rate
than inflation, real interest rates might rise, leading to a decrease in value
of inflation indexed bonds.
56
Although these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may result in a decline
in value. If interest rates rise due to reasons other than inflation (such as
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop. Certain
foreign governments, such as the United Kingdom, Canada and Australia, have a
longer history of issuing inflation indexed bonds, and there may be a more
liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. In addition, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Coupon payments received by the Fund from inflation indexed bonds will be
includable in the Fund's gross income in the period in which they accrue. In
addition, any increase in the principal amount of an inflation indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity. The Fund's investments in inflation indexed
securities may therefore create taxable income in excess of the cash they
generate. In such cases, the Fund may be required to sell assets to generate the
cash necessary to distribute as dividends to its shareholders all of its income
and gains and therefore to eliminate any tax liability at the Fund level. See
"Distributions" and "Taxes -- Tax Implications of Certain Investments."
The Fund may invest in fixed income securities of any maturity, although
under normal market conditions at least 65% of the Fund's total assets will be
comprised of inflation indexed "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. 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 forward foreign exchange agreements, and purchase or
sell securities on a when- issued or delayed delivery basis.
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 indexes, 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 net 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 indexes) is
limited such that the time 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
domestic and foreign indexes 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.
For a more detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
ASSET ALLOCATION FUNDS
The Asset Allocation Funds are mutual funds that invest in other Funds
of the Trust (referred to in this section as "underlying Funds") and, in
doing so, seek to outperform a specified benchmark. The Asset Allocation
Funds
57
are able to operate in such a manner notwithstanding prohibitions in Sections
12(d)(1) and 17(a), inter alia, of the 1940 Act pursuant to an exemptive order
of the SEC. The Manager decides and manages the allocation of the assets of each
Asset Allocation Fund among a permitted subset of underlying Funds, as set forth
below. Thus, an investor in an Asset Allocation Fund receives investment
management within each of the underlying Funds and receives management with
respect to the allocation of the investment among the underlying Funds as well.
The Manager does not charge an advisory fee for asset allocation advice
provided to the Asset Allocation Funds, but receives such fees only from the
underlying Funds in which the Asset Allocation Funds invest. Stated otherwise,
there are no investment advisory fees at the Asset Allocation Fund level.
Because the underlying Funds have differing fees, certain allocations will
produce greater overall fees for GMO than others. Certain expenses, such as
custody, transfer agency and audit fees, will be incurred at the Asset
Allocation Fund level, although the Manager has agreed to voluntarily bear such
expenses until further notice.
Each Asset Allocation Fund will invest in Class III Shares of the underlying
Funds and will bear the 0.15% Shareholder Service Fees assessed against those
Class III shares. Each Asset Allocation Fund offers Class I, Class II and Class
III Shares with special lower Shareholder Service Fees that are designed to
mitigate the indirect cost of Shareholder Servicing Fees of the Class III shares
of the Underlying Funds in which the Asset Allocation Funds invest. Thus,
investors in Class I, Class II and Class III Shares of the Asset Allocation
Funds will bear, in the aggregate, direct and indirect Shareholder Service Fees
that are the same as those borne directly by Class I, Class II and Class III
Shares of the other Funds (i.e., an aggregate of 0.28%, 0.22% and 0.15% per
annum, respectively). Investors should refer to "Multiple Classes" herein for
greater detail concerning the eligibility requirements and other differences
among the classes.
Investors in the Asset Allocation Funds should consider both the direct
risks associated with an investment in a "fund-of-funds," and the indirect risks
associated with an investment in the underlying Funds. See "Description and
Risks of Fund Investments -- Special Allocation Fund Considerations" for a
discussion of the risks directly associated with an investment in the Asset
Allocation Funds. Investors should also carefully review the "Investment
Objectives and Policies" description of each underlying Fund in which the
relevant Asset Allocation Fund may invest, as well as each corresponding
"Description and Risks of Fund Investments" section associated with each
underlying Fund's investment practices.
NOTE: Although the Asset Allocation Funds are managed relative to a specified
index, none of the Funds is managed as an index fund or an "index-plus" fund,
but rather each Fund seeks to add total return in excess of its respective
benchmark both by making bets relative to that benchmark with respect to the
allocation among the underlying Funds, and by participating in the attempt that
each of the underlying Funds makes to outperform its own respective benchmark
index. At any given time, the exposure of an Asset Allocation Fund may be
substantially different than that of its benchmark.
INTERNATIONAL EQUITY ALLOCATION FUND
CURRENT BENCHMARK: EAFE-Lite Extended Index
The International Equity Allocation Fund seeks a total return greater than
the return of the EAFE-LITE EXTENDED INDEX. This index has been developed by the
Manager and is a modification of the EAFE-Lite Index which includes a weighting
for emerging countries. See "Investment Objectives and Policies -- International
Core Fund" for a description of the EAFE-Lite Index. The Fund will pursue its
objective by investing to varying extents, as determined by the Manager,
primarily in Class III Shares of the International Core Fund, Currency Hedged
International Core Fund, Foreign Fund, International Small Companies Fund, Japan
Fund and Emerging Markets Fund. The Fund may also invest up to 15% of its net
assets in any combination of the Domestic Bond Fund, International Bond Fund,
Currency Hedged International Bond Fund, Global Bond Fund, Emerging Country Debt
Fund, Inflation Indexed Bond Fund, U.S. Bond/Global Alpha A Fund and U.S.
Bond/Global Alpha B Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities 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.
For a detailed description of the objective and policies of each underlying
Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments."
WORLD EQUITY ALLOCATION FUND
CURRENT BENCHMARK: World-Lite Extended Index
The World Equity Allocation Fund seeks a total return greater than the
return of WORLD-LITE EXTENDED INDEX. This index has been developed by the
Manager and is a modification of the Morgan Stanley Capital International World
Index that reduces the weighting of Japan and includes a weighting for emerging
countries. The Fund will pursue its objective by investing to varying extents,
as determined by the Manager, in Class III Shares of the Core Fund, Value Fund,
Growth Fund, U.S. Sector Fund, Fundamental Value Fund, Small Cap Value Fund,
Small Cap Growth Fund, REIT Fund, International Core Fund, Currency Hedged
International Core Fund, Foreign Fund, International Small Companies Fund, Japan
Fund and Emerging Markets Fund. The Fund may also invest up to 15% of its net
assets in any combination of the Domestic Bond Fund, International Bond Fund,
Currency Hedged International Bond Fund,
58
Global Bond Fund, Emerging Country Debt Fund, Inflation Indexed Bond Fund, U.S.
Bond/Global Alpha A Fund and U.S. Bond/Global Alpha B Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities 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.
For a detailed description of the objective and policies of each underlying
Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments."
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
CURRENT BENCHMARK: GMO Global (U.S.+)
Equity Index
The Global (U.S.+) Equity Allocation Fund seeks a total return greater than
the return of the GMO GLOBAL (U.S.+) EQUITY INDEX. This index has been developed
by the Manager and is a weighted index comprised 75% by the S&P 500 Index and
25% by the EAFE-Lite Extended Index. The Fund will pursue its objective by
investing to varying extents, as determined by the Manager, in Class III Shares
of the Core Fund, Value Fund, Growth Fund, U.S. Sector Fund, REIT Fund,
Fundamental Value Fund, Small Cap Value Fund, Small Cap Growth Fund,
International Core Fund, Currency Hedged International Core Fund, Foreign Fund,
International Small Companies Fund, Japan Fund and Emerging Markets Fund. The
Fund may also invest up to 15% of its net assets in any combination of the
Domestic Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, Emerging Country Debt Fund, Inflation Indexed Bond Fund,
U.S. Bond/Global Alpha A Fund and U.S. Bond/Global Alpha B Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities 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.
For a detailed description of the objective and policies of each underlying
Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments."
GLOBAL BALANCED ALLOCATION FUND
The Global Balanced Allocation Fund seeks a total return greater than the
return of the GMO GLOBAL BALANCED INDEX. This index has been developed by the
Manager and is a weighted index comprised 48.75% by the S&P 500, 16.25% by the
EAFE-Lite Extended Index and 35% by the Lehman Brothers Government Bond Index.
The Fund will pursue its objective by investing to varying extents, as
determined by the Manager, in Class III Shares of the Core Fund, Value Fund,
Growth Fund, U.S. Sector Fund, Fundamental Value Fund, Small Cap Value Fund,
Small Cap Growth Fund, REIT Fund, International Core Fund, Currency Hedged
International Core Fund, Foreign Fund, International Small Companies Fund, Japan
Fund, Emerging Markets Fund, Domestic Bond Fund, International Bond Fund,
Currency Hedged International Bond Fund, Global Bond Fund, Inflation Indexed
Bond Fund, Emerging Country Debt Fund, U.S. Bond/Global Alpha A Fund and U.S.
Bond/Global Alpha B Fund. The Fund has a fundamental policy that it will, under
normal market conditions, invest in equity securities of underlying Funds such
that, under normal market conditions, at least 25% of the Fund's total assets
will indirectly be invested in fixed income senior securities.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities 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.
For a detailed description of the objective and policies of each underlying
Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments."
DESCRIPTION AND RISKS
OF FUND INVESTMENTS
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. Investors in Asset Allocation Funds
should be aware that the Asset Allocation Funds will indirectly engage in the
practices engaged in by the underlying Funds in which they are invested.
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 each of the
Global Properties Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B
Fund, Small Cap Growth Fund, Inflation Indexed Bond Fund, REIT Fund and Foreign
Fund is not expected to exceed 150%. High portfolio turnover involves
correspondingly greater brokerage
59
commissions and other transaction costs, which will be borne directly by the
relevant Fund, and may well 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" below.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
It is a fundamental policy of each of the Core Fund, the Tobacco-Free Core
Fund, the Small Cap Value Fund, the Fundamental Value Fund, the International
Core Fund, the International Small Companies Fund, the GMO International Equity
Allocation Fund, the GMO World Equity Allocation Fund, the GMO Global (U.S.+)
Equity Allocation Fund, and the GMO Global Balanced Allocation Fund, which may
not be changed without shareholder approval, that at least 75% of the value of
each such Funds' total assets are represented by cash and cash items (including
receivables), Government securities, securities of other investment companies,
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
relevant Fund's total assets and to not 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.
However, the Japan Fund may not own more than 10% of the outstanding voting
securities of any single issuer. As a non- diversified fund, each of these Funds
is permitted to (but is not required to) invest a higher percentage of its
assets in the securities of fewer issuers. Such concentration could 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 or nationalization of assets, 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.
60
DIRECT INVESTMENT IN RUSSIAN SECURITIES. Each of the Emerging Markets Fund,
Foreign Fund, International Core Fund, Currency Hedged International Core Fund,
Global Properties Fund, Emerging Country Debt Fund and U.S. Bond/Global Alpha A
Fund may invest directly in securities of Russian issuers. Investment in
securities of such issuers presents many of the same risks as investing in
securities of issuers in other emerging market economies, as described in the
immediately preceding section. However, the political, legal and operational
risks of investing in Russian issuers, and of having assets custodied within
Russia, may be particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When a Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
SECURITIES LENDING
All of the Funds (except for the Asset Allocation 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 lending agents on behalf of several of the Funds that are 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
Many of the Funds 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 described under "Investment Objectives and Policies" 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 indexes, 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 cur-
61
rency 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 Fund (except for the Short-Term Income Fund
and the Asset Allocation Funds) may seek to increase its return by writing
covered call or put options on optionable securities or indexes. 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 indexes, 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 on a security 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 call option on an index is "covered" if a 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. 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 its obligation, it 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 it has been notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate its
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
62
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
63
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 indexes ("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 indexes 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, Foreign Fund, International Small
Companies Fund and Emerging Markets Fund may each purchase Index Futures on
foreign stock indexes, including those which may trade outside the United
States. The Domestic Bond Fund, International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, U.S.
Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund and Inflation Indexed
Bond Fund may each purchase Index Futures on domestic and (except for the
Domestic Bond Fund) foreign fixed income securities indexes, 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.
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.
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
64
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 indexes 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 "Description
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
65
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 -- Fixed Income 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
66
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
benchmark 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 nonsegregated
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 "Description and Risks of Fund Investments -- Illiquid
Securities."
67
FOREIGN CURRENCY TRANSACTIONS
Funds that are permitted to invest in securities denominated in foreign
currencies may buy or sell foreign currencies, deal in forward foreign currency
contracts, currency futures contracts and related options and options on
currencies. These Funds may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active currency positions relative to both the securities portfolio of
the Fund and the Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quantity of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
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 these 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 U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund,
International Bond Fund, the Currency Hedged International Bond Fund, the Global
Bond Fund and the 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. For a description of the particular manner in which the
Currency Hedged International Core Fund may engage in foreign currency
transactions, see "Investment Objectives and Policies -- Currency Hedged
International Core Fund."
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
68
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
As described under "Investment Objectives and Policies" above, many of the
Funds may temporarily invest a portion of their 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 supra-national 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 vary-
69
ing 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
70
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 imple mented 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 indexes, 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
71
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.
A Fund's investment in indexed securities may also create taxable income in
excess of the cash such investments generate. See "Investment Objectives and
Policies -- Inflation Indexed Bond Fund" and "Taxes -- Tax Implications of
Certain Investments" in this Prospectus.
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
agency 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 or 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.
72
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 (except for the Asset Allocation Funds) 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% (or,
in the case of the Foreign Fund only, 10%) 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% (or, in the case of the
Foreign Fund only, 10%) of the Fund's total assets.
SPECIAL ASSET ALLOCATION FUND CONSIDERATIONS
The Manager does not charge an investment management fee for asset
allocation advice provided to the Asset Allocation Funds, but certain other
expenses such as custody, transfer agency and audit fees will be borne by the
Asset Allocation Funds. Investors in Asset Allocation Funds will also indirectly
bear a proportionate share of the Total Operating Expenses (including investment
management, custody, transfer agency, audit and other Fund expenses) of the
underlying Funds in which the Asset Allocation Funds invest, as well as any
purchase premiums or redemption fees charged by such underlying Funds. Since the
Manager will receive fees from the underlying Funds, the Manager has a financial
incentive to invest the assets of the Asset Allocation Funds in underlying Funds
with higher fees, despite the investment interests of the Asset Allocation
Funds. The Manager is legally obligated to disregard that incentive in selecting
shares of the underlying Funds.
ADDITIONAL INVESTMENT RESTRICTIONS
Fundamental 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 as indicated:
(1) Borrow money except under the following circumstances: (i) Each Fund may
borrow money from banks so long as after such a transaction, the total assets
(including the amount borrowed) less liabilities other than debt obligations,
represent at least 300% of outstanding
73
debt obligations; (ii) Each Fund may also borrow amounts equal to an additional
5% of its total assets without regard to the foregoing limitation for temporary
purposes, such as for the clearance and settlement of portfolio transactions and
to meet shareholder redemption requests; (iii) Each Fund may enter into
transactions that are technically borrowings under the 1940 Act because they
involve the sale of a security coupled with an agreement to repurchase that
security (e.g., reverse repurchase agreements, dollar rolls and other similar
investment techniques) without regard to the asset coverage restriction
described in (i) above, so long as and to the extent that a Fund establishes a
segregated account with its custodian in which it maintains cash and/or high
grade debt securities equal in value to its obligations in respect of these
transactions. Under current pronouncements of the SEC staff, such transactions
are not treated as senior securities so long as and to the extent that the Fund
establishes a segregated account with its custodian in which it maintains liquid
assets, such as cash, U.S. Government securities or other appropriate high grade
debt securities equal in value to its obligations in respect of these
transactions; notwithstanding the foregoing, the Japan Fund may not 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, and which borrowings will be repaid before any additional
investments are purchased.
(2) 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.)
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Invest in securities of any issuer if, to the knowledge of the Trust,
officers and Trustees of the Trust and officers and members of Grantham, Mayo,
Van Otterloo & Co. LLC (the "Manager") who beneficially own more than 1/2 of 1%
of the securities of that issuer together beneficially own more than 5%.
(8) 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 and Global Properties Funds may invest more than 25% of their assets in
real estate-related securities).
(9) 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.
(10) Issue senior securities, as defined in the 1940 Act and as amplified by
rules, regulations and pronouncements of the SEC. The SEC has concluded that
even though reverse repurchase agreements, firm commitment agreements and
standby commitment agreements fall within the functional meaning of the term
"evidence of indebtedness," the issue of compliance with Section 18 of the 1940
Act will not be raised with the SEC by the Division of Investment Management if
a Fund covers such securities by maintaining certain "segregated accounts."
Similarly, so long as such segregated accounts are maintained, the issue of
compliance with Section 18 will not be raised with respect to any of the
following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (5) below; any
borrowing permitted by restriction 1 above; any collateral arrangements with
respect to initial and variational margin permitted by non- fundamental policy
(5) below; and the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts.
(11) With respect to the Tobacco-Free Core Fund only, 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.
(12) With respect to the Japan Fund only, (i) own greater than 10% of the
outstanding voting securities of any single issuer; or (ii) 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 permitted borrowings (for
purposes of this restriction, collateral ar-
74
rangements 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).
Non-Fundamental Restrictions:
It is contrary to the present policy of all the Funds, which may be changed
by the Trustees without shareholder approval, to:
(1) 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 (i) the International Equity Funds 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, and (ii) the Foreign Fund may invest
without limitation in such warrants or rights.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) Make investments for the purpose of gaining control of a company's
management.
(4) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
(5) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 33 1/3 % of the Fund's total assets (taken at cost). (For the purposes of
this restriction, collateral arrangements with respect to swap agreements, 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. 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 encumbrance.)
(6) With respect to the Foreign Fund only, to (i) invest in interests of any
general partnership, (ii) utilize margin or other borrowings to increase market
exposure (such prohibition shall extend to the use of cash collateral obtained
in exchange for loaned securities but does not prohibit the use of margin
accounts for permissible futures trading; further, the Fund may borrow an amount
equal to cash receivable from sales of stocks or securities the settlement of
which is deferred under standard practice in the country of sale), (iii) pledge
or otherwise encumber its assets, and (iv) invest more than 5% of its assets in
any one issuer (except Government securities and bank certificates of deposit).
Except as indicated above in Fundamental 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.
MULTIPLE CLASSES
Each Fund (except the Short-Term Income Fund) offers three classes of
shares: Class I, Class II and Class III. The Short-Term Income Fund offers only
Class III Shares. Eligibility generally depends on the size of a client's total
investment with GMO, as described more fully in this section. See "Eligibility
for Classes" below.
SHAREHOLDER SERVICE FEES
The principal economic difference among the various classes of shares is the
level of Shareholder Service Fee which the classes bear for client and
shareholder service, reporting and other support. The existence of multiple
classes reflects the fact that, as the size of a client relationship increases,
the cost to service that client decreases as a percentage of the assets in that
account. Thus, the Shareholder Service Fee is lower for classes where
eligibility criteria require greater total assets under GMO's management.
The Trust has adopted a Shareholder Servicing Plan with respect to the
multiple classes of shares. Pursuant to the terms of the Shareholder Servicing
Plan, the classes will pay the following Shareholder Service Fees, expressed as
an annual percentage of the average daily net assets attributable to that class
of shares:
SHAREHOLDER SERVICE FEE
<TABLE>
<CAPTION>
FUND CLASS I CLASS II CLASS III
---- ------- -------- ---------
<S> <C> <C> <C>
All Funds (except Asset 0.28% 0.22% 0.15%
Allocation Funds)
Asset Allocation Funds* 0.13% 0.07% 0.00%
</TABLE>
* The Asset Allocation Funds will invest in Class III Shares of underlying Funds
and will therefore also indirectly bear an additional Shareholder Service Fee of
0.15%. Thus, the total Shareholder Service Fee borne by Class I, Class II and
Class III Shares of the Asset Allocation Funds is the same as that borne by
Class I, Class II and Class III Shares, respectively, of the other Funds.
75
CLIENT SERVICE -- GMO AND GMO FUNDS DIVISION
A significant distinction among classes is that clients eligible for Class I
or Class II Shares are serviced by the Manager's GMO FUNDS DIVISION, a division
of GMO established in April of 1996 to deliver institutional quality service and
reporting to clients generally committing between $1 million and $35 million to
GMO's management.
Clients eligible to purchase Class III Shares will be serviced directly by
the Manager.
ELIGIBILITY FOR CLASSES
With certain exceptions described below, eligibility for Class I, Class II,
and Class III Shares depends on a client's "TOTAL INVESTMENT" with GMO.
For clients establishing a relationship with GMO on or after June 1, 1996: A
client's Total Investment is equal at any time to the aggregate of all amounts
contributed by the client to any GMO Fund, less the "INVESTMENT COST" of all
redemptions by the client from such Funds. Where applicable, the market value of
assets managed by GMO for the client other than in a mutual fund, as of the
prior month end, will be added to the client's Total Investment. For purposes of
class eligibility, market appreciation or depreciation of a client's mutual fund
account is not considered; the Total Investment of a client is affected only by
the amount of purchases and redemptions made by the client. Further, it is
assumed that any redemptions made by a client are satisfied first by market
appreciation so that a redemption does not have Investment Cost except to the
extent that the redemption or withdrawal exceeds the market appreciation of the
client's account in a Fund.
Subject to the exceptions set forth following this table, the minimum Total
Investment for a new client (establishing a GMO Account after June 1, 1996) to
be eligible for Class I, II or III Shares is set forth in the following table:
<TABLE>
<CAPTION>
MINIMUM TOTAL INVESTMENT
------------------------
<S> <C>
Class I $1 Million
Class II $10 Million
Class III $35 Million
</TABLE>
Investments by defined contribution pension plans (such as 401(k) plans)
will be accepted only in Class I Shares regardless of the size of the
investment, and will not be eligible to convert to other classes.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose Total
Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on or shortly after July 31, 1997. For clients with GMO accounts as of
May 31, 1996, their initial Total Investment will equal the market value of all
of their GMO investments as of the close of business on May 31, 1996 and will
subsequently be calculated as described in the preceding section.
There is no minimum for subsequent investments into any class of shares.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
CONVERSIONS BETWEEN CLASSES
On July 31 of each year (the "DETERMINATION DATE") the value of each
client's Total Investment with GMO, as defined above, will be determined. Based
on that determination, each client's shares of all Funds will be automatically
converted to the class with the lowest Shareholder Service Fee for which the
client is eligible based on the amount of their Total Investment on the
Determination Date. The conversion will occur within 15 business days following
the Determination Date. Also, if a client makes an investment in a GMO Fund or
puts additional assets under GMO's management so as to cause the client to be
eligible for a new class of shares, such determination will be made as of the
close of business on the last day of the month in which the investment was made,
and the conversion will be effected within 15 business days of that month-end.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in the new class of shares immediately after the
conversion should equal the client's basis in the converted shares immediately
before conversion, and the holding period of the new class of shares should
include the holding period of the converted shares.
Certain special rules will be applied by the Manager with respect to clients
for whom GMO managed assets prior to the creation of multiple classes on May 31,
1996. Clients whose Total Investment as of May 31, 1996 is equal to $7 million
or more will be eligible to remain invested in Class III Shares indefinitely
(despite the normal $35 million minimum), provided that such client does not
make a withdrawal or redemption that causes the client's Total Investment to
fall below $7 million. Clients whose Total Investment as of May 31, 1996 is less
than $7 million will be converted to Class II Shares (rather than Class I
Shares), and such conversion will not occur until July 31, 1997 or slightly
76
thereafter. Of course, if such a client makes an additional investment prior to
July 31, 1997 such that their Total Investment on July 31, 1997 is $35 million
or more, the client will remain eligible for Class III Shares.
Investors should be aware that not all classes of all Funds are available in
all jurisdictions.
PURCHASE OF SHARES
Shares of each Fund are available only from the Trust and may be purchased
on any day when the New York Stock Exchange is open for business (a "business
day"). Class I and Class II Shares may be purchased by calling (617) 790-5000.
Class III Shares may be purchased by calling (617) 330-7500. See "Purchase
Procedures" below.
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,
if any, established from time to time by the Trust for the particular Fund and
class to be purchased. All purchase premiums are paid to and retained by the
Fund and are intended to cover the brokerage and other costs associated with
putting the investment to work in the relevant markets. Each class of shares of
a Fund has the same rate of purchase premium.
The purchase premiums currently in effect for each Fund are as follows:
<TABLE>
<CAPTION>
FUND PURCHASE PREMIUM
---- ----------------
<S> <C>
Short-Term Income Fund,
Domestic Bond Fund and Foreign Fund None
Inflation Indexed Bond Fund 0.10%
Core Fund, Tobacco-Free
Core Fund, Value Fund and Growth Fund 0.14%
Fundamental Value Fund,
International Bond Fund,
Currency Hedged International Bond Fund,
Global Bond Fund, U.S. Bond/Global
Alpha A Fund and U.S. Bond/Global
Alpha B Fund 0.15%
U.S. Sector Fund 0.27%
Global Balanced Allocation Fund 0.35%
Global Hedged Equity Fund 0.37%
Japan Fund 0.40%
Global (U.S.+) Equity Allocation Fund 0.47%
Small Cap Value Fund,
Small Cap Growth Fund, REIT Fund and
Emerging Country Debt Fund 0.50%
International Core Fund,
Currency Hedged International
Core Fund and Global Properties Fund 0.60%
World Equity Allocation Fund 0.66%
International Equity Allocation Fund 0.80%
International Small Companies Fund 1.00%
Emerging Markets Fund 1.60%
</TABLE>
Purchase premiums apply only to cash transactions. These fees are paid to
and retained by the Fund itself and are designed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity,
rather than to the Fund as a whole. Purchase premiums are not sales loads.
In certain limited circumstances, the purchase premiums and/or redemption
fees for certain Funds may be waived in part or in full. The circumstances are
described in the footnotes to the Schedule of Fees and Expenses beginning on
page 13 of this Prospectus. 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%.
Shares may be purchased (i) in cash, (ii) 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, or (iii) by a combination of such
securities and cash. In all cases, the Manager reserves the right to reject any
particular investment. Securities acceptable to the Manager as consideration 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 securities as acceptable consideration 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 making in-kind purchases should
telephone the Manager at (617) 330-7500.
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
77
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, 200 Clarendon Street,
Boston, Massachusetts 02116. 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 or prior to 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) General: Investors should call the Trust at (617) 790-5000 before
attempting to place an order for Class I or Class II Shares. Investors should
call the Trust at (617) 330-7500 before attempting to place an order for Class
III Shares. The Trust reserves the right to reject any order for Trust shares.
DO NOT SEND CASH, CHECKS OR SECURITIES DIRECTLY TO THE TRUST. Wire transfer and
mailing instructions are contained on the PURCHASE ORDER FORM which can be
obtained from the Trust at the telephone numbers set forth above.
Purchases will be made in full and fractional shares of each Fund calculated
to three decimal places. The Trust will send a written confirmation (including a
statement of shares owned) to shareholders at the time of each transaction.
(b) Purchase Order Form: Investors must submit an application to the
Trust and it must be accepted by the Trust before it will be considered in
"good order."
Class I and Class II Shares: A Purchase Order Form for Class I and Class II
Shares may be obtained by calling the Trust at (617) 790-5000. This Order Form
may be submitted to the Trust (i) By Mail to GMO Trust c/o GMO Funds Division,
40 Rowes Wharf, Boston, MA 02110; or (ii) By Facsimile to (617) 439-4290.
Class III Shares: A Purchase Order Form for Class III Shares may be obtained
by calling the Trust at (617) 330-7500. This Order Form may be submitted to the
Trust (i) By Mail to GMO Trust c/o Grantham, Mayo, Van Otterloo & Co. LLC, 40
Rowes Wharf, Boston, MA 02110; Attention: Shareholder Services, or (ii) By
Facsimile to (617) 439-4192; Attention:
Shareholder Services.
(c) Acceptance of Order: No purchase order is in "good order" until it has
been accepted by the Trust. As noted above, investors should call the Trust at
the telephone numbers indicated before attempting to place an order. If a
Purchase Order Form is faxed to the Trust without first contacting the Trust,
investors should not consider their order acknowledged until they have received
notification from the Trust or have confirmed receipt of the order by contacting
the Trust. A shareholder may confirm acceptance of a mailed or faxed purchase
order by calling the Trust at (617) 330-7500 in the case of Class III Shares, or
at (617) 790-5000 in the case of Class I or II Shares. If a Purchase Order is
mailed to the Trust, it will be acted upon when received.
(d) Payment: All Federal funds must be transmitted to Investors Bank & Trust
Company for the account of the specific Fund of GMO Trust. "Federal funds" are
monies credited to Investors Bank & Trust Company's account with the Federal
Reserve Bank of Boston.
NOTE: The Trust 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 cannot be held 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. All redemption fees are paid to and retained by the Fund and are intended
to cover the brokerage and other Fund costs associated with redemptions. All
classes of a particular Fund bear the same redemption fee rate, if any.
The redemption fees currently in effect for each Fund are as follows:
<TABLE>
<CAPTION>
FUND REDEMPTION FEE
---- --------------
<S> <C>
Inflation Indexed Bond Fund 0.10%
International Equity Allocation Fund 0.11%
Global Balanced Allocation Fund 0.11%
Global (U.S.+) Equity Allocation Fund 0.15%
World Equity Allocation Fund 0.15%
Emerging Country Debt Fund 0.25%1
Global Properties Fund 0.30%
Emerging Markets Fund 0.40%2
Small Cap Value Fund 0.50%
Small Cap Growth Fund 0.50%
REIT Fund 0.50%
International Small Companies Fund 0.60%
Japan Fund 0.61%
Global Hedged Equity Fund 1.40%3
</TABLE>
1 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).
2 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).
3 This redemption fee will be 0% unless the size of a redemption forces the
Manager to an early termination of a hedging transaction to meet the redemption
request.
78
No redemption fees apply to redemptions of shares of any Funds other than
the Funds listed above.
Redemption fees apply only to cash transactions. These fees are paid to and
retained by the Fund itself and are employed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity,
rather than to the Fund as a whole. Redemption fees are not sales loads or
contingent deferred sales charges.
In certain limited circumstances, the purchase premiums and/or redemption
fees for certain Funds may be waived in part or in full. The circumstances are
described in the footnotes to the Schedule of Fees and Expenses beginning on
page 13 of this Prospectus. 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 Trust 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 will be considered "received" by
the Trust only after (i) it is mailed to, and received by, the Trust at the
appropriate address set forth above for purchase orders, or (ii) it is faxed to
the Trust at the appropriate facsimile number set forth above for purchase
orders, and the investor has confirmed receipt of the faxed request by calling
the Trust at (617) 330-7500 in the case of Class III Shares, or at (617)
790-5000 in the case of Class I or Class II Shares. 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
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, except that a Fund may not determine its net asset value 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. A Fund's net asset value is
determined 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,
unless circumstances dictate otherwise. Circumstances may dictate otherwise,
among other times, when the issuer's creditworthiness has become impaired.
All other fixed income securities (which includes bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied
79
from another source) because of such price activity or because the Manager has
other reasons to suspect that a price supplied may not be reliable.
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.
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, at least annually, substantially
all of its net investment income (which is derived from dividends and interest
it receives from its portfolio 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 carryovers. It is the policy of each Fund
to make distributions, at least annually, sufficient to avoid the imposition of
a non-deductible 4% excise tax on certain undistributed amounts of taxable
investment income and capital gains. The policy of each Domestic Equity Fund
(except for the REIT Fund), the Short-Term Income Fund and the Domestic Bond
Fund is to declare and pay distributions of its dividends and interest
quarterly. The policy of each other 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
capital gains at least annually. Investors should be aware that by purchasing
shares shortly before the record date of a dividend or capital gains
distribution, they will pay the full price of the shares and shortly thereafter
will receive some portion of the price paid back as a taxable dividend or
taxable capital gains distribution.
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 Application or by
writing to the Trust.
Certain of the Funds' investments, including assets "marked to the market"
for federal income tax purposes, debt obligations issued or purchased at a
discount and potentially so-called "indexed securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
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, and
to meet all other requirements necessary for it to be relieved of federal taxes
on income and gains it distributes to shareholders. So long as a Fund so
qualifies, the Fund itself will not pay federal income taxes on the amounts
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. 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. 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 div-
80
idends and distributions paid during the preceding year to taxable investors and
others requesting such information.
For corporate shareholders, the dividends-received deduction will generally
apply to a Fund's dividends paid from investment income to the extent derived
from dividends received from U.S. corporations. However, any distributions
received by a Fund from REITs will not qualify for the corporate
dividends-received deduction. A Fund's investments in REIT equity securities may
require such Fund to accrue and distribute income not yet received. In order to
generate sufficient cash to make the requisite distributions, the Fund may be
required to sell securities in its portfolio that it otherwise would have
continued to hold (including when it is not advantageous to do so). A Fund's
investments in REIT equity securities may at other times result in the Fund's
receipt of cash in excess of the REIT's earnings; if the Fund distributes such
amounts, such distribution could constitute a return of capital to Fund
shareholders for federal income tax purposes.
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 principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise 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 (including possible liability for federal alternative
minimum tax).
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 30% 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 realized long-term capital
gains paid by a Fund 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, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Federal regulations generally require the Funds to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and gains realized upon a sale of securities
paid to a shareholder if such shareholder fails to certify either that the TIN
furnished in connection with opening an account is correct or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Also, the IRS may notify a Fund
to institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a Federal income tax return. A TIN is either the Social
Security number or employer identification number of the record owner of the
account. Any tax withheld as a result of backup withholding does not constitute
an additional tax imposed on the record owner of the account, and may be claimed
as a credit on the record owner's Federal income tax return. Also, 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 value of the total
assets of any Fund is represented by stock or securities 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
81
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.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
As described above under the heading "Distributions," certain of the Funds'
investments, including assets "marked to the market" for federal income tax
purposes, debt obligations issued or purchased at a discount and potentially
so-called "index securities" (including inflation indexed bonds), will create
taxable income in excess of the cash they generate. In such cases, a Fund may be
required to sell assets (including when it is not advantageous to do so) to
generate the cash necessary to distribute as dividends to its shareholders all
of its income and gains and therefore to eliminate any tax liability at the Fund
level.
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 requirements noted above may restrict a 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
distribution received from the sale of its investment in such a company, which
tax cannot be eliminated by making distributions to Fund shareholders. However,
a Fund may elect to treat a passive foreign investment company as a "qualified
electing fund." A Fund may also elect the mark-to-market election likely
available under proposed regulation 1.1291-8, which may have the effect of
accelerating the recognition of income (without the receipt of cash) and
increase the amount required to be distributed for the Fund to avoid taxation.
Making either of these elections may therefore require a Fund to liquidate other
investments (including when it is not advantageous to do so) to meet its
distribution requirement, which may also accelerate the recognition of gain and
affect a Fund's total return.
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 that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
MANAGEMENT OF THE TRUST
Each Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO") which
provides investment advisory services to a substantial number of institutional
and other investors, including one other registered investment company.
Grantham, Mayo, Van Otterloo & Co. LLC converted from a general partnership to a
limited liability company on December 16, 1996. Each of the following four
members 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 management
fee at the stated annual rates set forth under Schedule of Fees and Expenses.
The management fee is computed and accrued daily, and paid monthly. While the
fee paid to the Manager by each of the Fundamental Value Fund, the REIT 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
82
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, 1997, the Manager received, as
compensation for management services rendered in such year (after waiver), the
percentages of each Fund's average daily net assets as set forth below:
<TABLE>
<CAPTION>
FUND % OF AVERAGE NET ASSETS
---- -----------------------
<S> <C>
Core Fund 0.35%
Tobacco-Free Core Fund 0.19%
Value Fund 0.45%
Growth Fund 0.33%
U.S. Sector Fund 0.30%
Small Cap Value Fund 0.30%
Fundamental Value Fund 0.59%
International Core Fund 0.50%
International Small Companies Fund 0.46%
Japan Fund 0.40%
Emerging Markets Fund 0.82%
Global Hedged Equity Fund 0.49%
Domestic Bond Fund 0.08%
Short-Term Income Fund 0.00%
International Bond Fund 0.17%
Currency Hedged International Bond
Fund 0.18%
Emerging Country Debt Fund 0.35%
Currency Hedged International Core
Fund 0.32%
Global Bond Fund 0.00%
REIT Fund 0.43%
Foreign Fund 0.44%
Global Properties Fund 0.00%
Small Cap Growth Fund 0.08%
World Equity Allocation Fund 0.00%
Global Balanced Allocation Fund 0.00%
International Equity Allocation Fund 0.00%
Global (US+) Equity Allocation Fund 0.00%
</TABLE>
Mr. R. Jeremy Grantham and Christopher Darnell are primarily responsible for
the day-to-day management of the Core Fund, the Tobacco-Free Core Fund, the
Growth Fund, the U.S. Sector Fund, the Small Cap Value Fund and the Small Cap
Growth Fund. Each has served in this capacity for more than five years. Mr.
Richard A. Mayo has been primarily responsible for the day-to-day management of
the Fundamental Value Fund since the Fund's inception. Mr. Mayo and Mr.
Christopher Darnell have been primarily responsible for the day-to-day
management of the Value Fund since the Fund's inception. Mr. Darnell, Mr. Robert
Brokaw and Mr. Richard McQuaid are primarily responsible for the day-to-day
Management of the REIT Fund. Mr. Grantham, Mr. Darnell and Mr. Forrest Berkley
have been primarily responsible for the day-to-day management 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 six
years. Mr. Arjun Bhagwan Divecha has been primarily responsible for the
day-to-day management of the Emerging Markets Fund since the inception of the
Fund. Mr. Jui L. Lai and Ms. Ann M. Spruill are primarily responsible for the
day-to-day management of the Foreign Fund. Mr. Eyk H.A. Van Otterloo and Mr.
Wilson Magee have been primarily responsible for the day-to-day management of
the Global Properties Fund since its inception. Mr. William L. Nemerever, Mr.
Thomas F. Cooper and Mr. Steven Edelstein are primarily responsible for the day-
to-day management of the Fixed Income Funds other than the Global Hedged Equity
Fund. 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 1994. Mr. Edelstein has served in this capacity since 1995. Prior to 1993,
the Short-Term Income Fund was managed by Mr. Brokaw. Day-to-day management of
each of the Asset Allocation Funds is the responsibility of a committee and no
person or persons is primarily responsible for making recommendations to that
committee.
Mr. Grantham, Mr. Mayo and Mr. Van Otterloo are all founding partners of the
Manager, are currently members of the Manager, and have been engaged by the
Manager in equity and fixed-income portfolio management since its inception in
1977. Mr. Grantham serves as President -- Quantitative, Mr. Mayo serves as
President -- Domestic Active and Mr. Van Otterloo serves as
President-International of the Trust. Mr. Darnell is a member of the Manager and
has been with the Manager since 1979 and has been involved in equity portfolio
management for more than ten years. Mr. Berkley is a member of the Manager, has
been employed by the Manager for more than eight years, and has been involved in
equity portfolio management (principally of international equities) for more
than six years. Mr. Nemerever and Mr. Cooper are each members of the Manager and
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. Edelstein joined the Manager in June 1995. For the five years prior to that,
Mr. Edelstein was Vice President in the Fixed Income Futures and Options Group
at Morgan Stanley & Company. Mr. Divecha is the sole shareholder and President
of the Consultant which he organized 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. Mr. Lai is a
member of the Manager and has been employed by the Manager in international
equity portfolio management since 1988. Ms. Spruill is a member of the Manager
and
83
has been employed by the Manager in international equity portfolio management
since 1990. Mr. Magee joined the Manager in 1997. From September 1994 to
November 1996, Mr. Magee was a principal for the Penobscot Group, a real estate
securities research firm, where he was responsible for securities analysis,
marketing/client relations and new business development. From January 1987 to
December 1994, Mr. Magee was the principal for his own firm, advising
institutional investors and private clients in real estate investments and
conducting fundamental research for portfolio strategies.
Pursuant to an Administrative Services Agreement with GMO, Investors Bank &
Trust Company provides administrative services to each of the Funds. GMO pays
Investors Bank & Trust Company an annual fee for its services to each Fund.
Pursuant to a Servicing Agreement with the Trust on behalf of each class of
shares of each Fund, Grantham, Mayo, Van Otterloo & Co. LLC, in its capacity as
the Trust's shareholder servicer (the "Shareholder Servicer") provides direct
client service, maintenance and reporting to shareholders of each class of
shares. Such servicing and reporting services include, without limitation,
professional and informative reporting, client account information, personal and
electronic access to Fund information, access to analysis and explanations of
Fund reports, and assistance in the correction and maintenance of client-related
information.
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
thirty-one series of shares: one for each Fund and one for the Pelican Fund. 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. All shares entitle their holders to one vote per
share. 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. Shareholders of a particular class of
shares do not have separate class voting rights except with respect to matters
that affect only that class of shares or as otherwise required by law. 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 June 10, 1997, the following shareholders held greater than 25% of the
outstanding shares of a series of the Trust:
<TABLE>
<CAPTION>
FUND SHAREHOLDERS
---- ------------
<S> <C>
Tobacco-Free Core Fund Dewitt Wallace -- Reader's Digest
Fund, Inc.; Lila Wallace
Reader's Digest Fund, Inc.
U.S. Sector Fund John D. MacArthur & Catherine T.
MacArthur Foundation; Yale University;
Bost & Co./BAMF8721002
Growth Fund Surdna Foundation, Inc.
Fundamental Value Fund Yale University; Leland Stanford
Junior University II
Small Cap Growth Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Domestic Bond Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Currency Hedged GTE Service Corp. Pension Trust
International Bond Fund Bankers Trust Company as Trustee,
Global Hedged Equity Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Global Bond Fund Essex & Company
Global Properties Fund Eyk Van Otterloo
Global Balanced Allocation Fund Providence Washington Insurance Co.
Employees' Pension Plan
Global (U.S.+) Equity
Allocation Fund Milbank Foundation for Rehabilitation
Inflation Indexed Bond Fund The Duke Endowment -- AA
World Equity Allocation Fund RJR Nabisco Canada Master Trust
</TABLE>
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.
CERTAIN FINANCIAL INFORMATION
RELATING TO THE GMO FOREIGN FUND
As discussed in "Financial Highlights -- Foreign Fund" above, the Foreign
Fund commenced operations on June 28, 1996 subsequent to a transaction
involving, in essence, the reorganization of the GMO International Equities Pool
of The Common Fund for Nonprofit Organizations (the "GMO Pool") as the Foreign
Fund, pursuant to an Agreement and Plan of Reorganization which provided that
(i) the GMO Pool be discontinued and its assets and liabilities distributed pro
rata to the unitholders of the GMO Pool as a liquidating distribution, and (ii)
such assets and liabilities immediately thereafter be transferred by the
unitholders to the Foreign Fund in exchange for shares of the Foreign Fund. The
Foreign Fund's portfolio of investments on June 28, 1996 was the same as the
portfolio of the GMO Pool immediately prior
84
to the transfer, and the Foreign Fund will operate under investment policies,
objectives, guidelines and restrictions that are in all material respects
equivalent to those of the GMO Pool.
The GMO Pool was not a registered investment company as it was exempt from
registration under the 1940 Act. Since, in a practical sense, the GMO Pool
constitutes a predecessor of the Foreign Fund, the Trust calculates the
performance for the Foreign Fund for periods prior to June 28, 1996 by including
the total return of the GMO Pool.
AVERAGE ANNUAL TOTAL RETURN. The Foreign Fund from time to time may
advertise certain investment performance figures. These figures are based on
historical earnings but past performance data is not necessarily indicative of
future performance of the Fund. All performance information will be provided net
of Fund and GMO Pool expenses. The Fund may, in conformance with SEC guidelines,
advertise its total return for various periods of time by determining, over a
period of time stated in the advertisement, the average annual compounded rate
of return that an investment in the Fund earned over that period, assuming
reinvestment of all distributions.
The performance data quoted below includes the performance of the GMO Pool
for periods before the commencement of operations of the Foreign Fund.
Performance data relating to Class II and Class III Shares of the Foreign Fund
has not been restated because the historical level of expenses for the GMO Pool
(0.83% per annum) was higher than the expenses anticipated for Class II and
Class III Shares of the Foreign Fund (0.75% and 0.82% per annum). Performance
data relating to Class I Shares of the Foreign Fund has been restated because
the historical level of expenses for the GMO Pool (0.83% per annum) was lower
than the expenses anticipated for the Class I Shares of the Foreign Fund (0.88%
per annum). The GMO Pool was not registered under the 1940 Act and therefore was
not subject to certain investment restrictions imposed by the 1940 Act. If the
GMO Pool had been registered under the 1940 Act, its performance may have been
adversely affected.
Average Annual Total Return for the periods ended December 31, 1995:
<TABLE>
<CAPTION>
CLASS II AND III SHARES CLASS I SHARES
----------------------- --------------
<S> <C> <C>
1-year return 13.85% 13.80%
3-year return 19.63% 19.57%
5-year return 12.87% 12.81%
10-year return 15.94% 15.88%
Since inception (9/1/84) 19.73% 19.67%
</TABLE>
85
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
86
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 time 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
87
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, 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.
88
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.
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.
89
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.
90
- -------------------------------------------------------------------------------
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries regarding CLASS III Shares
to Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
(1-617-330-7500)
Shareholders may direct inquiries regarding CLASS I or CLASS II
Shares to GMO Funds Division,
40 Rowes Wharf, Boston, MA 02110
(1-617-790-5000)
- -------------------------------------------------------------------------------
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1997
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the GMO Trust Prospectus dated June 30, 1997,
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.
Table of Contents
Caption Page
INVESTMENT OBJECTIVES AND POLICIES 1
MISCELLANEOUS INVESTMENT PRACTICES 1
INVESTMENT RESTRICTIONS 2
INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS 3
MANAGEMENT OF THE TRUST 4
INVESTMENT ADVISORY AND OTHER SERVICES 5
PORTFOLIO TRANSACTIONS 9
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES 11
FINANCIAL STATEMENTS 26
SPECIMEN PRICE-MAKE-UP SHEET 27
-i-
INVESTMENT OBJECTIVES AND POLICIES
The investment objective 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
"Description and Risks of Fund Investments -- Futures and Options," many of the
Funds may purchase futures contracts on various securities indexes ("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
A complete list of the fundamental investment policies relating to the
Funds, which policies may not be changed without a vote of the majority of the
outstanding voting securities of the relevant Fund, is set forth in the
Prospectus. See "Investment Restrictions--Fundamental Restrictions." In
addition, 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 (i) 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, and (ii) the Foreign Fund may invest without
limitation in such warrants or rights.
(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) Invest more than 15% of net assets (or such lower
percentage permitted by the states in which shares are eligible for
sale) in illiquid securities. The securities currently thought to be
included as "illiquid securities" are restricted securities under the
Federal securities laws (including illiquid securities traded under
Rule 144A), repurchase agreements and securities that are not readily
marketable. To the extent the Trustees determine that restricted
securities traded under Rule 144A are in fact liquid, they will not be
included in the 15% limit on investment in illiquid securities.
(f) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 33_% of the Fund's total assets (taken at cost).
(For the purposes of this restriction, collateral arrangements with
respect to swap agreements, 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.
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 encumbrance.)
(g) With respect to the Foreign Fund only, to (i) invest in
interests of any general partnership, (ii) utilize margin or other
borrowings to increase market exposure (such prohibition shall extend
to the use of cash collateral obtained in exchange for loaned
securities but does not prohibit the use of margin accounts for
permissible futures trading; further, the Fund may borrow an amount
equal to cash receivable from sales of stocks or securities the
settlement of which is deferred under standard practice in the country
of sale), (iii) pledge or otherwise encumber its assets, and (iv)
invest more than 5% of its assets in any one issuer (except Government
securities and bank certificates of deposit).
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.
-2-
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"). 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 carryover. 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 requirements 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. However, a Fund may elect to treat a passive foreign investment
company as a "qualified electing fund," or elect the mark-to-market election
under proposed regulation 1.1291-8, which may have the effect of accelerating
the recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the Fund to avoid taxation. Making either of
these elections may therefore require the Fund to liquidate other investments to
meet its distribution requirement, which may also accelerate the recognition of
gain and affect the Fund's total return.
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
-3-
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-Quantitative and Trustee of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
Harvey R. Margolis. Trustee of the Trust. Mathematics Professor,
Boston College.
Jay O. Light. Trustee of the Trust. Professor of Business
Administration, Harvard University; Senior Associate Dean, Harvard
University (1988-1992).
Eyk del Mol Van Otterloo. President-International of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC
Richard Mayo. President-Domestic Active of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC
Kingsley Durant. Vice President, Treasurer and Secretary of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
Susan Randall Harbert. Secretary and Assistant Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
William R. Royer, Esq.. Vice President and Assistant Treasurer of
the Trust. General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC
(January, 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September, 1992 - January, 1995).
Jui Lai. Secretary of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC
Ann Spruill. Secretary of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC
Alison E. Baur, Esq. Clerk of the Trust. Associate General
Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (February 1997 -
Present). Attorney, Securities and Exchange Commission (April 1991
- January 1997).
Robert V. Brokaw, Jr. Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC
*Trustee is deemed to be an "interested person" of the Trust and the Manager, as
defined by the 1940 Act.
-4-
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. Except as set forth
below, as of June 13, 1997, the Trustees and officers of the Trust as a
group own less than 1% of the outstanding shares of each class of
shares of each Fund of the Trust:
Aggregate
Fund Class Ownership Interest
---- ----- ------------------
REIT Fund III 1.80%
Japan Fund III 1.81%
Global Properties Fund III 80.74%
Short-Term Income Fund III 24.05%
Global Hedged Equity Fund III 2.45%
Global Bond Fund III 1.26%
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.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series
thereof:
- ---------------------------------------- ---------------------------------------
NAME OF PERSON, TOTAL ANNUAL COMPENSATION FROM THE
POSITION TRUST
- ---------------------------------------- ---------------------------------------
Harvey R. Margolis, Trustee $70,000
- ---------------------------------------- ---------------------------------------
Jay O. Light, Trustee $70,000
- ---------------------------------------- ---------------------------------------
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai and Brokaw, and Mses.
Harbert and Spruill, as members 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 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
Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses and transfer taxes; and, in the case
of the Emerging Markets Fund, Emerging Country Debt Fund and Global Hedged
Equity Fund, excluding custodial fees; and, in the case of the Asset
Allocation Funds, U.S. Sector Fund and Global Hedged Equity Fund,
excluding expenses indirectly incurred by investment in other Funds of the
Trust) 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.
-5-
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 a majority of the Trustees who are not "interested persons" 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 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:
<TABLE>
<CAPTION>
Gross Reduction Net
<S> <C> <C> <C>
CORE FUND
Year ended 2/28/97 $16,712,773 $ 5,742,268 $10,970,505
Year ended 2/29/96 $14,964,100 $ 2,052,651 $12,911,449
Year ended 2/28/95 $10,703,745 $ 1,492,476 $ 9,211,269
INTERNATIONAL CORE FUND
Year ended 2/28/97 $33,112,051 $11,195,222 $21,916,829
Year ended 2/29/96 $25,419,063 $ 4,915,283 $20,503,780
Year ended 2/28/95 $19,964,039 $ 3,849,845 $16,114,194
GROWTH FUND
Year ended 2/28/97 $ 1,637,804 $ 561,765 $ 1,076,039
Year ended 2/29/96 $ 1,685,025 $ 241,245 $ 1,443,780
Year ended 2/28/95 $ 1,063,102 $ 162,479 $ 900,623
SHORT-TERM INCOME FUND
Year ended 2/28/97 $ 69,134 $ 69,134 $ 0
Year ended 2/29/96 $ 21,431 $ 21,431 $ 0
Year ended 2/28/95 $ 32,631 $ 24,693 $ 7,938
JAPAN FUND
Year ended 2/28/97 $ 1,566,406 $ 742,507 $ 823,899
Year ended 2/29/96 $ 647,675 $ 125,662 $ 522,013
Year ended 2/28/95 $ 3,394,922 $ 113,442 $ 3,281,480
-6-
VALUE FUND
Year ended 2/28/97 $ 2,462,093 $ 871,498 $ 1,590,595
Year ended 2/29/96 $ 2,296,190 $ 463,260 $ 1,832,930
Year ended 2/28/95 $ 3,144,806 $ 612,779 $ 2,532,027
TOBACCO-FREE CORE FUND
Year ended 2/28/97 $ 291,746 $ 183,825 $ 107,921
Year ended 2/29/96 $ 284,306 $ 113,925 $ 170,381
Year ended 2/28/95 $ 260,209 $ 140,422 $ 119,787
FUNDAMENTAL VALUE FUND
Year ended 2/28/97 $ 1,627,950 $ 347,372 $ 1,280,578
Year ended 2/29/96 $ 1,496,155 $ 108,537 $ 1,387,618
Year ended 2/28/95 $ 1,297,348 $ 118,250 $ 1,179,098
SMALL CAP VALUE FUND
Year ended 2/28/97 $ 1,948,526 $ 761,954 $ 1,186,572
Year ended 2/29/96 $ 873,239 $ 226,684 $ 646,555
Year ended 2/28/95 $ 865,852 $ 187,546 $ 678,306
INTERNATIONAL SMALL COMPANIES FUND
Year ended 2/28/97 $ 2,889,159 $ 1,833,495 $ 1,055,664
Year ended 2/29/96 $ 2,467,267 $ 1,358,838 $ 1,108,429
Year ended 2/28/95 $ 2,184,055 $ 1,368,080 $ 815,975
U.S. SECTOR FUND
Year ended 2/28/97 $ 1,138,768 $ 434,930 $ 703,838
Year ended 2/29/96 $ 1,134,431 $ 169,840 $ 964,591
Year ended 2/28/95 $ 934,108 $ 179,986 $ 754,122
INTERNATIONAL BOND FUND
Year ended 2/28/97 $ 849,645 $ 493,567 $ 356,078
Year ended 2/29/96 $ 779,352 $ 257,658 $ 521,694
Year ended 2/28/95 $ 345,558 $ 181,243 $ 164,315
EMERGING MARKETS FUND
Year ended 2/28/97 $12,541,622 $ 2,222,584 $10,319,038
Year ended 2/29/96 $ 5,944,710 $ 90,073 $ 5,854,637
Year ended 2/28/95 $ 3,004,553 $ 0 $ 3,004,553
-7-
EMERGING COUNTRY DEBT FUND
Year ended 2/28/97 $ 3,190,658 $ 986,384 $ 2,204,274
Year ended 2/29/96 $ 2,504,503 $ 810,112 $ 1,694,391
Commencement of
Operations $ 417,918 $ 174,820 $ 243,098
(4/19/94) - 2/28/95
GLOBAL HEDGED EQUITY FUND
Year ended 2/28/97 $ 2,168,233 $ 531,673 $ 1,636,560
Year ended 2/29/96 $ 2,071,406 $ 199,269 $ 1,872,137
Commencement of
Operations $ 324,126 $ 80,409 $ 243,717
(7/29/94) - 2/28/95
DOMESTIC BOND FUND
Year ended 2/28/97 $ 1,112,368 $ 744,230 $ 368,138
Year ended 2/29/96 $ 707,127 $ 158,391 $ 548,736
Commencement of
Operations $ 95,643 $ 68,732 $ 26,911
(8/18/94) - 2/28/95
CURRENCY HEDGED INTERNATIONAL BOND FUND
Year ended 2/28/97 $ 1,782,864 $ 1,149,683 $ 633,181
Year ended 2/29/96 $ 1,163,131 $ 522,806 $ 610,325
Commencement of
Operations $ 306,031 $ 173,302 $ 132,729
(9/30/94) - 2/28/95
GLOBAL BOND FUND
Year ended 2/28/97 $ 220,921 $ 220,921 $ 0
Commencement of
Operations $ 17,307 $ 17,307 $ 0
(12/28/95) - 2/29/96
CURRENCY HEDGED INTERNATIONAL CORE FUND
Year ended 2/28/97 $ 3,841,815 $ 2,218,152 $ 1,623,663
Commencement of
Operations $ 1,097,558 $ 663,365 $ 464,193
(6/30/95) - 2/29/96
GLOBAL PROPERTIES FUND
Commencement of
Operations $ 13,266 $ 13,266 $ 0
(12/20/96) - 2/28/97
-8-
FOREIGN FUND
Commencement of
Operations $ 3,034,381 $ 1,267,971 $ 1,766,410
(6/28/96) - 2/28/97
REIT FUND
Commencement of
Operations $ 666,973 $ 286,384 $ 380,589
(5/31/96) - 2/28/97
WORLD EQUITY ALLOCATION FUND
Commencement of
Operations $ 0 $ 0 $ 0
(6/28/96) - 2/28/97
GLOBAL BALANCED ALLOCATION FUND
Commencement of
Operations $ 0 $ 0 $ 0
(7/29/96) - 2/28/97
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
Commencement of
Operations $ 0 $ 0 $ 0
(11/25/96) - 2/28/97
INTERNATIONAL EQUITY ALLOCATION FUND
Commencement of
Operations $ 0 $ 0 $ 0
(10/11/96) - 2/28/97
SMALL CAP GROWTH FUND
Commencement of
Operations $ 124,256 $ 105,410 $ 18,846
(12/31/96) - 2/28/97
</TABLE>
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, 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.
-9-
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 Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses and transfer taxes; and, in the case
of the Emerging County Debt Fund, Emerging Markets Fund and Global Hedged
Equity Fund, excluding custodial fees; and, in the case of the Asset
Allocation Funds, excluding expenses indirectly incurred by investment in
other Funds of the Trust) 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.
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.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of
the Trust, Grantham, Mayo, Van Otterloo & Co. LLC, either directly or
through its GMO Funds Division, provides direct client service,
maintenance and reporting to shareholders of the Funds. The Servicing
Agreement was approved by the Trustees of the Trust (including a majority
of the Trustees who are not "interested persons" of the Manager or the
Trust). The Servicing Agreement will continue in effect for a period more
than one year 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 the purpose, of a majority of those Trustees who are
not "interested persons" of the Manager or the Trust, and by (ii) the
majority vote of the full Board of Trustees. The Servicing Agreement
automatically terminates on assignment (except as specifically provided in
the Servicing Agreement) and is terminable by either party upon not more
than 60 days written notice to the other party.
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 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.
-10-
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>
1995 1996 1997 TOTAL
<S> <C> <C> <C> <C>
Core Fund $4,641,334 $3,353,136 $4,664,903 $12,659,373
Growth Fund 211,476 295,985 531,486 $1,038,947
Value Fund 1,523,065 784,675 813,100 $3,120,840
Short-Term Income Fund --- --- --- ---
International Core Fund 4,518,970 1,888,442 9,469,695 $15,877,107
Japan Fund 1,038,223 41,022 84,857 $1,164,102
Tobacco-Free Core Fund 126,491 71,940 103,341 $301,772
Fundamental Value Fund 444,239 270,800 295,379 $1,010,418
International Small Companies Fund 470,900 77,221 98,496 $646,617
Bond Allocation Fund 29,533 --- --- $29,533
-11-
Small Cap Value Fund 514,168 678,406 879,092 $2,071,666
U.S. Sector Fund 434,291 324,992 356,778 $1,116,061
International Bond Fund 3,251 13,750 5,760 $22,761
Emerging Markets Fund 2,668,508 3,199,810 5,114,325 $10,982,643
Emerging Country Debt Fund --- 31,200 70,471 $101,671
Global Hedged Equity Fund 146,893 415,040 594,924 $1,156,857
Domestic Bond Fund --- 62,799 73,491 $136,290
Currency Hedged International Bond Fund --- 1,800 7,523 $9,323
Currency Hedged International Core Fund --- 264,754 1,280,998 $1,545,752
Global Bond Fund --- 2,321 9,644 $11,965
Global Properties Fund --- --- 3,456 $3,456
Foreign Fund --- --- 492,537 $492,537
REIT Fund --- --- 386,888 $386,888
Small Cap Growth Fund --- --- 36,918 $36,918
World Equity Allocation Fund -- -- --- ---
Global Balanced Allocation Fund --- --- --- ---
Global (U.S.+) Equity Allocation Fund --- --- --- ---
International Equity Allocation Fund --- --- --- ---
Total $16,771,342 $11,778,093 $25,374,062 $53,923,497
</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 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional
shares of thirty-two series: the Core Fund; the Value Fund; the Growth
Fund; the Pelican Fund; the Short-Term Income Fund; the Small Cap Value
Fund; the Fundamental Value Fund, the Tobacco-Free Core Fund; the U.S.
Sector Fund; the Small Cap Growth Fund; the International Core Fund; the
Japan Fund; the International Bond Fund; the Emerging Markets Fund; the
Global Properties 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;
the Inflation Indexed Bond Fund; the Foreign Fund; the U.S. Bond/Global
Alpha A
-12-
Fund; the U.S. Bond/Global Alpha B Fund; the Emerging Markets L Fund; the
International Equity Allocation Fund; the World Equity Allocation Fund;
the Global (U.S.+) Equity Allocation Fund and the Global Balanced
Allocation 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 and
transfer agency 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 or
classes of shares with such dividend preferences and other rights as the
Trustees may designate. This power is intended to allow the Trustees to
provide for an equitable allocation of the impact of any future regulatory
requirements which might affect various classes of shareholders
differently. The Trustees have currently authorized the establishment and
designation of up to eight classes of shares for each series of the Trust
(except for the Pelican Fund): Class I Shares, Class II Shares, Class III
Shares, Class IV Shares, Class V Shares, Class VI Shares, Class VII Shares
and Class VIII Shares.
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 (i.e., a new fund). 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 affected
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.
Shareholders of a particular class of shares do not have separate class
voting rights except with respect to matters that affect only that class
of shares and as otherwise required by law.
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
-13-
(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 Class I Shares of the Core Fund as of June 10, 1997:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Huntington Trust Co. FBO the Attn: Ms. Michelle McCallister 77.92
Jewish Community Federation P.O. Box 1558
of Cleveland Employees Ret. Plan Columbus, OH 43260
and Trust
ICD--International Center for the Attn: Michael A. Kellman 17.28
Disabled Chief Financial Officer
340 East 24th Street
New York, NY 10010
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Core Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
The Washington and Lee Attn: John E. Cuny 51.66
University Treasurer's Office
Washington and Lee Univ.
Washington Hall 33
Lexington, VA 24450
Trust for Millipore Corporation Attn: Ms. Evon Beland 48.34
Invested Employee Plans 80 Ashby Road
Bedford, MA 01730
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Core Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Employee Retirement Plan of 5918 Stoneridge Mall Road 7.01
Safeway IN Pleasanton, CA 94588-3299
3M Company Building 224-5N-21 5.60
MMM Center
St. Paul, MN 55144
NRECA Investment Division 10.41
Attn: Peter Morris
4301 Wilson Boulevard
RSI8-305
Arlington, VA 22203-1860
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Growth Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
The Northern Trust Company, Attn: Mutual Funds 23.12
Trustee of the Aerospace P.O. Box 92956
Corporation Employees Chicago, IL 60675
Retirement Plan Trust
Surdna Foundation, Inc. Attn: Mark De Venoge 27.30
330 Madison Avenue
30th Floor
New York, NY 10017-5001
Duke University Attn: Deborah Lane 15.90
Long Term Endowment PO 2200 West Main St.
Suite 1000
Durham, NC 27705
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Japan Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
-15-
Collins EAFE Group Trust Attn: Performance Accounting 14.52
840 Newport Center Drive
Newport Beach, CA 92691
International Monetary Fund Staff Attn: Hillary Boardman 11.79
Retirement Plan 700 19th St., NW
Washington, DC 20431
Public Service Electric & Gas Attention: Doug Hoerr 5.39
Company Master Retirement Trust 80 Park Plaza
P.O. Box 570
Newark, NJ 07102
Gordon Family Trust c/o Strategic Investment Management 9.17
1001 19th Street North, 16th Floor
Arlington, VA 22209-1722
Brown University Attn: Robert J. Kolyer, Jr. 9.41
Investment Office - Box C
164 Angell Street
Providence, RI 02912
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Short-Term Income Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Alm Charitable Trust 4 c/o Alfred McDougal 10.44
400 N. Michigan Avenue
Suite 300
Chicago, IL 60611
Cormorant Fund c/o Jeremy Grantham 20.98
40 Rowes Wharf
Boston, MA 02110
Directors Fund Limited Attn: Michael J. Leahy 23.40
Partnership c/o Commodities Corporation Ltd
CN 850
Princeton, NJ 08542
BEHE Attn: Ms. Chris Blangey 10.93
c/o Affida Bank
P.O. Box 5274
CH 8022
Zurich, Switzerland
Gezamelyk Mollenfonds c/o Eyk Van Otterloo 5.88
32 Foster Street
Marblehead, MA 01945
-16-
IF International Cultural Fund Attn: Ms. Chris Blangey 5.85
c/o Affida Bank
P.O. Box 5274
CH 8022
Zurich, Switzerland
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Value Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Duke University Long Term Attn: Deborah Lane 7.02
Endowment PO 2200 West Main Street
Suite 1000
Durham, NC 27705
Leland Stanford Junior Stanford Management Company 24.35
University II 2770 Sand Hill Road
Menlo Park, CA 94025
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Fundamental Value Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Yale University Attn: Theodore D. Seides 29.22
230 Prospect Street
New Haven, CT 06511
Berea College Attn: Jeff Amburgey 11.36
Associate Controller
Box 2306, CPO2306
Berea, KY 40404
-17-
Leland Stanford Junior Stanford Management Company 37.93
University II 2770 Sand Hill Road
Menlo Park, CA 94025
Wachovia Bank of NC, NA Attn: Ms. Ruth Hawley 15.97
Trustees for Vice President NC 31013
RJR Nabisco Defined 301 North Main Street
Benefits Master Trust Winston-Salem, NC 27150-3099
- Fundamental Value
Account
Princeton University TR Attn: John D. Sweeney 5.40
P.O. Box 35
Princeton, NJ 08544
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Small Cap Value Fund as of June 10,
1997:
Name Address Ownership
---- ------- ---------
Anne E. Croco 456 39th Ave., East 100.00
Seattle, WA 98112
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Value Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
John D. & Catherine T. Attn: Lawrence L. Landry 5.24
MacArthur Foundation 140 South Dearborn
Suite 1100
Chicago, IL 60603
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 5.94
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Yale University Attn: Theodore D. Seides 9.26
230 Prospect St.
New Haven, CT 06511
-18-
Bankers Trust Company TR Attn: Marshall Jones 13.67
GTE Service Corp Pension GTE Investment Management
Trust One Stanford Forum
Stanford, CT 06902
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Small Companies Fund as
of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Yale University Attn: Theodore D. Seides 7.28
230 Prospect Street
New Haven, CT 06511
Bankers Trust Company TR Attn: Marshall Jones 6.54
GTE Service Corp Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tobacco-Free Core Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 39.84
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
Lila Wallace-Reader's Digest Attn: Rob D. Nagel 34.10
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
Tufts Associated Health 353 Wyman Street 17.99
Maintenance Organization Inc. Waltham, MA 02254
Beverly Hospital Corporation Attn: Peter J. Kilcommons 5.15
Finance Department
85 Herrick Street
Beverly, MA 01915-1777
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the U.S. Sector Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
-19-
The Herb Society of America, Inc. Attn: David Pauer 100.00
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Sector Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
John D. & Catherine T. Attn: Lawrence L. Landry 26.75
MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
Trustees of Columbia University Columbia University 10.50
in the City of New York-Global 475 Riverside Drive, Suite 401
New York, NY 10115
Yale University Attn: Theodore D. Seides 30.00
230 Prospect St.
New Haven, CT 06511
Bost & Co/BAMF8721002 Mutual Fund Operations 27.50
Bell Atlantic 1 Cabot Road 028-003B
Medford, MA 02155
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Bond Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
The Trustees of Princeton Attn: John D. Sweeney 13.12
University Int'l PO Box 35
Princeton, NY 08544
Saturn & Co. A/C 4600712 P.O. Box 1537 Top 57 19.30
c/o Investors Bank & Trust Co. TR Boston, MA 02205-1537
FBO The John Hancock Mutual
Life Insurance Company Pension
Plan
Bost & Co/BAMF8721002 Mutual Fund Operations 8.59
Bell Atlantic 1 Cabot Road 028-003B
Medford, MA 02155
The University of North Carolina Attn: Sue Madden 5.07
At Chapel Hill Foundation Investment Wachovia Bank & Trust
Fund, Inc., Global Fixed Income Acct. 100 N. Main St., Char. FDS. Dept.
-20-
P.O. Box 309
Winston Salem, NC 27150
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Emerging Markets Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Anne E. Croco 456 39th Ave., East 87.10
Seattle, WA 98112
Paul K. Woolley 48 Amenbury Lane 11.75
Harpenden Herts AL52DQ UK
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Markets Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Trustees of Princeton University Attn: John D. Sweeney 8.57
Intl PO Box 35
Princeton, NJ 08544
Bankers Trust Company TR Attn: Marshall Jones 7.62
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Domestic Bond Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
The Herb Society of America, Inc. Attn: David Pauer 20.36
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
Institute of Textile Technology Attn: Michael T. Waroblak 44.83
2551 Ivy Road
Charlottesville, VA 22903-4614
ICD--International Center for the Attn: Michael A. Kellman 34.81
Disabled Chief Financial Officer
340 East 24th Street
New York, NY 10010
-21-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Domestic Bond Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 19.17
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company TR Attn: Marshall Jones 31.60
GTE Service Corp. Pension Trust GTE Investment Management
One Stamford Forum
Stamford, CT 06902
John D. & Catherine T. Attn: Lawrence L. Landry 5.92
MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
Corning Retirement Master Trust II Attn: Mr. Lindsay W. Brown 9.59
One Riverfront Plaza
HQ-E2-34
Corning, NY 14831-0001
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Currency Hedged International Bond Fund
as of June 10, 1997:
Name Address % Ownership
---- ------------------- -----------
Anne E. Croco 456 39th Ave., East 98.69
Seattle, WA 98112
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Bond
Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 7.06
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company TR Attn: Marshall Jones 44.46
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
Park Foundation, Inc. Attn: Sharon Linderberry 5.51
Fixed Income Terrace Hill
-22-
P.O. Box 550
Ithaca, NY 14851
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Emerging Country Debt Fund as of June
10, 1997:
Name Address % Ownership
---- ------- -----------
The Corporation of Haverford Attn: Stephen A. Tessino 95.22
College 370 Lancaster Avenue
Haverford, PA 19041 1392
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Emerging Country Debt Fund as of June
10, 1997:
Name Address % Ownership
---- ------- -----------
Louisa Stude Sarofim Attn: Nancy Head 45.45
1995 Charitable Trust 1001 Fannin #4700
Houston, TX 77002
Mary Lawrence Porter Attn: Nancy Head 31.82
Revocable 1994 Trust 1001 Fannin #4700
Houston, TX 77002
Louisa Stude Sarofim Foundation Attn: Nancy Head 22.73
1001 Fannin #4700
Houston, TX 77002
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Fund as of June
10, 1997:
Name Address % Ownership
---- ------- -----------
Bankers Trust Company TR Attn: Marshall Jones 5.36
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
Retirement Plan of Mobil Corporation Attn: Donald Hellyer 11.39
3225 Gallows Road
Fairfax, VA 22037
San Francisco County & Attn: Richard Piket 16.39
Retirement Syst. 1155 Market Street, 2nd Floor
San Francisco, CA 94103
Saturn & Co. A/C 4600712 P.O. Box 1537 Top 57 7.20
-23-
c/o Investors Bank & Trust Company TR Boston, MA 02205-1537
FBO The John Hancock Mutual Life
Insurance Company Pension Plan
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Hedged Equity Fund as of June
10, 1997:
Name Address % Ownership
---- ------- -----------
Bankers Trust Company TR Attn: Marshall Jones 35.10
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
Partners Healthcare System Partners Healthcare System, Inc. 8.60
Pooled Investment Accounts 101 Merrimac Street, 4th Floor
Boston, MA 02114
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Core
Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 8.23
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Trustees of Columbia University Columbia University 9.92
in the City of New York - Global 475 Riverside Drive Suite 401
New York, NY 10115
Duke University Long Term Attn: Deborah Lane 5.27
Endowment PO 2200 West Main Street, Suite 1000
Durham, NC 27705
Howard Hughes Medical 4000 Jones Bridge Road 22.67
Institute Chevy Chase, MD 20815-6789
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Global Bond Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Community Foundation of Palm Attn: Lisa Williams 88.14
Beach and Martin Counties Chief Financial Officer
324 Datura St., Ste. # 340
West Palm Beach, FL 33401
-24-
Institute of Textile Technology Attn: Michael T. Waroblak 11.86
2551 Ivy Road
Charlotteville, VA 22903-4614
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Bond Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Catholic Bishop of Chicago Attn: John F. Benware 15.60
155 East Superior Street
Chicago, IL 60611
The University of North Carolina Attn: Sue Madden 25.41
at Chapel Hill Foundation Investment Wachovia Bank & Trust
Fund, Inc., Global Fixed Income Account 100 N. Main St., Char. Fds. Dept.
P.O. Box 309
Winston Salem, NC 27150
Nazareth College of Rochester 4245 East Avenue 11.82
Fixed Income Rochester, NY 14618
Essex & Company Attn: Linda Wills, Trust Dept. 40.91
c/o First National in Palm Springs
255 South County Road
Palm Springs, FL 33480
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Foreign Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Wentworth Institute of Technology Attn: David Gilmore 40.21
550 Huntington Avenue
Boston, MA 02115
Dana Hall School Attn: Lucille R. Kooyoomjian 11.32
45 Dana Road
Wellesley, MA 02181
American Committee for The Weizman Attn: Mr. Henry Pavony 48.25
Institute of Science Inc. 51 Madison Avenue
New York, NY 10010
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Foreign Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
-25-
The Trustees of Boston College Attn: Paul Haran 100.00
Associate Treasurer More 310
140 Commonwealth Ave.
Chestnut Hill, MA 02167
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Foreign Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
President and Fellows c/o Harvard Management Company 16.76
of Harvard College 600 Atlantic Avenue
Boston, MA 02210
Trustees of the University Attn: Jon Scheinman 12.31
of Pennsylvania Office of Investments
3451 Walnut St
714 Franklin Building
Philadelphia, PA 19104-6205
Wellesley College Attn: Catherine Feddersen 9.17
Associate Treasurer
106 Central St
Wellesley, MA 02181
University of Minnesota Attn: Gracie A. Davenport 8.44
Foundation 1300 S. 2nd St. Suite 200
Minneapolis, MN 55454-1029
Swarthmore College - Foreign 500 College Ave. 7.33
Swarthmore, VA 19081-1397
Princeton University TR Attn: John D. Sweeney 5.62
P.O. Box 35
Princeton, NJ 08544
The Rector and Visitors of the Attn: Mr. Rob Walker Freer 10.71
University of Virginia Office of the Treasurer
P.O. Box 9012
Charlottesville, VA 22906
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the REIT Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Alan Shuman & Bernice P. Shuman 9 Christina Mainstone Farm 61.35
JT TEN Wayland, MA 01778
-26-
Investors Bank & Trust Co. Cust. c/o Grantham Mayo Van Otterloo & Co. 8.04
FBO ###-##-#### SEP IRA Attn: Susan Randall Harbert
40 Rowes Wharf
Boston, MA 02110
Investors Bank & Trust Co. Cust. c/o Grantham Mayo Van Otterloo & Co. 8.04
FBO ###-##-#### SEP IRA Attn: Susan Randall Harbert
40 Rowes Wharf
Boston, MA 02110
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the REIT Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Trust for Millipore Corporation Attn: Ms. Evon Beland 100.00
Invested Employee Plans 80 Ashby Road
Bedford, MA 01730
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the REIT Fund as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
The Andrew W. Mellon Foundation Attn: Kenneth J. Herr, Treasurer 7.02
140 E. 62nd Street
New York, NY 10021
The Duke Endowment - AA Attn: Ms. Karen Rogers 6.04
Controller
100 North Tryon Street Suite 3500
Charlotte, NC 28202-4012
Bankers Trust Company TR Attn: Marshall Jones 18.18
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
Dockwater & Co Attn: Jennifer Leung 12.79
FBO PF Holdings I, Inc. State Street Bank & Trust
1 Enterprise Drive, W6C
North Quincy, MA 02171
-27-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the World Equity Allocation Fund as of June
10, 1997:
Name Address % Ownership
---- ------- -----------
Melvin B. and Joan F. Lane 3000 Sand Hill Rd. 56.26
TR U/A DTD 09/14/93 Building 2 Suite 215
Melvin and Joan Lane Revocable Menlo Park, CA 94025
Trust I
Melvin B. and Joan F. Lane 3000 Sand Hill Rd. 10.59
TR U/A DTD 09/14/93 Building 2 Suite 215
Melvin and Joan Lane Revocable Menlo Park, CA 94025
Trust I
Longwood College Foundation, Inc. Attn: L. Darlene Selz 33.15
201 High Street
Farmville, VA 23909-1895
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the World Equity Allocation Fund as of
June 10, 1997:
Name Address % Ownership
---- ------- -----------
RJR Nabisco Canada Master Trust 10 Parklawn Road 84.46
Nabisco LTD Etobicoke, Ontario
CANADA M8Y 3
Bridgewater College Business Office 15.54
402 E. College Street
Bridgewater, VA 22512
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Global Balanced Allocation Fund as of
June 10, 1997:
Name Address % Ownership
---- ------- -----------
Redington-Fairview General Attn: Dana C. Kempton 31.44
Hospital - Operating Fund Associate Director
28 Fairview Avenue
Skowhegan, ME 049
Redington-Fairview General Attn: Dana C. Kempton 11.01
Hospital Associate Director
Funded Depreciation 28 Fairview Avenue
Skowhegan, ME 04976
-28-
Charles Evans Hughes Memorial c/o Waddell & Reed Asset Management Co. 19.55
FND, Inc. Attn: Mr. James D. Wineland
Vice President
P.O. Box 29223
Shawnee Mission, KS 66201-9223
Arthur H. Spiegel III 28 Fox Lane 9.84
Bedford Corners, NY 10549
The Memton Fund Inc. Attn: Lillian Daniels Treasurer 25.46
527 Madison Avenue
15th Floor
New York, NY 10022
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Global Balanced Allocation Fund as of
June 10, 1997:
Name Address % Ownership
---- ------- -----------
Providence Washington Insurance Attn: Christina L. Currie 44.93
Company Employees' Pension Plan 1 Providence Washington Plaza
Providence, RI 02901-0518
Escuela Agricola Panamericana, Inc. Attn: Federico Fiatlos & James S. Hughes 48.03
Controller
c/o Horwich Corporation
2150 Washington Street
Newton, MA 02162
Escuela Agricola Panamericana Inc. Attn: Sr. Federico Fiallos 6.63
Retirement Trust Colonia Palmira Quinta Avenia Casa No.2
Apartado 93
Teguiagalpa, Honduras
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Balanced Allocation Fund as of
June 10, 1997:
Name Address % Ownership
---- ------- -----------
Appalachian Mountain Club Attn: Jim Wells 100.00
Company Employees' Pension Plan 5 Joy Street
Boston, MA 02108
-29-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the International Core Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
The Herb Society of America, Inc. Attn: David Pauer 6.05
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
Bost & Co. A/C Werf 1968002 Attn: Mutual Funds Operations 93.80
PO Box 3198
Pittsburgh, PA 152303198
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the International Core Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Holy Cross Employees Reirement Trust c/o David L. Burk, TR. 48.09
Holy Cross Shared Services
Saint Mary's Lourdes Hall
Notre Dame, IN 46556
Sisters of the Holy Cross, Inc. c/o Sister Kathleen Moroney, CSC. 30.80
Secretary and Treasurer
Saint Mary's Lourdes Hall
Notre Dame, IN 46556
Louisa Stude Sarofim Attn: Nancy Head 13.19
1995 Charitable Trust 1001 Fannin #4700
Houston, TX 77002
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Growth Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Bankers Trust Company TR Attn: Marshall Jones 27.26
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
John D. & Catherine T. Attn: Lawrence L. Landry 10.47
-30-
MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
The Andrew W. Mellon Foundation Attn: Kenneth J. Herr 8.71
Treasurer
140 E. 62nd Street
New York, NY 10021
Bost & Co A/C WFHF6202002 Attn: Mutual Funds Operations 8.27
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
Wachovia Bank TR Attn: Ruth Hawley 5.32
RJR Nabisco, Inc. NC 31013
301 North Main Street
Winston-Salem, NC 27150-3099
The Duke Endowment--AA Attn: Ms. Karen Rogers 7.76
Controller
100 North Tryon Street
Suite 3500
Charlotte, NC 28202-4012
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Inflation Index Bond Fund as of June
10, 1997:
Name Address % Ownership
---- ------- -----------
The Duke Endowment-AA Attn: Ms. Karen Rogers 33.53
Controller
100 North Tryon Street Suite 3400
Charlotte, NC 28202-4012
GMO Global Balanced Allocation Fund Attn: Tara H. Oliver 9.08
c/o GMO
40 Rowes Wharf
Boston, MA 02110
Princeton University TR Attn: John D. Sweeney 8.17
PO Box 35
Princeton, NJ 08544
The Rockefeller University Attn: David J. Lyons 6.61
1230 York Avenue
New York, NY 10021
GMO Global (US+) Equity Allocation Attn: Tara H. Oliver 6.48
-31-
Fund 40 Rowes Wharf
Boston, MA 02110
GMO World Equity Allocation Fund Attn: Tara H. Oliver 5.60
c/o GMO
40 Rowes Wharf
Boston, MA 02110
Schering Plough Retirement Trust Attn: Gary Karlin 9.66
Global AA One Giralda Farms
Madison, NJ 07940
Schering Plough Corporation Attn: Gary Karlin 5.15
Postretirement Trust One Giralda Farms
Global AA Madison, NJ 07940
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the International Equity Allocation Fund as
of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Crestar Bank Agent Attn: Mutual Funds Dest 51.57
FBO St. Paul's Episcopal Church P.O. Box 2624
Richmond, VA 23260
Carol L. Questrom Patch of Bleu Farm 48.43
36 Lafrente Road
Greenwich, CT 06831
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the International Equity Allocation Fund as
of June 10, 1997:
Name Address % Ownership
---- ------- -----------
M.D. Co FBO c/o MDT Advisors, Inc. 100.00
Memorial Drive Trust Attn: Kelly Costello
125 Cambridge Park Drive
Cambridge, MA 02140-2314
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Equity Allocation Fund
as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Juvenile Diabetes Foundation 120 Wall Street 11.66
International New York, NY 10005-3904
-32-
Francis W. Hatch & S. Parker Gilbert Attn: Lois B. Wetzell 19.48
& Robert M. Pennoyer TR Trust Sullivan & Cromwell
U/I 12/11/39 FBO John H.C. Merck 125 Broad Street
New York, NY 10004-2498
Francis W. Hatch & S. Parker Gilbert Attn: Lois B. Wetzell 19.48
& Robert M. Pennoyer TR Trust Sullivan & Cromwell
U/ART 11 F FBO John H.C. Merck 125 Broad Street
New York, NY 10004-2498
Lawrence Memorial Association Attn: Peter Semenza 11.14
170 Governors Avenue
Medford, MA 02155
The Catholic Church Extension Society PO Box 1443 11.11
USA LaSalle National Bank as Custodian Chicago, IL 606901443
A/C # 037464302-362998502
S. Parker Gilbert & Robert M. Patterson, Belkapp, Webb & Tyler 9.74
Pennoyer T, Trust U/ART 11 (G) 1133 Avenue of the Americas
FBO George W. Merck New York, NY 10036
Saturn & Co. Attn: Income Collection 7.09
FBO Retirement Plan of Lawrence P.O. Box 1537
Memorial Hospital Boston, MA 02205-1537
The Raymond and Gertrude R. Saltman Suite 105 East Cooper River Plaza 6.65
Foundation 2400 McClellan Avenue
Pennsauken, NJ 08109
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Global (U.S.+) Equity Allocation Fund as
of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Redington Fairview General Hospital Attn: Dana C. Kempton 31.44
Operating Fund Associate Director
28 Fairview Ave
Skowhegan, ME 04976
The Memton Fund, Inc. Attn: Lillian Daniels 25.46
Treasurer
527 Madison Ave, 15th Floor
New York, NY 10022
-33-
Charles Evans Hughes Memorial Attn: Mr. James D. Wineland, V.P. 19.55
Foundation c/o Waddell & Reed Asset Management Co.
P.O. Box 29223
Shawnee Mission, KS 66201-9223
Redington Fairview General Hospital Attn: Dana C. Kempton 11.01
Funded Depreciation Associate Director
28 Fairview Ave
Skowhegan, ME 04976
Arthur Spiegel 28 Fox Lane 9.84
Bedford Corners, NY 10549
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global (U.S.+) Equity Allocation Fund
as of June 10, 1997:
Name Address % Ownership
---- ------- -----------
Milbank Foundation For Attn: Chris K. Olander 29.83
Rehabilitation Executive Director
60 East 42nd St., Room 1651
New York, NY 10165
Yale University TR Attn: Linda Rockhill 12.56
Scripps League Newspapers State Street Bank & Trust, CS0104
Education & Research Fund 750 Main Street, Suite 1114
Hartford, CT 06103
Yale University TR Attn: Linda Rockhill 8.12
Laila & Thurston Twigg Smith State Street Bank & Trust CS0109
Unitrust 750 Main Street
Suite 1114
Hartford, CT 06103
Yale University TR Attn: Linda L. Rockhill 5.46
U/A Charles W. Palmer 5% State Street Bank & Trust, SSB CS0125t
750 Main Street, Suite 1114 CS
Hartford, CT 06103
Yale University TR Twigg-Smith Thurston & Sharon 10.80
U/A Trustee of Thurston & Sharon State Street Unitrust Company
CS0138 LRockhill
750 Main Street Suite 1114
Hartford, CT 06103
-34-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Properties Fund as of June 10,
1997:
Name Address % Ownership
---- ------- -----------
Eyk Van Otterloo 32 Foster Street 70.80
Marblehead, MA 01945
Cormorant Fund c/o Jeremy Grantham 5.11
40 Rowes Wharf
Boston, MA 02210
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Bond/Global Alpha A Fund as of
June 10, 1997:
Name Address % Ownership
---- ------- -----------
John D. & Catherine T. Attn: Lawrence L. Landry 61.99
MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
GMO Global Balanced Allocation Fund Attn: Tara H. Oliver 14.31
c/o Grantham Mayo Van Otterloo & Co.
40 Rowes Wharf
Boston, MA 02110
Princeton University TR Attn: John D. Sweeney 5.40
P.O. Box 35
Princeton, NJ 08544
</TABLE>
-35-
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year
ended February 28, 1997 included in the Trust's Annual Reports filed with
the Securities and Exchange Commission on May 7, 1997 pursuant to Section
30(d) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder, are (with the exception of the financial
statements relating to the Pelican Fund) hereby incorporated in this
Statement of Additional Information by reference.
-36-
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 Fund, the
Short-Term Income Fund, the Japan Fund, the Value Fund, the Tobacco-Free
Core Fund, the Small Cap Value Fund (formerly the "Core II Secondaries
Fund"), the International Small Companies Fund, the U.S. Sector 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, the
Currency Hedged International Core Fund, the Global Bond Fund, the REIT
Fund, the Foreign Fund, the Global Balanced Allocation Fund, the World
Equity Allocation Fund, the Global Properties Fund, the International
Equity Allocation Fund, the Global (U.S.+) Equity Allocation Fund, the
Small Cap Growth Fund and the Pelican Fund based upon their respective net
asset values and shares of beneficial interest outstanding at the close of
business on February 28, 1997.
Core Fund-Class I
Net Assets at Value (Equivalent to
$20.12 per share based on
452,508 shares of beneficial $9,103,927
interest outstanding)
Offering Price ($20.12 x 100/99.86)* $20.15
Core Fund-Class II
Net Assets at Value (Equivalent to
$20.10 per share based on
3,221,403 shares of beneficial
interest outstanding) 64,763,264
Offering Price ($20.10 x 100/99.86)* $20.13
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-37-
Core Fund-Class III
Net Assets at Value (Equivalent to
$20.12 per share based on
151,675,682 shares of beneficial
interest outstanding) $3,051,344,424
Offering Price ($20.12 x 100/99.86)* $20.15
International Core Fund-Class I
Net Assets at Value (Equivalent to
$24.36 per share based on
8,554 shares of beneficial
interest outstanding) $208,388
Offering Price ($24.36 x 100/99.40)* $24.50
International Core Fund-Class II
Net Assets at Value (Equivalent to $24.36
per share based on 1,038,814 shares of
beneficial interest outstanding) $25,302,379
Offering Price ($24.36 x 100/99.40)* $24.50
International Core Fund-Class III
Net Assets at Value (Equivalent to $24.37
per share based on 173,673,156 shares of
beneficial interest outstanding) $4,232,936,524
Offering Price ($24.37 x 100/99.40)* $24.52
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-38-
Growth Fund-Class III
Net Assets at Value (Equivalent to $5.18
per share based on 47,135,740 shares of
beneficial interest outstanding) $244,183,432
Offering Price ($5.18 x 100/99.86)* $5.19
Short-Term Income Fund-Class III
Net Assets at Value (Equivalent to $9.78
per share based on 4,187,806 shares of
beneficial interest outstanding) $40,936,937
Offering Price $9.78
Japan Fund-Class III
Net Assets at Value (Equivalent to $7.02
per share based on 31,179,725 shares of
beneficial interest outstanding) $218,796,924
Offering Price ($7.02 x 100/99.60)* $7.05
Value Fund-Class III
Net Assets at Value (Equivalent to $14.85
per share based on 31,629,482 shares of
beneficial interest outstanding) $469,591,362
Offering Price ($14.85 x 100/99.86)* $14.87
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-39-
Tobacco-Free Core Fund-Class III
Net Assets at Value (Equivalent to
$12.98 per share based on
5,106,204 shares of beneficial $66,260,435
interest outstanding)
Offering Price ($12.98 x 100/99.86)* $13.00
Small Cap Value Fund-Class I
Net Assets at Value (Equivalent to
$15.89 per share based on
87,565 shares of beneficial
interest outstanding) $1,391,447
Offering Price ($15.89 x 100/99.50)* $15.97
Small Cap Value Fund-Class III
Net Assets at Value (Equivalent to $15.89
per share based on 41,234,772 shares of
beneficial interest outstanding) $655,372,566
Offering Price ($15.89 x 100/99.50)* $15.97
International Small Companies Fund-Class III
Net Assets at Value (Equivalent to $13.46
per share based on 17,508,892 shares of
beneficial interest outstanding) $235,652,804
Offering Price ($13.46 x 100/99.00)* $13.60
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-40-
Fundamental Value Fund-Class III
Net Assets at Value (Equivalent to $16.33
per share based on 14,246,178 shares of
beneficial interest outstanding) $232,583,224
Offering Price ($16.33 x 100/99.85)* $16.35
U.S. Sector Fund-Class I
Net Assets at Value (Equivalent to
$13.03 per share based on
104,149 shares of beneficial
interest outstanding) $1,356,604
Offering Price ($13.03 x 100/99.73)* $13.07
U.S. Sector Fund-Class III
Net Assets at Value (Equivalent to $13.03
per share based on 17,394,941 shares of
beneficial interest outstanding) $226,710,921
Offering Price ($13.03 x 100/99.73)* $13.07
Emerging Markets Fund-Class I
Net Assets at Value (Equivalent to $12.48
per share based on 140,068 shares of
beneficial interest outstanding) $1,747,646
Offering Price ($12.48 x 100/98.40)* $12.68
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-41-
Emerging Markets Fund-Class III
Net Assets at Value (Equivalent to $12.49
per share based on 138,115,145 shares of
beneficial interest outstanding) $1,725,651,345
Offering Price ($12.49 x 100/98.4)* $12.69
International Bond Fund-Class III
Net Assets at Value (Equivalent to $10.78
per share based on 21,873,511 shares of
beneficial interest outstanding) $235,783,123
Offering Price ($10.78 x 100/99.85)* $10.80
Emerging Country Debt Fund-Class I
Net Assets at Value (Equivalent to $14.08
per share based on 2,566 shares of
beneficial interest outstanding) $36,124
Offering Price ($14.08 x 100/99.50)* $14.15
Emerging Country Debt Fund-Class III
Net Assets at Value (Equivalent to $14.09
per share based on 39,409,825 shares
of beneficial interest outstanding) $555,452,233
Offering Price ($14.09 x 100/99.50)* $14.16
Global Hedged Equity Fund-Class III
Net Assets at Value (Equivalent to $10.69
per share based on 27,760,589 shares of
beneficial interest outstanding) $296,701,952
Offering Price ($10.69 x 100/99.63)* $10.73
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-42-
Domestic Bond Fund-Class I
Net Assets at Value (Equivalent to $10.16
per share based on 357,259 shares of beneficial
interest outstanding) $3,630,253
Offering Price $10.16
Domestic Bond Fund-Class III
Net Assets at Value (Equivalent to $10.18
per share based on 56,064,794 shares of
beneficial interest outstanding) $570,862,387
Offering Price $10.18
Currency Hedged International Bond Fund-Class I
Net Assets at Value (Equivalent to $12.16
per share based on 95,601 shares of
beneficial interest outstanding) $1,162,376
Offering Price ($12.16 x 100/99.85)* $12.18
Currency Hedged International Bond Fund-Class III
Net Assets at Value (Equivalent to $12.16
per share based on 38,558,577 shares of
beneficial interest outstanding) $468,978,846
Offering Price ($12.16 x 100/99.85)* $12.18
Currency Hedged International Core Fund-Class III
Net Assets at Value (Equivalent to $12.68
per share based on 45,811,127 shares of
beneficial interest outstanding) $581,099,085
Offering Price ($12.68 x 100/99.40)* $12.76
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-43-
Global Bond Fund-Class I
Net Assets at Value (Equivalent to $10.15
per share based on 63,643 shares of beneficial
interest outstanding) $646,038
Offering Price ($10.15 x 100/99.85)* $10.17
Global Bond Fund-Class III
Net Assets at Value (Equivalent to $10.16
per share based on 6,963,365 shares of
beneficial interest outstanding) $70,768,272
Offering Price ($10.16 x 100/99.85)* $10.18
Global Balanced Allocation Fund-Class I
Net Assets at Value (Equivalent to $11.19
per share based on 612,128 shares of beneficial
interest outstanding) $6,848,458
Offering Price ($11.19 x 100/99.69)* $11.22
Global Balanced Allocation Fund-Class II
Net Assets at Value (Equivalent to $11.19
per share based on 1,283,396 shares of
beneficial interest outstanding) $14,359,121
Offering Price ($11.19 x 100/99.69)* $11.22
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-44-
World Equity Allocation Fund-Class I
Net Assets at Value (Equivalent to $10.52
per share based on 896,088 shares of beneficial
interest outstanding) $9,424,152
Offering Price ($10.52 x 100/99.31)* $10.59
World Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $10.52
per share based on 3,494,003 shares of beneficial
interest outstanding) $36,746,140
Offering Price ($10.52 x 100/99.31)* $10.59
REIT Fund-Class I
Net Assets at Value (Equivalent to $12.62
per share based on 3,284 shares of
beneficial interest outstanding) $41,454
Offering Price ($12.62 x 100/99.50)* $12.68
REIT Fund-Class III
Net Assets at Value (Equivalent to $12.62
per share based on 20,672,613 shares of beneficial
interest outstanding) $260,928,850
Offering Price ($12.62 x 100/99.50)* $12.68
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-45-
Foreign Fund-Class I
Net Assets at Value (Equivalent to $10.65
per share based on 459,112 shares of beneficial
interest outstanding) $4,890,763
Offering Price $10.65
Foreign Fund-Class II
Net Assets at Value (Equivalent to $10.65
per share based on 2,061,100 shares of
beneficial interest outstanding) $21,956,554
Offering Price $10.65
Foreign Fund-Class III
Net Assets at Value (Equivalent to $10.66
per share based on 63,052,464 shares of beneficial
interest outstanding) $671,829,408
Offering Price $10.66
Global Properties Fund-Class III
Net Assets at Value (Equivalent to $10.06
per share based on 940,343 shares of beneficial
interest outstanding) $9,464,355
Offering Price ($10.06 x 100/99.40) $10.12
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-46-
International Equity Allocation Fund-Class II
Net Assets at Value (Equivalent to $10.41
per share based on 1,487,501 shares of
beneficial interest outstanding) $15,489,842
Offering Price ($10.41 x 100/99.20) $10.49
International Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $10.41
per share based on 2,925,208 shares of
beneficial interest outstanding) $30,459,060
Offering Price ($10.41 x 100/99.20) $10.49
Global (U.S.+) Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $10.30
per share based on 2,988,868 shares of
beneficial interest outstanding) $30,786,579
Offering Price ($10.30 x 100/99.58) $10.34
Small Cap Growth Fund-Class III
Net Assets at Value (Equivalent to $9.82
per share based on 16,278,745 shares of
beneficial interest outstanding) $159,898,101
Offering Price ($9.82 x 100/99.50) $9.87
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-47-
