File Nos. 2-98772
811-4347
As filed with the Securities and Exchange Commission
On February 4, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
----
Post-Effective Amendment No. 34 / X /
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REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 36 / X /
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GMO TRUST
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(Exact Name of Registrant as Specified in Charter)
40 Rowes Wharf, Boston, Massachusetts 02110
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(Address of principal executive offices)
617-330-7500
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(Registrant's telephone number, including area code)
with a copy to:
R. Jeremy Grantham J.B. Kittredge, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
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(Name and address of agents for service)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its shares of
beneficial interest. The Registrant has filed a Rule 24f-2 Notice with respect
to the Registrant's fiscal year ended February 29, 1996 on April 26, 1996.
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to paragraph (b), or
/ X / 60 days after filing pursuant to paragraph (a)(1), or
/ / On ________________, pursuant to paragraph (b), or
/ / 75 days after filing pursuant to paragraph (a)(2), of Rule 485.
GMO TRUST
(For GMO U.S. Bond/Global Alpha Fund only)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A Item No. Location
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PART A
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<S> <C> <C>
Item 1. Cover Page ........................................................... Cover Page
Item 2. Synopsis.............................................................. Schedule of Fees and
Expenses
Item 3. Condensed Financial
Information .......................................................... Not Applicable
Item 4. General Description of
Registrant............................................................ Organization and
Capitalization of
the Trust;
Investment
Objectives and
Policies;
Description and
Risks of Fund
Investments; Cover
Page
Item 5. Management of the Fund............................................... Management of the
Trust
Item 5A. Management's Discussion
of Fund Performance.................................................. Not Applicable
Item 6. Capital Stock and Other
Securities........................................................... Organization and
Capitalization of
the Trust; Back
Cover (Shareholder
Inquiries)
Item 7. Purchase of Securities Being
Offered............................................................... Purchase of Shares;
Determination of Net
Asset Value
Item 8. Redemption or Repurchase.............................................. Redemption of
Shares;
Determination of Net
Asset Value
Item 9. Pending Legal Proceedings............................................. None
Part B
------
Item 10. Cover Page............................................................ Cover Page
Item 11. Table of Contents..................................................... Table of Contents
Item 12. General Information and
History........................................................ Not Applicable
Item 13. Investment Objectives
and Policies................................................... Investment
Objectives and
Policies; Investment
Restrictions
Item 14. Management of the Fund................................................ Management of the
Trust
Item 15. Control Persons and Principal
Holders of Securities.......................................... Description of the
Trust and Ownership
of Shares
Item 16. Investment Advisory and Other
Services....................................................... Investment Advisory
and Other Services
Item 17. Brokerage Allocation and Other
Practices...................................................... Portfolio
Transactions
Item 18. Capital Stock and Other
Securities..................................................... Description of the
Trust and Ownership
of Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered.................................... See in Part A
Purchase of Shares;
Redemption of
Shares;
Determination of Net
Asset Value
Item 20. Tax Status............................................................ Income, Dividends,
Distributions and
Tax Status
Item 21. Underwriters.......................................................... Not Applicable
Item 22. Calculation of Performance
Data........................................................... Not Applicable
Item 23. Financial Statements.................................................. Not Applicable
</TABLE>
Part C
------
Information to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
This Post-Effective Amendment relates solely to the GMO U.S. Bond/Global
Alpha Fund. No information relating to any other series of the registrant is
amended or superseded hereby.
GMO U.S. BOND/GLOBAL ALPHA FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO U.S. BOND/GLOBAL ALPHA FUND (the "Fund") is one of thirty
separate investment portfolios of GMO Trust (the "Trust"), an open-end
management investment company. The other portfolios are offered pursuant to a
separate prospectus. The Fund's investment manager is GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO").
The principal investment objective of the Fund is 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 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. However, the hedging of foreign
bond positions will allow the Fund to seek positive return relative to foreign
bond indices 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 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% 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
indices.
The Fund is a "non-diversified" portfolio, as defined in the Investment
Company Act of 1940 (the "1940 Act"). See "Description and Risks of Fund
Investments--Non-Diversified Portfolio" on page 7. A TABLE OF CONTENTS APPEARS
ON PAGE 3 OF THIS PROSPECTUS.
The Fund offers three CLASSES of shares: Class I, Class II and Class
III. 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 pages 14 through 15.
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 THE 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> <C>
GMO GMO FUNDS DIVISION The level of Shareholder Service Fee for each class is set
Class III Shares Class I and Class II Shares forth on the following page and described more fully
Tel: (617) 330-7500 Tel:(617) 790-5000 under "Multiple Classes--Shareholder Service Fee."
Fax: (617) 439-4192 Fax: (617) 439-4290
</TABLE>
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This Prospectus concisely describes the information which investors
ought to know about the Fund before investing. Please read this memorandum
carefully and keep it for further reference. A Statement of Additional
Information dated April 5, 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 the Fund, has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated by reference into this
Prospectus.
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 APRIL 5, 1997
CLASSES AND FEES
----------------
ELIGIBILITY
REQUIREMENT* SHAREHOLDER SERVICE FEE**
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Class I $1 million 0.28%
Class II $10 million 0.22%
Class III $35 million 0.15%
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* More detailed explanation of eligibility criteria is provided on page 14 and
under "Multiple Classes -- Eligibility for Classes."
** As noted above, all classes of shares of the Fund pay the same investment
management fee.
CLASS ELIGIBILITY
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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," beginning on page 15.
CLASS I AND CLASS II SHARES:
Recognizing that institutional and individual investors with assets
under GMO's management totaling 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 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 will receive
client service and reporting directly from GMO, and will bear a Shareholder
Service Fee of 0.15% of average net assets.
Purchasers of Class III Shares should follow purchase instructions
described under "Purchase of Shares" and direct questions to the Trust at (617)
330-7500.
-2-
TABLE OF CONTENTS
SCHEDULE OF FEES AND EXPENSES.................................................4
INVESTMENT OBJECTIVE AND POLICIES.............................................6
DESCRIPTION AND RISKS OF FUND
INVESTMENTS.........................................................7
Portfolio Turnover..................................................7
Non-Diversified Portfolio...........................................7
Certain Risks of Foreign Investments................................7
Securities Lending..................................................7
Depository Receipts.................................................7
Convertible Securities..............................................8
Futures and Options.................................................8
Options ...................................................8
Writing Covered Options.....................................8
Futures ...................................................9
Index Futures..............................................10
Interest Rate Futures......................................10
Options on Futures Contracts...............................10
Uses of Options, Futures and Options on
Futures....................................................10
Risk Management............................................10
Hedging ..................................................11
Investment Purposes........................................11
Synthetic Sales and Purchases..............................11
Swap Contracts and Other Two-Party
Contracts..................................................12
Swap Contracts.............................................12
Interest Rate and Currency Swap
Contracts.........................................12
Interest Rate Caps, Floors and Collars.....................12
Foreign Currency Transactions .....................................13
Repurchase Agreements..............................................14
Debt and Other Fixed Income Securities
Generally..................................................14
Temporary High Quality Cash Items..................................14
U.S. Government Securities and Foreign
Government Securities......................................14
Mortgage-Backed and Other Asset-Backed
Securities.................................................15
Collateralized Mortgage Obligations
("CMOs"); Strips and
Residuals.........................................15
Adjustable Rate Securities.........................................15
Zero Coupon Securities.............................................16
Indexed Securities.................................................16
Firm Commitments...................................................16
Loans, Loan Participations and Assignments.........................16
Reverse Repurchase Agreements and Dollar
Roll Agreements............................................17
Illiquid Securities................................................17
MULTIPLE CLASSES.............................................................17
Shareholder Service Fees...........................................18
Client Service - GMO and GMO Funds.................................18
Eligibility for Classes............................................18
Conversions Between Classes........................................18
PURCHASE OF SHARES...........................................................19
Purchase Procedures................................................20
REDEMPTION OF SHARES.........................................................20
DETERMINATION OF NET ASSET VALUE.............................................21
DISTRIBUTIONS................................................................21
TAXES........................................................................22
Withholding on Distributions to Foreign
Investors..........................................................22
Foreign Tax Credits................................................22
Loss of Regulated Investment Company Status........................22
MANAGEMENT OF THE TRUST......................................................23
ORGANIZATION AND CAPITALIZATION
OF THE TRUST.......................................................23
Appendix A...................................................................24
RISKS AND LIMITATIONS OF OPTIONS, FUTURES
AND SWAPS..........................................................24
Limitations on the Use of Options and Futures
Portfolio Strategies.......................................24
Risk Factors in Options Transactions...............................24
Risk Factors in Futures Transactions...............................24
Risk Factors in Swap Contracts, OTC Options and
other Two-Party Contracts..................................25
Additional Regulatory Limitations on the Use of
Futures and Related Options, Interest Rate
Floors, Caps and Collars and Interest Rate
and Currency Swap Contracts................................25
Appendix B...................................................................27
COMMERCIAL PAPER AND CORPORATE DEBT
RATINGS............................................................27
Commercial Paper Ratings ..........................................27
Corporate Debt Ratings.............................................27
Standard & Poor's Corporation......................................27
Moody's Investors Service, Inc.....................................27
-3-
SCHEDULE OF FEES AND EXPENSES
-----------------------------
<TABLE>
<CAPTION>
Class I Class II Class III
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C>
Cash Purchase Premium (as a percentage of amount
invested)1 .15% .15% .15%
Redemption Fees (as a percentage of amount redeemed) None None None
ANNUAL OPERATING EXPENSES
Investment Management Fees after Fee Waiver3 .15% .15% .15%
Shareholder Service Fee2 .28% .22% .15%
Other Expenses3 .10% .10% .10%
Total Operating Expenses3 .53% .47% .40%
EXAMPLES
You would pay the following expenses on a $1,000 investment
assuming 5% annual return with redemption at the end of each
time period:
- 1 Year $7 $6 $6
- 3 Years $18 $17 $14
You would pay the following expenses on the same investment
assuming no redemption:
- 1 Year $7 $6 $6
- 3 Years $18 $17 $14
</TABLE>
Annual Operating Expenses shown are based on estimated amounts for the Fund's
first fiscal year.
The purpose of the foregoing table is to assist in understanding the various
costs and expenses of the 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 THE FUND AS DESCRIBED IN THE TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. Where a
purchase premium is indicated as being charged by the Fund in certain instances,
the foregoing examples assume the payment of such purchase premium even though
such purchase premium is not applicable in all cases. (See "Purchase of
Shares").
-4-
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums apply only to cash transactions as set forth under
"Purchase of Shares." 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. The stated purchase premium will always be charged in full
except that the purchase premium will be reduced by 50% with respect to any
portion of a purchase that is offset by a corresponding redemption
occurring on the same day. The Manager examines each purchase of shares
eligible for such treatment to determine if circumstances exist to waive a
portion of the purchase premium. Absent a clear determination that
transaction costs will be reduced or absent for the purchase, the full
premium will be charged.
2. Shareholder Service Fee ("SSF") paid to GMO for providing client services
and reporting services.
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 Manager has voluntarily undertaken to reduce its management fees and to
bear certain expenses with respect to the Fund until further notice to the
extent that the 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) would otherwise
exceed 0.25% of the Fund's average daily net assets. Therefore, so long as
the Manager agrees so to reduce its fees and bear certain expenses, total
annual operating expenses (subject to such exclusions) of the Fund will not
exceed this limitation. Absent such undertakings, the management fee for
the Fund would be 0.40% and the total annual operating expenses for Class
I, Class II and Class III shares would be 0.78%, 0.72% and 0.65%,
respectively.
-5-
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The GMO U.S. Bond/Global Alpha Fund (the "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 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. However, the hedging of foreign bond positions will allow the
Fund to seek positive return relative to foreign bond indices 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
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% 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 indices.
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"
later in this Prospectus.
-6-
DESCRIPTION AND RISKS OF FUND
-----------------------------
INVESTMENTS
-----------
The following is a detailed description of the various investment practices
in which the Fund may engage and the risks associated with their use.
Portfolio Turnover
- ------------------
Portfolio turnover is not a limiting factor with respect to investment
decisions for the Fund. In any particular year, market conditions may well
result in a greater rate than is presently anticipated. However, portfolio
turnover for the Fund is not expected to exceed 150%. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund, and could involve realization
of capital gains that would be taxable when distributed to shareholders of the
Fund unless such shareholders are themselves exempt. See "Taxes" below.
Non-Diversified Portfolio
- -------------------------
The Fund is a "non-diversified" fund under the 1940 Act, and as such the
Fund 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 the Fund 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. Although the Fund is
a "non-diversified" fund, it must meet certain diversification standards to
qualify as a "regulated investment company" under the Internal Revenue Code of
1986. See "Taxes".
Certain Risks of Foreign Investments
- ------------------------------------
Investment in foreign issuers or securities principally traded overseas may
involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
of assets or nationalization, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign governments
and companies and foreign securities markets are less liquid and at times more
volatile than comparable U.S. securities and securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of some foreign countries may limit the 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.
Securities Lending
- ------------------
The Fund may make secured loans of portfolio securities amounting to not
more than one-third of its 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 Funds of the Trust 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
- -------------------
The Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with the 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.
-7-
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, the Fund 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 Fund 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 the Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices, or currency
exchange rates may result in poorer overall performance for the Fund than if it
had not entered into any futures contracts or options transactions. Losses
incurred in transactions in futures and options on futures and the costs of
these transactions will affect a Fund's performance. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Fund's investments in futures contracts and
related options.
Options. As has been noted above, the Fund (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. The Fund may seek to increase its return by
writing covered call or put options on optionable securities or indexes. A call
option written by the 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.
The 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 the 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 the Fund owns the underlying
security or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds on a share-for-share basis a call on the same security as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call written
if the difference is maintained by the Fund in cash, U.S. Government Securities
or other high grade debt obligations in a segregated account with its custodian.
A put option is "covered" if the Fund maintains cash, U.S. Government Securities
or other high grade debt obligations with a value equal to the exercise price in
a segregated account with its custodian, or else holds on a share-for-share
basis a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
If the writer of an option wishes to terminate 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
-8-
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.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security or securities owned by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the 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 the 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
-9-
making the long and short positions in the futures contract more or less
valuable, a process known as "marking to market." Prior to the settlement date
of the futures contract, the position may be closed out by taking an opposite
position which will operate to terminate the position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a commission is paid on each completed purchase and
sale transaction.
In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the same delivery date.
If the price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or be maintained.
Index Futures. The Fund may purchase futures contracts on various
securities indexes ("Index Futures"). The Fund may purchase Index Futures on
domestic and foreign fixed income securities indexes, including those which may
trade outside the Untied States. The 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 con tract 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 rele vant index. While a Fund that purchases an Index Future that
calls for physical delivery is obligated to pay the face amount on the stated
date, such an Index Future may be closed out on that date or any earlier date by
selling an Index Future with the same face amount and contract date. This will
terminate the Fund's position and the Fund will realize a profit or a loss based
on the difference between the cost of purchasing the original Index Future and
the price obtained from selling the closing Index Future. The amount of the
profit or loss is determined by the change in the value of the relevant index
while the Index Future was held.
Index Futures that are "cash settled" provide by their terms for settlement
on a net basis reflecting changes in the value of the underlying index. Thus,
the purchaser of such an Index Future is never obligated to pay the face amount
of the contract. The net payment obligation may in fact be very small in
relation to the face amount.
The use of Index Futures involves risk. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Fund's investment in futures contracts.
Interest Rate Futures. For the purposes previously described, the 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. The Fund may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, the Fund may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, the 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 Fund's 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, the 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 the Fund wants to increase its exposure to a particular fixed income
security, the Fund may take long positions in futures contracts on that
security. In the case of futures and options on futures, the 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
-10-
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. The 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, the Fund will not normally engage in
risk management to increase the average volatility (beta) of the 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, the 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 the Fund's assets.
Hedging. To the extent indicated elsewhere, the Fund may also enter into
options, futures contracts and buy and sell options thereon for hedging. For
example, if the 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. The Fund 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 the 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 the 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
the Fund.
Investment Purposes. To the extent indicated elsewhere, the Fund may also
enter into futures contracts and buy and sell options thereon for investment.
For example, the 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 the Fund pending investment in such securities
if or when they do become available. Through this use of futures and related
options, the 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 the 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 the Fund purchases futures contracts for investment, it will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount which, together with the
initial and variation margin deposited on the futures contracts, is equal to the
face value of the futures contracts at all times while the futures contracts are
held.
Incidental to other transactions in fixed income securities, for investment
purposes the 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). The 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 the 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 the Fund's
portfolio. For example, if the 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
-11-
synthetically buy the larger capitalization stocks). When the expected trend has
played out, the Fund would then close out both futures contract positions. The
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 the 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. The
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, the Fund 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 Fund's
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. The
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).
Contracts for Differences. Contracts for differences are swap arrangements
in which the 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 Fund 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 Fund 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 the Fund elects to obtain leverage up to the
10% limitation mentioned above, the 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.
The Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, the Fund may enter
into an interest rate or currency 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 the 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. The Fund will not normally enter into a contract for
differences to increase the volatility (beta) of the Fund's portfolio above
1.00. However, the 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
contracts, when aggregated with the Index Futures as described above, does not
exceed 10% of the Fund's net assets.
Interest Rate Caps, Floors and Collars. The Fund may use interest rate
caps, floors and collars for the same purposes or similar purposes as for which
it uses interest rate futures contracts and related options. Interest rate caps,
floors and collars are similar to interest rate swap contracts because the
payment
-12-
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, the 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 the 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 Fund's 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 Fund's 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."
Foreign Currency Transactions
- -----------------------------
To the extent the Fund is invested in foreign securities, it may buy or
sell foreign currencies or may deal in forward foreign currency contracts, that
is, agree to buy or sell a specified currency at a specified price and future
date. The Fund may use forward contracts for hedging or currency risk
management.
The Fund may enter into forward contracts for hedging under three
circumstances. First, when the 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 the 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 Fund may engage in currency "cross hedging" when, in the opinion
of the Manager, the historical relationship among foreign currencies suggests
that the Fund 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 Fund
assumes 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."
The 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
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
The Fund may also enter foreign currency forward contracts for currency
risk management. When the Fund uses currency instruments for this purpose, the
foreign currency exposure of the Fund may differ substantially from the
currencies in which the Fund's investment securities are denominated. However,
the Fund's aggregate foreign currency exposure will not normally exceed 100% of
the value of the Fund's securities, except that the 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 the Fund's net assets.
The Fund may 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 the Fund's
use of futures contracts and related options.
-13-
Except to the extent that the Fund may use such contracts for risk
management, whenever the 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. The Fund's ability to engage in
forward contracts may be limited by tax considerations.
The 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 Fund may use futures contracts and related options for
risk management, the Fund will, so long as it is obligated as the writer of a
call option on currency futures, own on a contract-for-contract basis an equal
long position in currency futures with the same delivery date or a call option
on currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, U.S. Government securities or other high grade
debt obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by the 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
- ---------------------
The 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 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. 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 the Fund investing in such securities. The net asset value of the 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
- ---------------------------------
The Fund may temporarily invest a portion of its assets in cash or cash
items pending other investments or in connection with the maintenance of a
segregated account. These cash items must be of high quality and may include a
number of money market investments 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 the Fund will seek to minimize credit risk with respect to such
investments.
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
-14-
of certain countries, Foreign Government Securities may involve varying degrees
of credit risk as a result of financial or political instability in such
countries and the possible inability of the 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 the 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, the 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 the 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 the 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 the 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
-15-
adjustable rate securities are backed by pools of mortgage loans. Although the
rate adjustment feature may act as a buffer to reduce sharp changes in the value
of adjustable rate securities, these securities are still subject to changes in
value based on changes in market interest rates or changes in the issuer's
creditworthiness. Because the interest rate is reset only periodically, changes
in the interest rates on adjustable rate securities may lag changes in
prevailing market interest rates. Also, some adjustable rate securities (or, in
the case of securities backed by mortgage loans, the underlying mortgages) are
subject to caps or floors that limit the maximum change in interest rate during
a specified period or over the life of the security. Because of the resetting of
interest rates, adjustable rate securities are less likely than non-adjustable
rate securities of comparable quality and maturity to increase significantly in
value when market interest rates fall.
Zero Coupon Securities
- ----------------------
When investing in "zero coupon" fixed income securities, the Fund 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. The Fund is required to distribute
the income on these securities to its shareholders as the income accrues, even
though the Fund is not receiving the income in cash on a current basis. Thus,
the 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
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 the Fund may invest include so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as short-term market interest rates increase and increase as
short-term market rates decline. Such securities have the effect of providing a
degree of investment leverage, since they will generally increase or decrease in
value in response to changes in market interest rates at a rate which is a
multiple of the rate at which fixed-rate long-term securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed rate
securities.
Firm Commitments
- ----------------
A firm commitment agreement is an agreement with a bank or broker-dealer
for the purchase of securities at an agreed-upon price on a specified future
date. The 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. The Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
The 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
- ------------------------------------------
The Fund 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
-16-
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, the 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, the Fund
typically will be able to enforce its rights only through the lender, and not
directly against the borrower. As a result, the 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, the 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, the 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 the Fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the 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, the Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by the 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. The 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
- --------------------------------------------------------
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by the 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 the 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.
In making such investments, the Fund 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 the 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, the 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 the Fund for purposes of the Fund's fundamental
investment restriction with respect to borrowings.
Illiquid Securities
- -------------------
The Fund may purchase "illiquid securities," i.e., securities which may not
be sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The 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.
MULTIPLE CLASSES
----------------
The Fund offers three classes of shares: Class I, Class II and Class III.
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."
-17-
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
-----------------------
Class I Class II Class III
------- -------- ---------
0.28% 0.22% 0.15%
Client Service - GMO and GMO Funds
- ----------------------------------
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.
Eligibility for Classes
- -----------------------
Class I, Class II and Class III Shares: 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 registered investment company for which GMO
acts as investment manager (a "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 GMO 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 below:
Minimum Total Investment
------------------------
Class I $1 Million
Class II $10 Million
Class III $35 Million
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 GMO 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 the client's Total
Investment. 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.
-18-
The Trust received a tax ruling from the Internal Revenue Service to the
effect 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
for the Trust 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 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 the 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 the Fund is (i) the net asset value next
determined after a purchase order is received in good order plus (ii) a premium
established from time to time by the Trust for the Fund. 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 the Fund has the same rate of purchase premium.
The purchase premium currently in effect for the Fund is 0.15%. The Fund will
reduce the stated purchase premium by 50% with respect to any portion of a
purchase that is offset by a corresponding redemption occurring on the same day.
The Manager examines each purchase of shares eligible for such treatment to
determine if circumstances exist to waive a portion of the purchase premium.
Absent a clear determination that transaction costs will be reduced or absent
for the purchase, the full premium will be charged.
The purchase premium applies 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.
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 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 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
subscription agreement is received by the Trust on the day that it is in "good
order" and is accepted by the Trust. For a subscription agreement to be in "good
order" on a particular day, the investor's consideration must be received before
the relevant deadline on that day. If the investor makes a cash investment, the
deadline for wiring Federal funds to the Trust is 2:00 p.m.; if the investor
makes an investment in-kind, the investor's securities must be placed on deposit
at DTC (or such other depository as is acceptable to the Manager) and 2:00 p.m.
is the deadline for transferring those securities to the account designated by
the transfer agent, Investors Bank & Trust Company, One Lincoln Plaza, Boston,
Massachusetts 02205. Investors should be aware that approval of the securities
to be used for purchase must be obtained from the Manager prior to this time.
When the consideration is received by the Trust after the relevant deadline, the
subscription agreement 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
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2:00 p.m. on or prior to the fourth business day after such assurances are
received.
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 the 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 a Purchase Order Form 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 Purchase
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 Purchase 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 Form 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 Form 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 GMO U.S. Bond/Global Alpha Fund. "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 the 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." There is no redemption
fee currently in effect for the Fund.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Securities used to redeem Fund shares in-kind will be valued in
accordance with the Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by the 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
-20-
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.
The 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 Fund will 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 the Fund's 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 the 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 the 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 Fund. The 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 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 Fund. 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 Fund 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
-------------
The Fund intends to pay out as dividends substantially all of its net
investment income (which comes from dividends and interest it receives from its
investments and net short-term capital gains). For these purposes and for
federal income tax purposes, a portion of the premiums from certain expired call
or put options written by the 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.
The Fund also intends to distribute substantially all of its net long-term
capital gains, if any, after giving effect to any available capital loss
carryover. The policy of the Fund is to declare and pay distributions of its
dividends, interest and foreign currency gains semi-annually. The Fund also
intends to distribute net short-term capital gains and net long-term gains at
least annually.
All dividends and/or distributions will be paid in shares of the Fund,
at net asset value, unless the shareholder elects to receive cash. There is no
purchase premium on reinvested dividends or
-21-
distributions. Shareholders may make this election by marking the appropriate
box on the Application or by writing to the Trust.
TAXES
-----
The Fund is treated as a separate taxable entity for federal income tax
purposes. The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. So
long as the Fund so qualifies, the Fund itself will not pay federal income tax
on the amount distributed.
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Designated distributions of any long-term capital
gains whether received in cash or reinvested shares are taxable as such to
shareholders subject to federal income tax, regardless of how long a shareholder
may have owned shares in the Fund. Any loss realized upon a taxable disposition
of shares held for six months or less will be treated as long-term capital loss
to the extent of any long-term capital gain distributions received by a
shareholder with respect to those shares. A distribution paid to shareholders by
the Fund in January of a year generally is deemed to have been received by
shareholders on December 31 of the preceding year, if the distribution was
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. The Trust will provide federal tax information
annually, including information about dividends and distributions paid during
the preceding year to taxable investors and others requesting such information.
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 Fund, and on the amount of the proceeds
of any redemption of Fund shares paid or credited to any shareholder account for
which an incorrect or no taxpayer identification number has been provided, where
appropriate certification has not been provided for a foreign shareholder, or
where the Trust is notified that the shareholder has underreported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding).
The foregoing is a general summary of the federal income tax
consequences for shareholders who are U.S. citizens, residents or domestic
corporations. Shareholders should consult their own tax advisors about the tax
consequences of an investment in the Fund in light of each shareholder's
particular tax situation. Shareholders should also consult their own tax
advisors about consequences under foreign, state, local or other applicable tax
laws.
Withholding on Distributions to Foreign Investors
- -------------------------------------------------
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 31% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net long-term capital gains to a
foreign shareholder, and any gain realized upon the sale of Fund shares by such
a shareholder will ordinarily not be subject to U.S. taxation, unless the
recipient or seller is a nonresident alien individual who is present in the
United States for more than 182 days during the taxable year. However, foreign
shareholders with respect to whom income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder will in
general be subject to U.S. federal income tax on the income derived from the
Fund at the graduated rates applicable to U.S. citizens, residents or domestic
corporations, whether received in cash or reinvested in shares, and, in the case
of a foreign corporation, may also be subject to a branch profits tax. Again,
foreign shareholders who are resident in a country with an income tax treaty
with the United States may obtain different tax results, and are urged to
consult their tax advisors.
Foreign Tax Credits
- -------------------
If, at the end of the fiscal year, more than 50% of the total assets of
the Fund is represented by stock of foreign corporations, the Fund intends to
make an election 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 the Fund whose income
from the Fund is not subject to U.S. taxation at the graduated rates applicable
to U.S. citizens, residents or domestic corporations may receive substantially
different tax treatment of distributions by the Fund, and may be disadvantaged
as a result of the election described in this paragraph.
Loss of Regulated Investment Company Status
- -------------------------------------------
The 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
-22-
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company, the Fund may be required to recognize unrealized gains, pay taxes on
such gains, and make certain distributions.
MANAGEMENT OF THE TRUST
-----------------------
The 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 and to the other 29 GMO Funds. Each of the following four
general partners holds a greater than 5% interest in the Manager: R. Jeremy
Grantham, Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley Durant.
Under a Management Contract with the Trust, the Manager selects and
reviews the 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 the
Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn.
The Management Contract provides for payment to the Manager of a
management fee at the stated annual rate set forth under Schedule of Fees and
Expenses. The Management Fee is computed and accrued daily, and paid monthly.
The Manager has voluntarily agreed to waive its fee and to bear certain expenses
until further notice in order to limit each Fund's annual expenses to specified
limits (with certain exclusions). These limits and the terms applicable to them
are described under Schedule of Fees and Expenses.
Mr. William L. Nemerever, Mr. Thomas F. Cooper and Mr. Steven Edelstein
are primarily responsible for the day-to-day management of the Fund. Mr.
Nemerever and Mr. Cooper have been employed by the Manager in fixed-income
portfolio management since October, 1993. For the five years prior to October,
1993, Mr. Nemerever was employed by Boston International Advisors and Fidelity
Management Trust Company in fixed-income portfolio management. For the five
years prior to October, 1993, Mr. Cooper was employed by Boston International
Advisors, Goldman Sachs Asset Management and Western Asset Management in
fixed-income portfolio management. Mr. 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.
Pursuant to an Administrative Services Agreement with GMO, Investors
Bank & Trust Company provides administrative services to the Fund. GMO pays
Investors Bank & Trust Company an annual fee for its services to the Fund.
Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of the 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 series of shares: one for the Fund and one for each of the other 29 GMO
Funds. 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 GMO 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 particular GMO Fund, then only shareholders of
the GMO 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 GMO Fund, but not of any other GMO 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.
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.
-23-
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 Fund 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, the
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 Fund's 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 the Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, the
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 Fund, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
the Fund's ability to purchase or sell options on a particular security.
The amount of risk the 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
-24-
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency (e.g., the German Mark) is used to hedge a security denominated
in another currency (e.g., the Spanish Peseta). In the event of an imperfect
correlation between a futures position and a portfolio position (or anticipated
position) which is intended to be protected, the desired protection may not be
obtained and the 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, the 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, the 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, the 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
the 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 the 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. The 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, the 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, the 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 the 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 the 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 the
Fund may commit to initial margin on such contracts or time premiums on such
options may not exceed 5% of the Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective
obligations under equity swap contracts, reverse equity swap contracts or Index
Futures are senior securities and, accordingly, the Fund will not treat them as
being subject to its borrowing restrictions. However, the net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each equity swap contract will be accrued on a daily basis and an amount of
cash, U.S. Government Securities or other high grade debt obligations having an
aggregate market value at least equal to the accrued excess will be maintained
in a segregated account by the Fund's custodian. Likewise, when the Fund takes a
short position with respect to an Index Futures contract the position must be
covered or the Fund must maintain at all times while that position is held by
the Fund, cash, U.S. government securities or other high grade debt obligations
in a segregated account with its custodian, in an amount which, together with
the initial margin deposit on the futures contract, is equal to the current
delivery or cash settlement value.
The use of unsegregated futures contracts, related written options,
interest rate floors, caps and collars and interest
-25-
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 the
Fund's total net assets when aggregated with the 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 the 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.
-26-
Appendix B
----------
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
-------------------------------------------
Commercial Paper Ratings
- ------------------------
Commercial paper ratings of Standard & Poor's Corporation ("Standard &
Poor's") are current assessments of the likelihood of timely payment of debts
having original maturities of no more than 365 days. Commercial paper rated A-1
by Standard & Poor's indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Commercial paper
rated A-2 by Standard and Poor's indicates that capacity for timely payment on
issues is strong. However, the relative degree of safety is not as high as for
issues designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternate liquidity is maintained.
Corporate Debt Ratings
- ----------------------
Standard & Poor's Corporation. A Standard & Poor's corporate debt
rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. The following is a summary of the ratings used
by Standard & Poor's for corporate debt:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc. The following is a summary of the
ratings used by Moody's Investor Services, Inc. for corporate debt:
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.1
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
-27-
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.1
Baa - Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or
accepted.
2. The issue or issuer belongs to a group of
securities that are not rated as a matter of policy.
3. There is lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols 1Aa1,
A1, Baa1, and B1.
-28-
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)
-29-
GMO U.S. BOND/GLOBAL ALPHA FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 5, 1997
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated April 5, 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...............................5
MANAGEMENT OF THE TRUST.......................................................7
INVESTMENT ADVISORY AND OTHER SERVICES........................................8
PORTFOLIO TRANSACTIONS.......................................................10
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.............................11
-i-
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of the 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," the Fund 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 the 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 the Fund may invest typically can be traded
through all major commodity brokers, and trades are currently effected on the
exchanges described in the Prospectus. The 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 the Fund purchases foreign stock
Index Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions
which could distort the normal relationship between the S&P 500 Index and
futures markets. Secondly, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions. In addition, trading hours for foreign stock Index
Futures may not correspond perfectly to hours of trading on the foreign exchange
to which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of
the Fund, the Trust will not take any of the following actions with respect to
the Fund:
(1) Borrow money except under the following circumstances: (i)
The 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 debt obligations; (ii) The 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) The 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
the 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 Securities and Exchange Commission and its 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.
(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
-2-
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 the Fund's total assets.
(7) Invest in securities of any issuer if, to the knowledge of
the Trust, officers and Trustees of the Trust and officers and partners
of Grantham, Mayo, Van Otterloo & Co. (the "Manager") who beneficially
own more than 1/2 of 1% of the securities of that issuer together
beneficially own more than 5%.
(8) Concentrate more than 25% of the value of its total assets
in any one industry.
(9) Purchase or sell commodities or commodity contracts,
except that the 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 (f)
below; any borrowing permitted by restriction 1 above; any collateral
arrangements with respect to initial and variational margin permitted
by non-fundamental policy (f) below; and the purchase or sale of
options, forward contracts, futures contracts or options on futures
contracts.
-3-
Notwithstanding the latitude permitted by Restrictions 1, 3, and 5
above and non- fundamental policy (f) below, the Fund has no current intention
of (a) borrowing money (other than temporary borrowings to meet redemption
requests or to settle securities transactions), (b) entering into short sales or
(c) investing in real estate investment trusts.
It is contrary to the present policy of the Fund, which may be changed
by the Trustees without shareholder approval, to:
(a) Invest in warrants or rights excluding options (other than
warrants or rights acquired by the Fund as a part of a unit or attached
to securities at the time of purchase), except that the Fund may invest
in such warrants or rights so long as the aggregate value thereof
(taken at the lower of cost or market) does not exceed 5% of the value
of the Fund's total net assets; provided that within this 5%, not more
than 2% of its net assets may be invested in warrants that are not
listed on the New York or American Stock Exchange or a recognized
foreign exchange.
(b) Invest in securities of an issuer, which, together with
any predecessors or controlling persons, has been in operation for less
than three consecutive years if, as a result, the aggregate of such
investments would exceed 5% of the value of the Fund's net assets;
except that this restriction shall not apply to any obligation of the
U.S.
Government or its instrumentalities or agencies.
(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 331/3% 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
-4-
equivalents in escrow in connection with the writing of covered call or
put options, respectively is not deemed to be a pledge or encumbrance.)
Except as indicated above in Restriction No. 1, all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to the 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 the 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
The 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 the 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 the Fund and the distributions which it may make are
summarized in the Prospectus under the heading "Taxes." The 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 the 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 the Fund may be limited to the extent
shareholders dispose of shares of one Fund and invest in shares of the same or
another Fund.
Certain of the Fund's 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," will 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.
The Fund's 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 Fund's
securities and convert short-term capital gains
-5-
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 Fund in certain "passive foreign investment
companies" could subject the 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, the 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 the 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 the Fund's dividends paid from investment income to the extent derived from
dividends received by the Fund from domestic corporations.
The Fund may be subject to foreign withholding taxes on income and
gains derived from foreign investments. Such taxes would reduce the yield on the
Trust's investments, but, as discussed in the Prospectus, may be taken as either
a deduction or a credit by U.S. citizens and corporations if the Fund makes the
election described in the Prospectus.
-6-
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.
Eyk del Mol Van Otterloo. President-International of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
Jay O. Light. Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior
Associate Dean, Harvard University (1988- 1992).
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.. Clerk of the Trust. General
Counsel, Grantham, Mayo, Van Otterloo & Co. (January,
1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September, 1992 - January, 1995).
Margaret McGetrick. Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
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.
*Trustee is deemed to be an "interested person" of the Trust and the Manager, as
defined by the 1940 Act.
-7-
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. The Trustees and officers of
the Trust as a group own less than 1% of any class of outstanding shares of the
Trust.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
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
POSITION FROM THE TRUST
Harvey R. Margolis, Trustee $40,000
Jay O. Light, Trustee $40,000
Messrs. Grantham, Mayo, Van Otterloo and Durant, and Mses. Harbert,
McGetrick, Lai 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," pursuant to a Management Contract (a "Management Contract") between the
Trust and Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager"), subject to
such policies as the Trustees of the Trust may determine, the Manager will
furnish continuously an investment program for the 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 the Fund's annual expenses incurred in the operation
of the Fund (including the management fee but excluding Shareholder Service
Fees, brokerage commissions and other
-8-
investment-related costs, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes. 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 Fund exceed the limits on
investment company expenses imposed by any statute or regulatory authority of
any jurisdiction in which shares of the 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. The Fund is not currently subject to any
state imposed limit on expenses.
The 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.
The 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 Fund's sole shareholder in connection with the organization
of the Trust and the establishment of the Fund. The 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 Fund. The Management Contract
automatically terminates on assignment, and is terminable on not more than 60
days' notice by the Trust to the Manager. In addition, the Management Contract
may be terminated on not more than 60 days' written notice by the Manager to the
Trust.
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), One
Lincoln Plaza, Boston, Massachusetts 02205 serves as the Trust's custodians on
behalf of the Fund. As such, IBT holds in safekeeping certificated securities
and cash belonging to the Fund and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Fund. Upon instruction, IBT
receives and delivers cash and securities of the Fund in connection with Fund
transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. IBT 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 the Fund on a daily basis. The Manager has
voluntarily agreed with the Trust to reduce its management fees and to bear
certain expenses with respect to the Fund until further notice to the extent
that the 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) would otherwise exceed the percentage of the
-9-
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 the Fund and the
annual operating expenses for the 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 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 the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account's being
preferred over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash, will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the
-10-
investment objectives and policies of the Fund; (b) such securities are acquired
for investment and not for resale; (c) such securities are liquid securities
which are not restricted as to transfer either by law or liquidity of market;
and (d) such securities have a value which is readily ascertainable as evidenced
by a listing on the American Stock Exchange, the New York Stock Exchange, NASDAQ
or a recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of the 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.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's 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 Fund.
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.
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.
-11-
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty 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 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 six 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 and
Class VI 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
- -------------
-12-
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 (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
-13-
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.
-14-
GMO TRUST
PART C. OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements: Not Applicable. This Post-Effective Amendment
relates solely to the GMO U.S. Bond/Global Alpha Fund. No information
relating to any other series of the registrant is amended or superseded
hereby.
(b) Exhibits
1. Amended and Restated Agreement and Declaration of Trust--Exhibit 1.
2. Amended and Restated By-laws of the Trust -- Exhibit 2.
3. None.
4. Not Applicable.
5. (a) Form of Management Contracts between the Trust, on behalf of
each of its GMO Core Fund, GMO Currency Hedged International
Bond Fund, GMO International Core Fund, GMO Growth Fund
(formerly "GMO Growth Allocation Fund"), Pelican Fund, GMO
Value Fund (formerly "GMO Value Allocation Fund"), GMO
International Small Companies Fund, GMO Japan Fund, GMO
Short-Term Income Fund, GMO Small Cap Value Fund (formerly
"GMO Core II Secondaries Fund"), GMO Fundamental Value Fund,
GMO Tobacco-Free Core Fund, GMO U.S. Sector Fund (formerly
"GMO U.S. Sector Allocation Fund"), GMO International Bond
Fund, GMO Emerging Country Debt Fund, GMO Emerging Markets
Fund, GMO Domestic Bond Fund, GMO Global Hedged Equity Fund
and GMO Currency Hedged International Core Fund, and Grantham,
Mayo, Van Otterloo & Co. LLC ("GMO")1;
(b) Form of Consulting Agreement (sub-advisory agreement)
between GMO, on behalf of its GMO Emerging Markets Fund, and
Dancing Elephant, Ltd.1;
(c) Form of Management Contract between the Trust, on behalf of
each of its GMO REIT Fund, GMO Global Bond Fund, GMO Foreign
Fund, GMO International Equity Allocation Fund, GMO Global
(U.S.+) Equity Allocation Fund, GMO World Equity Allocation
Fund, GMO Global
Balanced Allocation Fund, GMO Small Cap Growth Fund, GMO
Inflation Indexed Bond Fund and GMO Global Properties Fund,
and GMO2;
(d) Form of Management Contract between the Trust, on behalf of
the GMO U.S. Bond/Global Alpha Fund (formerly "GMO Global
Fund"), and GMO -- Exhibit 5.
6. None.
7. None.
8. (a) Custodian Agreement (the "IBT Custodian Agreement")
among the Trust, on behalf of its GMO Core Fund, GMO
Currency Hedged International Bond Fund (formerly "GMO SAF
Core Fund"), GMO Value Fund (formerly "GMO Value Allocation
Fund"), GMO Growth Fund (formerly "GMO Growth Allocation
Fund"), and GMO Short-Term Income Fund, GMO and Investors
Bank & Trust Company ("IBT")1;
(b) Custodian Agreement ("BBH Custodian Agreement") among the
Trust, on behalf of its GMO International Core Fund and GMO
Japan Fund, GMO and Brown Brothers Harriman & Co. ("BBH")1;
(c) Custodian Agreement ("State Street Custodian Agreement")
among the Trust, on behalf of its Pelican Fund, GMO and
State Street Bank and Trust Company ("State Street")1;
(d) Forms of Letter Agreements with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO Tobacco-Free
Core Fund, GMO Fundamental Value Fund, GMO U.S. Sector Fund
(formerly "GMO U.S. Sector Allocation Fund"), GMO
International Bond Fund, GMO Small Cap Value Fund (formerly
"GMO Core II Secondaries Fund"), GMO Emerging Country Debt
Fund, GMO Domestic Bond Fund, GMO Currency Hedged
International Core Fund, GMO and IBT1;
(e) Forms of Letter Agreements with respect to the BBH Custodian
Agreement among the Trust, on behalf of its GMO Emerging
Markets Fund, GMO Global Hedged Equity Fund and GMO
International Small Companies Fund, GMO and BBH1;
-2-
(f) Forms of Letter Agreements with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO REIT Fund,
GMO Global Bond Fund, GMO International Equity Allocation
Fund, GMO Global (U.S.+) Equity Allocation Fund, GMO World
Equity Allocation Fund, GMO Global Balanced Allocation Fund,
GMO Small Cap Growth Fund and Inflation Indexed Bond Fund,
GMO and IBT2;
(g) Form of Letter Agreement with respect to the BBH Custodian
Agreement among the Trust, on behalf of its GMO Foreign Fund
and GMO Global Properties Fund, GMO and BBH2.
(h) Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO U.S.
Bond/Global Alpha Fund (formerly "GMO Global Fund"), GMO and
IBT -- Exhibit 8.
9. (a) Transfer Agency Agreement among the Trust, on behalf of its
GMO Core Fund, GMO Currency Hedged International Bond Fund,
GMO Growth Fund (formerly "GMO Growth Allocation Fund"), GMO
Value Fund (formerly "GMO Growth Allocation Fund"), GMO
Short-Term Income Fund, GMO International Core Fund and GMO
Japan Fund, GMO and IBT1;
(b) Forms of Letter Agreements to the Transfer Agency Agreement
among the Trust, on behalf of each of its GMO Fundamental
Value Fund, GMO Tobacco-Free Core Fund, GMO U.S. Sector Fund,
GMO International Bond Fund, GMO Emerging Markets Fund, GMO
Emerging Country Debt Fund, GMO Domestic Bond Fund, GMO
Global Hedged Equity Fund, GMO Small Cap Value Fund (formerly
"GMO Core II Secondaries Fund"), GMO International Small
Companies Fund, Pelican Fund and GMO Currency Hedged
International Core Fund, GMO and IBT1;
(c) Forms of Letter Agreements to the Transfer Agency Agreement
among the Trust, on behalf of each of its GMO REIT Fund, GMO
Global Bond Fund, GMO Foreign Fund, GMO International Equity
Allocation Fund, GMO Global (U.S.+) Equity Allocation Fund,
GMO World Equity Allocation Fund, GMO Global Balanced
Allocation Fund, GMO Small Cap Growth Fund, GMO Inflation
Indexed Bond Fund and GMO Global Properties Fund, GMO and
IBT2;
(d) Form of Letter Agreement to the Transfer Agency Agreement
among the Trust, on behalf of its GMO U.S. Bond/Global Alpha
Fund (formerly "GMO Global Fund"), GMO and IBT -- Exhibit
9.1.
-3-
(e) Form of Notification of Fee Waiver and Expense Limitation by
GMO to the Trust relating to all Funds of the Trust --
Exhibit 9.2.
(f) Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of the Funds, and GMO -- Exhibit 9.3.
10. (a) Opinion and Consent of Ropes & Gray with respect to all Funds
of the Trust (except with respect to the GMO REIT Fund, GMO
Foreign Fund, GMO International Equity Allocation Fund, GMO
World Equity Allocation Fund, GMO Global (U.S.+) Equity
Allocation Fund, GMO Global Balanced Allocation Fund, GMO
U.S. Bond/Global Alpha Fund, GMO Small Cap Growth Fund, GMO
Inflation Indexed Bond Fund and GMO Global Properties Fund)2;
(b) Opinion and Consent of Ropes & Gray with respect to the GMO
REIT Fund, GMO Foreign Fund, GMO International Equity
Allocation Fund, GMO Global (U.S.+) Equity Allocation Fund,
GMO World Equity Allocation Fund, GMO Global Balanced
Allocation Fund, GMO Global Active Fund, GMO Small Cap
Growth Fund, GMO Inflation Indexed Bond Fund, GMO Global
Properties Fund and GMO U.S. Bond/Global Alpha Fund (to be
filed with Rule 24f-2 Notice).
11. None.
12. None.
13. None.
14. Prototype Retirement Plans1.
15. None.
16. Not Applicable.
17. Not Applicable.
18. Form of Rule 18f-3 Multiclass Plan2.
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
None.
-4-
Item 26. Number of Holders of Securities
-------------------------------
Not Applicable.
Item 27. Indemnification
---------------
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 29. Principal Underwriters
----------------------
Not Applicable.
Item 30. Location of Accounts and Records
--------------------------------
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertakings
------------
(a) See Item 33 of Post-Effective Amendment No. 1 which is hereby
incorporated by reference.
(b) See Item 33 of Post-Effective Amendment No. 1 which is hereby
incorporated by reference.
-8-
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders containing the information required
by Item 5A of Form N-1A omitted from the Prospectus, upon request
and without charge.
- ----------------
1 = Previously manually filed with the Securities and Exchange Commission
and incorporated herein by reference.
2 = Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference.
-9-
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act") and the Investment Company Act of 1940 (the "1940 Act"), the Registrant
has duly caused this Post- Effective Amendment No. 34 to the Trust's
Registration Statement under the Securities Act and Post-Effective Amendment No.
36 under the 1940 Act, to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston and The Commonwealth of Massachusetts, on
the 3rd day of February, 1997.
GMO Trust
By: R. JEREMY GRANTHAM*
-----------------------------
R. Jeremy Grantham
President - Quantitative;
Principal Executive Officer;
Title: Trustee
Pursuant to the Securities Act, this Post-Effective Amendment No. 34 to the
Trust's Registration Statement under the Securities Act has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
R. JEREMY GRANTHAM* President - Quantitative; Principal February 3, 1997
- -------------------
R. Jeremy Grantham Executive Officer; Trustee
KINGSLEY DURANT* Treasurer; Principal Financial and February 3, 1997
- ----------------
Kingsley Durant Accounting Officer
HARVEY R. MARGOLIS* Trustee February 3, 1997
- --------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee February 3, 1997
- ----------------
Jay O. Light
</TABLE>
* By:/s/ William R. Royer
------------------------
William R. Royer
Attorney-in-Fact
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
Signature Title Date
- --------- ----- ----
President-Domestic;
Principal Executive
/S/ R. Jeremy Grantham Officer; Trustee March 12, 1996
- --------------------------
R. Jeremy Grantham
/S/ Eyk H.A. Van Otterloo President-International March 12, 1996
- --------------------------
Eyk H.A. Van Otterloo
/S/ Harvey Margolis Trustee March 12, 1996
- --------------------------
Harvey Margolis
Treasurer; Principal
Financial and
/S/ Kingsley Durant Accounting Officer March 12, 1996
- -----------------------------
Kingsley Durant
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
- --------- ----- ----
/S/ JAY O. LIGHT Trustee May 23, 1996
- --------------------
Jay O. Light
EXHIBIT INDEX
-------------
GMO TRUST
Exhibit No. Title of Exhibit
----------- ----------------
1 Form of Amended and Restated Agreement and Declaration of
Trust.
2 Form of Amended and Restated By-Laws of the Trust.
5 Form of Management Contract between the Trust, on behalf of
the GMO U.S. Bond/Global Alpha Fund, and GMO.
8 Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO U.S.
Bond/Global Alpha Fund, GMO and IBT.
9.1 Form of Letter Agreement to the Transfer Agency Agreement
among the Trust, on behalf of its GMO U.S. Bond/Global Alpha
Fund, GMO and IBT.
9.2 Form of Notification of Fee Waiver and Expense Limitation by
GMO to the Trust relating to all Funds of the Trust.
9.3 Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of the Funds, and GMO.
Exhibit 1
FIRST AMENDED AND RESTATED
--------------------------
AGREEMENT AND DECLARATION OF TRUST
----------------------------------
GMO TRUST
---------
THIS FIRST AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
made at Boston, Massachusetts this ____ day of April, 1997 by the Trustees
hereunder and the holders of shares of beneficial interest issued hereunder and
to be issued hereunder as hereinafter provided:
WITNESSETH that
WHEREAS the Trustees desire to restate all prior Amendments to the
original Agreement and Declaration of Trust made to date and additionally
desire to amend and restate this Agreement and Declaration of Trust in
connection with the creation of Classes within each Series of the GMO Trust
pursuant to the power of the Trustees set forth in Article III, Section 5 of
the original Agreement and Declaration of Trust.
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with
the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that this First Amended and
Restated Agreement and Declaration of Trust be filed with the Secretary of The
Commonwealth of Massachusetts and with the City Clerk of the City of Boston and
do hereby declare that they will hold all cash, securities and other assets,
which they may from time to time acquire in any manner as Trustees hereunder IN
TRUST to manage and dispose of the same upon the following terms and conditions
for the pro rata benefit of the holders from time to time of Shares in this
Trust as hereinafter set forth.
ARTICLE I.
Name and Definitions
Section 1. This Trust shall be known as GMO Trust and the Trustees shall
conduct the business of the Trust under that name or any other name as they may
from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by the
context or specifically provided
(a) "Trust" refers to the Massachusetts business trust established by this
First Amended and Restated Agreement and Declaration of Trust, as amended from
time to time;
(b) "Trustees" refers to the Trustees of the Trust named in Article IV hereof or
elected in accordance with such Article;
(c) "Shares" means the equal proportionate units of interest into which the
beneficial interest in the Trust or in the Trust property belonging to any
Series of the Trust (or in the property belonging to any Series allocable to
any Class of that Series) (as the context may require) shall be divided from
time to time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules and
Regulations thereunder, all as amended from time to time;
(f) The terms "Commission" and "principal underwriter" shall have the meanings
given to them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust,
as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time;
(i) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision;
(j) "Series" refers to Series of Shares established and designated under or in
accordance with the provisions of Article III; and
(k) "Class" refers to any Class of Shares established and designated under or
in accordance with the provisions of Article III. The Shares of any Class shall
represent a subset of Shares of a Series, and together with all other Classes
of the same Series, shall constitute all Shares of that Series.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities (including options), debt instruments, commodities,
commodity contracts and options thereon.
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ARTICLE III.
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, without
par value. Subject to the provisions of Section 6 of this Article III, each
Share shall have voting rights as provided in Article V hereof, and holders of
the Shares of any Series or Class shall be entitled to receive dividends, when
and as declared with respect thereto in the manner provided in Article VI,
Section 1 hereof. No Share shall have any priority or preference over any other
Share of the same Series and Class with respect to dividends or distributions
upon termination of the Trust or of such Series or Class made pursuant to
Article VIII, Section 4 hereof. All dividends and distributions shall be made
ratably among all Shareholders of a particular Series or Class from the assets
belonging to such Series (or, in the case of a Class, allocable to such Class)
according to the number of Shares of such Series or Class held of record by
such Shareholders on the record date for any dividend or on the date of
termination, as the case may be. Shareholders shall have no preemptive or other
right to subscribe to any additional Shares or other securities issued by the
Trust. The Trust may from time to time divide or combine the Shares of any
particular Series or Class into a greater or lesser number of Shares of that
Series or Class without thereby changing the proportionate beneficial interest
of the Shares of that Series or Class in the assets belonging to that Series
(or, in the case of a Class, allocable to such Class) in any way affecting the
rights of Shares of any other Series or Class.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded on
the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series and Class.
No certificates certifying the ownership of Shares shall be issued except as
the Trustees may otherwise determine from time to time. The Trustees may make
such rules as they consider appropriate for the transfer of Shares of each
Series and Class and similar matters. The record books of the Trust as kept by
the Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders of each Series and Class and as to
the number of Shares of each Series and Class held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept investments in
the Trust from such persons and on such terms and for such consideration as
they from time to time authorize.
Section 4. Status of Shares and Limitation of Personal Liability. Shares shall
be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the continuance of the
Trust shall not operate to terminate the same nor entitle the representative of
any deceased Shareholder to an accounting or to take any action in court or
elsewhere
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against the Trust or the Trustees, but entitles such representative only to the
rights of said deceased Shareholder under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholders,
nor except as specifically provided herein to call upon any Shareholder for the
payment of any sum of money or assessment whatsoever other than such as the
Shareholder may at any time personally agree to pay.
Section 5. Power of Trustees to Change Provisions Relating to Shares.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as
provided elsewhere herein, the Trustees shall have the power to amend this
Declaration of Trust, at any time and from time to time, in such manner as the
Trustees may determine in their sole discretion, without the need for
Shareholder action, so as to add to, delete, replace or otherwise modify any
provisions relating to the Shares contained in this Declaration of Trust for
the purpose of (i) responding to or complying with any regulations, orders,
rulings or interpretations of any governmental agency or any laws, now or
hereafter applicable to the Trust, or (ii) designating and establishing Series
and Classes in addition to the Series and Classes established in Section 6 of
this Article III; provided that before adopting any such amendment without
Shareholder approval the Trustees shall determine that it is consistent with
the fair and equitable treatment of all Shareholders. The establishment and
designation of any Series or Class of Shares in addition to the Series and
Classes established and designated in Section 6 of this Article III shall be
effective upon the execution by a majority of the then Trustees of an amendment
to this Declaration of Trust, taking the form of a complete restatement or
otherwise, setting forth such establishment and designation and the relative
rights and preferences of such Series or Class, as the case may be, or as
otherwise provided in such instrument.
Without limiting the generality of the foregoing, the Trustees may,
for the above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or Classes of Shares (in addition to any Series
or Classes already existing or otherwise) with such rights and preferences and
such eligibility requirements for investment therein as the Trustees shall
determine and reclassify any or all outstanding Shares as shares of particular
Series or Classes in accordance with such eligibility requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j) of
Section 6 of this Article III;
(c) combine one or more Series or Classes of Shares into a single Series or
Class on such terms and conditions as the Trustees shall determine;
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(d) change or eliminate any eligibility requirements for investment in Shares
of any Series or Class, including without limitation the power to provide for
the issue of Shares of any Series or Class in connection with any merger or
consolidation of the Trust with another trust or company or any acquisition by
the Trust of part or all of the assets of another trust or company;
(e) change the designation of any Series or Class of Shares;
(f) change the method of allocating dividends among the various Series and
Classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any specific
items of income or expense of the Trust to one or more Series or Classes of
Shares;
(h) specifically allocate assets to any or all Series or Classes of Shares or
create one or more additional Series or Classes of Shares which are preferred
over all other Series or Classes of Shares in respect of assets specifically
allocated thereto or any dividends paid by the Trust with respect to any net
income, however determined, earned from the investment and reinvestment of any
assets so allocated or otherwise and provide for any special voting or other
rights with respect to such Series or Classes.
Section 6. Establishment and Designation of Series. Without limiting the
authority of the Trustees set forth in Section 5, inter alia, to establish and
designate any further Series or Classes or to modify the rights and preferences
of any Series, each Series set forth on Schedule 3.6 hereto (as may be amended
from time to time by the Trustees) shall be, and are hereby, established and
designated. In addition, with respect to each such Series, the Class I Shares,
Class II Shares, Class III Shares, Class IV Shares, Class V Shares and Class VI
Shares, which each such Series may issue from time to time, shall be, and are
hereby, established and designated, which Classes shall have the respective
rights and preferences as are set forth in Exhibit 3.6 attached hereto as it
may be amended from time to time by the Board of Trustees.
Shares of each Series (or Class, as the case may be) established in this
Section 6 shall have the following relative rights and preferences:
(a) Assets belonging to Series. All consideration received by the Trust for the
issue or sale of Shares of a particular Series, together with all assets in
which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall irrevocably belong to that
Series for all purposes, subject only to the rights of creditors, and shall be
so recorded upon the books of
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account of the Trust. Such consideration, assets, income, earnings, profits and
proceeds thereof, from whatever source derived, including, without limitation,
any proceeds derived from the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment of such proceeds, in
whatever form the same may be, are herein referred to as "assets belonging to"
that Series. In the event that there are any assets, income, earnings, profits
and proceeds thereof, funds or payments which are not readily identifiable as
belonging to any particular Series (collectively "General Assets"), the
Trustees shall allocate such General Assets to, between or among any one or
more of the Series established and designated from time to time in such manner
and on such basis as they, in their sole discretion, deem fair and equitable,
and any General Asset so allocated to a particular Series shall belong to that
Series. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all Series for all purposes.
(b) Liabilities Belonging to Series. The assets belonging to each particular
Series shall be charged solely with the liabilities of the Trust in respect to
that Series, expenses, costs, charges and reserves attributable to that Series,
and any general liabilities of the Trust which are not readily identifiable as
belonging to any particular Series but which are allocated and charged by the
Trustees to and among any one or more of the Series established and designated
from time to time in a manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses, costs, charges,
and reserves so charged to a Series are herein referred to as "liabilities
belonging to" that Series. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon the
holders of all Series for all purposes.
(c) Dividends, Distributions, Redemptions, and Repurchases. Notwithstanding any
other provisions of this Declaration, including, without limitation, Article
VI, no dividend or distribution (including, without limitation, any
distribution paid upon termination of the Trust or of any Series or Class) with
respect to, nor any redemption or repurchase of, the Shares of any Series shall
be effected by the Trust other than from the assets belonging to such Series,
nor shall any Shareholder of any particular Series otherwise have any right or
claim against the assets belonging to any other Series except to the extent
that such Shareholder has such a right or claim hereunder as a Shareholder of
such other Series.
(d) Voting. Notwithstanding any of the other provisions of this Declaration,
including, without limitation, Section 1 of Article V, the Shareholders of any
particular Series or Class shall not be entitled to vote on any matters as to
which such Series or Class is not affected except as otherwise required by the
1940 Act or other applicable law. On any matter submitted to a vote of
Shareholders, all Shares of the Trust then entitled to vote shall be voted by
individual Series, unless otherwise required by the 1940 Act or other
applicable law.
(e) Equality. All the Shares of each particular Class of a Series shall
represent an equal proportionate interest in the assets allocable to that Class,
and each Share of any particular
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Series shall be equal to each other Share of that Series (subject to the
liabilities allocated to each Class of that Series).
(f) Fractions. Any fractional Share of a Series or Class shall carry
proportionately all the rights and obligations of a whole share of that Series
or Class, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority to provide that
the holders of Shares of any Series or Class shall have the right to exchange
said Shares for Shares of one or more other Series or Class of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series or Classes. The Trustees shall have the authority,
without the approval of the Shareholders of any Series or Class unless
otherwise required by applicable law, to combine the assets and liabilities
belonging to any two or more Series (or the assets allocable to any two or more
Classes) into assets and liabilities belonging (or allocable) to a single
Series (or Class).
(i) Elimination of Series or Classes. At any time that there are no Shares
outstanding of any particular Series or Class previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series or Class and to rescind the establishment and designation thereof, such
amendment to be effected in the manner provided in Section 5 of this Article
III.
(j) Assets and Liabilities Allocable to a Class. The assets and liabilities
belonging to a Series shall be proportionately allocated among all the Classes
of that Series according to the percentage of net assets allocated to each
particular Class. For purposes of determining the assets and liabilities
belonging to a Series that are allocable to a Class of that Series, subject to
the provisions of paragraph (g) of Section 5 of this Article III, expenses
shall be accrued as set forth in Exhibit 3.6 attached hereto.
Section 7. Indemnification of Shareholders. In case any Shareholder or former
Shareholder shall be held to be personally liable solely by reason of his or
her being or having been a Shareholder of the Trust or of a particular Series
and not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation
or other entity, its corporate or other general successor) shall be entitled
out of the assets of the Series of which he is a Shareholder or former
Shareholder to be held harmless from and indemnified against all loss and
expense arising from such liability.
Section 8. No Preemptive Rights. Shareholders shall have no preemptive or other
right to subscribe to any additional Shares or other securities issued by the
Trust.
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The Trustees
Section 9. Election and Tenure. The Trustees may fix the number of vacancies
arising from an increase in the number of Trustees, or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he dies, resigns or is removed, or if sooner, until the next
meeting of Shareholders called for the purpose of electing Trustees and until
the election and qualification of his successor. Any Trustee may resign at any
time by written instrument signed by him and delivered to any officer of the
Trust or to a meeting of the Trustees. Such resignation shall be effective upon
receipt unless specified to be effective at some other time. Except to the
extent expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation for
any period following his resignation or removal, or any right to damages on
account of such removal. The Shareholders may fix the number of Trustees and
elect Trustees at any meeting of Shareholders called by the Trustees for that
purpose.
Section 10. Effect of Death, Resignation, etc. of a Trustee. The death,
declination, resignation, retirement, removal, or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
Section 11. Powers. Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have all
powers necessary or convenient to carry out that responsibility including the
power to engage in securities transactions of all kinds on behalf of the Trust.
Without limiting the foregoing, the Trustees may adopt By-Laws not inconsistent
with this Declaration of Trust providing for the regulation and management of
the affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; they may fill vacancies
in or remove from their number (including any vacancies created by an increase
in the number of Trustees); they may remove from their number with or without
cause; they may elect and remove such officers and appoint and terminate such
agents as they consider appropriate; they may appoint from their own number and
terminate one or more committees consisting of two or more Trustees which may
exercise the powers and authority of the Trustees to the extent that the
Trustees determine; they may employ one or more custodians of the assets of the
Trust and may authorize such custodians to employ subcustodians and to deposit
all or any part of such assets in a system or systems for the central handling
of securities or with a Federal Reserve Bank, retain a transfer agent or a
shareholder servicing agent, or both, provide for the distribution of Shares by
the Trust, through one or more principal underwriters or otherwise, set record
dates for the determination of Shareholders with respect to various matters,
and in general delegate such authority as they consider desirable to any
officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian or underwriter.
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Without limiting the foregoing, the Trustees shall have power
and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write
options with respect to or otherwise deal in any property rights relating to
any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with respect
to stock or other securities or property; and to execute and deliver proxies or
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(d) To exercise power and rights of subscription or otherwise which in any
manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own name or
in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or
sale of property by such corporation or issuer; and to pay calls or
subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall
deem proper and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall
deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or against
the Trust or any matter in controversy, including but not limited to claims for
taxes;
(i) To enter into joint ventures, general or limited partnerships and any other
combinations or associations;
(j) To borrow funds or other property;
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(k) To endorse or guarantee the payment of any notes or other obligations of
any person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property such insurance as
they may deem necessary or appropriate for the conduct of the business,
including without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, principal underwriters, or independent
contractors of the Trust individually against all claims and liabilities of
every nature arising by reason of holding being or having held any such office
or position, or by reason of any action alleged to have been taken or omitted
by any such person as Trustee, officer, employee, agent, investment adviser,
principal underwriter, or independent contractor, including any action taken or
omitted that may be determined to constitute negligence, whether or not the
Trust would have the power to indemnify such person against liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to adopt,
establish and carry out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity contracts as
a means of providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present
or future law or custom in regard to investments by Trustees. The Trustees
shall not be required to obtain any court order to deal with any assets of the
Trust or take any other action hereunder.
Section 12. Payment of Expenses by the Trust. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust, or partly
out of principal and partly out of income, as they deem fair, all expenses,
fees, charges, taxes and liabilities incurred or arising in connection with the
Trust, or in connection with the management thereof, including but not limited
to, the Trustees' compensation and such expenses and charges for the services
of the Trust's officers, employees, investment adviser or manager, principal
underwriter, auditor, counsel, custodian, transfer agent, shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.
Section 13. Payment of Expenses by Shareholders. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series or Class, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, shareholder
servicing or similar agent, an amount fixed from time to time by the Trustees,
by setting off such charges due from such Shareholder from declared but unpaid
dividends owed such Shareholder and/or by reducing the number of Shares in the
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account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
Section 14. Ownership of Assets of the Trust. Title to all of the assets of the
Trust shall at all times be considered as vested in the Trustees.
Section 15. Advisory, Management and Distribution Contracts. Subject to such
requirements and restrictions as may be set forth in the By-Laws, the Trustees
may, at any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services for the Trust or for any Series with
Grantham, Mayo, Van Otterloo & Co. (including any limited liability company,
provided that a majority of the beneficial owners of Grantham, Mayo, Van
Otterloo & Co. hold a majority of the equity interest in such entity and
substantially all business of Grantham, Mayo, Van Otterloo & Co. is assigned
thereto) or any other partnership, corporation, trust, association or other
organization (the "Manager"); and any such contract may contain such other
terms as the Trustees may determine, including, without limitation, authority
for a Manager to determine from time to time without prior consultation with
the Trustees what investments shall be purchased, held, sold or exchanged and
what portion, if any, of the assets of the Trust shall be held uninvested and
to make changes in the Trust's investments. The Trustees may also, at any time
and from time to time, contract with the Manager or any other partnership,
corporation, trust, association or other organization, appointing it exclusive
or nonexclusive distributor or principal underwriter for the Shares, every such
contract to comply with such requirements and restrictions as may be set forth
in the By-Laws; and any such contract may contain such other terms as the
Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter, distributor or affiliate or agent of or for any
partnership, corporation, trust, association, or other organization, or of or
for any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may have been or may
hereafter be made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract with one or more other
corporations, trusts, associations, or other organizations, or has other
business or interests,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its
Shareholders.
ARTICLE IV.
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to vote only (i)
for the election of Trustees as provided in Article IV, Section 1, (ii) with
respect to any amendment of this Declaration of Trust to the extent and as
provided in Article VIII, Section 8, (iii) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(iv) with respect to the termination of the Trust or any Series or Class to the
extent and as provided in Article VIII, Section 4, and (v) with respect to such
additional matters relating to the Trust as may be required by this Declaration
of Trust, the By-Laws or any registration of the Trust with the Commission (or
any successor agency) or any state, or as the Trustees may consider necessary
or desirable. Each whole Share shall be entitled to one vote as to any matter
on which it is entitled to vote and each fractional Share shall be entitled to
a proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them.
A proxy purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. At any time when no Shares of
a Series or Class are outstanding the Trustees may exercise all rights of
Shareholders of that Series or Class with respect to matters affecting that
Series or Class and may with respect to that Series or Class take any action
required by law, this Declaration of Trust or the By-Laws to be taken by the
Shareholders.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the ByLaws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or
caused to be given by the Trustees by mailing such notice at least seven days
before such meeting, postage prepaid, stating the time and place of the
meeting, to each Shareholder at the Shareholder's address as it appears on the
records of the Trust. Whenever notice of a meeting is required to be given to a
Shareholder under this Declaration of Trust or the By-Laws, a written waiver
thereof,
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executed before or after the meeting by such Shareholder or his attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is required by
law, by the By-Laws or by this Declaration of Trust, 40% of the Shares entitled
to vote shall constitute a quorum at a Shareholders' meeting. When any one
Series or Class is to vote separately from any other Shares which are to vote
on the same matters as a separate Series or Class, 40% of the Shares of each
such Series or Class entitled to vote shall constitute a quorum at a
Shareholder's meeting of that Series or Class. Any meeting of Shareholders may
be adjourned from time to time by a majority of the votes property cast upon
the question, whether or not a quorum is present, and the meeting may be held
as adjourned within a reasonable time after the date set for the original
meeting without further notice. When a quorum is present at any meeting, a
majority of the Shares voted shall decide any questions and a plurality shall
elect a Trustee, except when a larger vote is required by any provision of this
Declaration of Trust or the By-Laws or by law. If any question on which the
Shareholders are entitled to vote would adversely affect the rights of any
Series or Class of Shares, the vote of a majority (or such larger vote as is
required as aforesaid) of the Shares of such Series or Class which are entitled
to vote, voting separately, shall also be required to decide such question.
Section 4. Action by Written Consent. Any action taken by Shareholders may be
taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or Class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records
of the meetings of Shareholders. Such consent shall be treated for all purposes
as a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the Shareholders of any
Series or Class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 60 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series or Class having the
right to notice of and to vote at such meeting and any adjournment thereof, and
in such case only Shareholders of record on such record date shall have such
right, notwithstanding any transfer of shares on the books of the Trust after
the record date. For the purpose of determining the Shareholders of any Series
or Class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be
before the date for the payment of such dividend or such other payment, as the
record date for determining the Shareholders of such Series or Class having the
right to receive such dividend or distribution. Without fixing a record date
the Trustees may for voting and/or distribution purposes close the register or
transfer books for one or more Series or Class for all or any part of the
period between a record date and a
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meeting of shareholders or the payment of a distribution. Nothing in this
section shall be construed as precluding the Trustees from setting different
record dates for different Series or Classes.
Section 6. Additional Provisions. The By-Laws may include further provisions for
Shareholders' votes and meetings and related matters.
ARTICLE V.
Net Income, Distributions, and Redemptions and Repurchases
Section 1. Distributions of Net Income. The Trustees shall each year, or more
frequently if they so determine in their sole discretion, distribute to the
Shareholders of each Series or Class, in shares of that Series or Class, cash
or otherwise, an amount approximately equal to the net income attributable to
the assets belonging to such Series (or the assets allocable to such Class) and
may from time to time distribute to the Shareholders of each Series or Class,
in shares of that Series, cash or otherwise, such additional amounts, but only
from the assets belonging to such Series (or allocable to that Class), as they
may authorize. All dividends and distributions on Shares of a particular Series
or Class shall be distributed pro rata to the holders of that Series or Class
in proportion to the number of Shares of that Series or Class held by such
holders and recorded on the books of the Trust at the date and time of record
established for that payment or such dividend or distributions.
The manner of determining net income, income, asset values, capital gains,
expenses, liabilities and reserves of any Series or Class may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such
person as they may authorize at the times and in the manner provided in the
By-Laws. Determinations of net income of any Series or Class and determination
of income, asset value, capital gains, expenses, and liabilities made by the
Trustees, or by such person as they may authorize, in good faith, shall be
binding on all parties concerned. The foregoing sentence shall not be construed
to protect any Trustee, officer or agent of the Trust against any liability to
the Trust or its security holders 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.
If, for any reason, the net income of any Series or Class determined at any
time is a negative amount, the pro rata share of such negative amount allocable
to each Shareholder of such Series or Class shall constitute a liability of
such Shareholder to that Series or Class which shall be paid out of such
Shareholder's account at such times and in such manner as the Trustees may from
time to time determine (x) out of the accrued dividend account of such
Shareholder, (y) by reducing the number of Shares of that Series or Class in
the account of such Shareholder, or (z) otherwise.
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Section 2. Redemptions and Repurchases. The Trust shall purchase such Shares as
are offered by any Shareholder for redemption, upon the presentation of a
proper instrument of transfer together with a request directed to the Trust or
a person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, as determined in accordance with the By-Laws, next determined. Payment
for said Shares shall be made by the Trust to the Shareholder within seven days
after the date on which the request is made. The obligation set forth in this
Section 2 is subject to the provision that in the event that any time the New
York Stock Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Trust to dispose of the investments of the applicable Series or to
determine fairly the value of the net assets belonging to such Series (or net
assets allocable to such Class) or during any other period permitted by order
of the Commission for the protection of investors, such obligations may be
suspended or postponed by the Trustees. The Trust may also purchase or
repurchase Shares at a price not exceeding the net asset value of such Shares
in effect when the purchase or repurchase or any contract to purchase or
repurchase is made.
The redemption price may in any case or cases be paid wholly or partly
in kind if the Trustees determine that such payment is advisable in the
interest of the remaining Shareholders of the Series or Class the Shares of
which are being redeemed. In making any such payment wholly or partly in kind,
the Trust shall, so far as may be practicable, deliver assets which approximate
the diversification of all of the assets belonging at the time to the Series
(or allocable to the Class) the Shares of which are being redeemed. Subject to
the foregoing, the fair value, selection and quantity of securities or other
property so paid or delivered as all or part of the redemption price may be
determined by or under authority of the Trustees. In no case shall the Trust be
liable for any delay of any corporation or other person in transferring
securities selected for delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have the
right at its option and at any time to redeem Shares of any Shareholder at the
net asset value thereof as described in Section 1 of this Article VI: (i) if at
such time such Shareholder owns Shares of any Series or Class having an
aggregate net asset value of less than an amount determined from time to time
by the Trustees; or (ii) to the extent that such Shareholder owns Shares equal
to or in excess of a percentage determined from time to time by the Trustees of
the outstanding Shares of the Trust or of any Series or Class.
ARTICLE VI.
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein
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shall in any way prevent the employment of any Trustee for advisory,
management, legal, accounting, investment banking or other services and payment
for the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not be responsible or
liable in any event for any neglect or wrong-doing of any officer, agent,
employee, Manager or principal underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Every note, bond, contract, instrument, certificate or undertaking and every
other act or thing whatsoever issued, executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VII.
Miscellaneous
Section 1. Trustees, Shareholders, etc. Not Personally Liable; Notice. All
persons extending credit to, contracting with or having any claim against the
Trust or any Series or Class shall look only to the assets of the Trust, or, to
the extent that the liability of the Trust may have been expressly limited by
contract to the assets of a particular Series (or the assets allocable to a
particular Class), only to the assets belonging to the relevant Series (or
allocable to the relevant Class), for payment under such credit, contract or
claim; and neither the Shareholders nor the Trustees, nor any of the Trust's
officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such 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 the office of
Trustee.
Every note, bond, contract, instrument, certificate or undertaking
made or issued on behalf of the Trust by the Trustees, by any officers or
officer or otherwise shall give notice that this Declaration of Trust is on
file with the Secretary of The Commonwealth of Massachusetts and shall recite
that the same was executed or made by or on behalf of the Trust or by them as
Trustee or Trustees or as officers or officer or otherwise and not individually
and that the obligations of such instrument are not binding upon any of them or
the shareholders individually but are binding only upon the assets and property
of the Trust or upon the assets belonging to the Series (or allocable to the
Class) for the benefit of which the Trustees have caused the note, bond,
contract, instrument, certificate or undertaking to be made, or issued, and may
contain such further recital as he or they may deem appropriate, but
-16-
the omission of any such recital shall not operate to bind any Trustee or
Trustees or officers or officer or Shareholders or any other person
individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The
exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Declaration of Trust, and shall be under no
liability for any act or omission in accordance with such advice or for failing
to follow such advice. The Trustees shall not be required to give any bond as
such, nor any surety if a bond is required.
Section 3. Liability of Third Persons Dealing with Trustees. No person dealing
with the Trustees shall be bound to make any inquiry concerning the validity of
any transaction made or to be made by the Trustees or to see to the application
of any payments made or property transferred to the Trust or upon its order.
Section 4. Termination of Trust or Series or Class. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by vote of at least 66-2/3% of the Shares of each
Series entitled to vote and voting separately by Series or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of at least 66-2/3% of the Shares of that Series or by the Trustees by
written notice to the Shareholders of that Series. Any Class may be separately
terminated at any time by vote of at least a majority of the Shares of that
Class present and voting on the question (a quorum being present) or by the
Trustees by written notice to the Shareholders of that Class.
Upon termination of the Trust (or any Series or Class, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series or allocable to each Class (or
the applicable Series or Classes, as the case may be), whether due or accrued
or anticipated as may be determined by the Trustees, the Trust shall in
accordance with such procedures as the Trustees consider appropriate reduce the
remaining assets belonging, severally, to each Series or allocable to each
Class (or the applicable Series or Classes, as the case may be), to
distributable form in cash or shares or other securities, or any combination
thereof, and distribute the proceeds belonging to each Series or allocable to
each Class (or the applicable Series or Classes, as the case may be), to the
Shareholders of that Series or Class, as a Series or Class, ratably according
to the number of Shares of that Series or Class held by the several
Shareholders on the date of termination.
Section 5. Merger and Consolidation. The Trustees may cause the Trust to be
merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger
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or consolidation or share exchange has been authorized by vote of a majority of
the outstanding Shares; provided that in all respects not governed by statute
or applicable law, the Trustees shall have power to prescribe the procedure
necessary or appropriate to accomplish a sale of assets, merger or
consolidation.
Section 6. Filing of Copies, References, Headings. The original or a copy of
this instrument and of each amendment hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. A copy of this instrument
and of each amendment hereto shall be filed by the Trust with the Secretary of
The Commonwealth of Massachusetts and with any other governmental office where
such filing may from time to time be required. Anyone dealing with the Trust
may rely on a certificate by an officer of the Trust as to whether or not any
such amendments have been made and as to any matters in connection with the
Trust hereunder; and, with the same effect as if it were the original, may rely
on a copy certified by an officer of the Trust to be a copy of this instrument
or of any such amendments. In this instrument and in any such amendment,
references to this instrument, and all expressions like "herein", "hereof" and
"hereunder", shall be deemed to refer to this instrument as amended or affected
by any such amendments. Headings are placed herein for convenience of reference
only and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
Section 7. Applicable Law. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
Section 8. Amendments. This Declaration of Trust may be amended at any time by
an instrument in writing signed by a majority of the then Trustees when
authorized so to do by vote of a majority of the Shares entitled to vote,
except that amendments described in Article III, Section 5 hereof or having the
purpose of changing the name of the Trust or of supplying any omission, curing
any ambiguity or curing, correcting or supplementing any defective or
inconsistent provision contained herein shall not require authorization by
Shareholder vote.
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IN WITNESS WHEREOF, all of the Trustees as aforesaid do hereto set
their hands this ____ day of ____________, 1997.
--------------------------
R. Jeremy Grantham
--------------------------
Jay O. Light
--------------------------
Harvey R. Margolis
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EXHIBIT 3.6
GMO TRUST
Plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940
- -------------------------------------
Effective June 1, 1996
This Plan (the "Plan") is adopted by GMO Trust (the "Trust") pursuant
to Rule 18f-3 under the Investment Company Act of 1940 (the "Act") and sets
forth the general characteristics of, and the general conditions under which
the Trust may offer, multiple classes of shares of its now existing and
hereafter created portfolios ("Funds"). This Plan may be revised or amended
from time to time as provided below.
CLASS DESIGNATIONS
Each Fund of the Trust may from time to time issue one or more of the
following classes of shares: Class I Shares, Class II Shares, Class III Shares,
Class IV Shares, Class V Shares and Class VI Shares. Each of the classes of
shares of any Fund will represent interests in the same portfolio of
investments and, except as described herein, shall have the same rights and
obligations as each other class. Each class shall be subject to such investment
minimums and other conditions of eligibility as are set forth in the Trust's
prospectus or statement of additional information as from time to time in
effect (the "Prospectus").
CLASS ELIGIBILITY
Class eligibility is generally dependent on the size of the client's
total account under the management of Grantham, Mayo, Van Otterloo & Co., the
Trust's investment adviser (referred to herein as "GMO" or the "Adviser"), as
described from time to time in the Prospectus. Eligibility for Class I, Class
II and Class III Shares in dependent on the size of a client's minimum "Total
Investment" with GMO. For clients that have accounts with GMO as of May 31,
1996, their initial Total Investment will equal the market value of all of
their investments advised by GMO as of the close of business on May 31, 1996.
For clients establishing a relationship with GMO on or after June 1, 1996,
their Total Investment at any date is equal to the aggregate of all amounts
contributed (and less amounts withdrawn) to any Fund on or after June 1, 1996,
plus the market value of any non-mutual fund investment with GMO as of the
month-end prior to the date that "Total Investment" is being computed. For
purposes of class eligibility, market appreciation or depreciation of a Fund's
account is not considered; the Total Investment of a client is impacted only by
the amount of contributions to and withdrawals from Funds made by the client.
It is assumed that any Fund redemptions or withdrawals made by a client are
satisfied first from market appreciation in their shares, so that a redemption
or withdrawal does not lower a client's Total Investment unless the
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redemption or withdrawal exceeds the value of market appreciation. Market value
of non- mutual fund accounts at GMO will be considered, however.
Eligibility for Class IV, Class V and Class VI Shares is dependent
upon the client meeting either (i) a minimum "Total Fund Investment"
requirement which includes only a client's total investment in the particular
Fund, or (ii) a minimum "Total Investment" requirement (calculated as described
above for Class I, II and III shares). A client's Total Fund Investment and
Total Investment will be determined similarly to the determination of Total
Investment for purposes of eligibility for Class I, Class II and Class III
Shares, i.e., appreciation and depreciation of mutual fund shares is not
considered but these two calculations do include the market value of all such
accounts as of May 31, 1996, and the market value of non-mutual fund accounts
as of the month-end prior to determination.
CLASS CHARACTERISTICS
The differences among the various classes of shares are solely (i) the
level of shareholder service fee ("Shareholder Service Fee") borne by the class
for client and shareholder service, reporting and other support, and (ii)
whether GMO itself or the GMO Funds Division provides service and reporting to
the shareholders.
The multiple class structure reflects the fact that, as the size of
the client relationship increases, the cost to service that relationship is
expected to decrease as a percentage of the account. Thus, the Shareholder
Service Fee is lower for classes for which eligibility criteria generally
require greater assets under GMO's management.
Certain Funds are subject to either an initial purchase premium, a
redemption fee, or both. The initial purchase premium and redemption fee, if
any, may, in some limited cases, be subject to reduction or waiver if the
Adviser determines that there are minimal brokerage and/or transaction costs
incurred as a result of the purchase or redemption, as set forth in the
Prospectus in effect from time to time.1
- ----------------------------
1 All purchase premiums are paid to and retained by the relevant Fund
and are intended to cover the brokerage and other costs associated with putting
an investment to work in the relevant markets. All redemption fees are paid to
and retained by the relevant Fund and are designed to allocate transaction
costs caused by shareholder activity to the shareholder generating the
activity.
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ALLOCATIONS TO EACH CLASS
EXPENSE ALLOCATIONS
Shareholder Service Fees payable by the Trust to the shareholder
servicer of the Trust's shares (the "Shareholder Servicer") shall be allocated,
to the extent practicable, on a class-by-class basis. Subject to the approval
of the Trust's Board of Trustees, including a majority of the independent
Trustees, the following "Class Expenses" may (if such expense is properly
assessable at the class level) in the future be allocated on a class-by-class
basis: (a) transfer agency costs attributable to each class, (b) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxy statements to current shareholders
of a specific Class, (c) SEC registration fees incurred with respect to a
specific class, (d) blue sky and foreign registration fees and expenses
incurred with respect to a specific class, (e) the expenses of administrative
personnel and services required to support shareholders of a specific class
(including, but not limited to, maintaining telephone lines and personnel to
answer shareholder inquiries about their accounts or about the Trust), (f)
litigation and other legal expenses relating to a specific class of shares, (g)
Trustees' fees or expenses incurred as a result of issues relating to a
specific class of shares, (h) accounting and consulting expenses relating to a
specific class of shares, (i) any fees imposed pursuant to a non-Rule 12b-1
shareholder service plan that relate to a specific class of shares, and (j) any
additional expenses, not including advisory or custodial fees or other expenses
related to the management of the Trust's assets, if these expenses are actually
incurred in a different amount with respect to a class, or if services are
provided with respect to a class, or if services are provided with respect to a
class that are of a different kind or to a different degree than with respect
to one or more other classes.
All expenses not now or hereafter designated as Class Expenses ("Fund
Expenses") will be allocated to each class on the basis of the net asset value
of that class in relation to the net asset value of the relevant Fund.
However, notwithstanding the above, a Fund may allocate all expenses
other than Class Expenses on the basis of relative net assets (settled shares),
as permitted by rule 18f-3(c)(2) under the Act.
WAIVERS AND REIMBURSEMENTS
The Adviser and the Shareholder Servicer may choose to waive or
reimburse Shareholder Service Fees, or any other Class Expenses on a voluntary
or temporary basis.
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INCOME, GAINS AND LOSSES
Income and realized and unrealized capital gains and losses shall be
allocated to each class on the basis of the net asset value of that class in
relation to the net asset value of the relevant Fund.
Each Fund may allocate income and realized and unrealized capital
gains and losses to each share based on relative net assets (i.e. settled
shares), as permitted by Rule 18f-3(c)(2) under the Act.
CONVERSION AND EXCHANGE FEATURES
On July 31 of each year (the "Conversion Date") each client's Total
Investment, as previously defined and as described in the Prospectus, will be
determined. Based on that determination, the client's shares will be
automatically converted to the class of shares (Class I, Class II or Class III
Shares) of such Fund with the lowest Shareholder Service Fee which the client
would be eligible to purchase based on such Total Investment. Further, if a
client makes an investment in a GMO Fund or other product that causes the
client to be eligible for a new class of shares, such conversion will be
effected within 15 days after the end of the month during which such investment
was made. The rules for conversion to and among Class IV, Class V and Class VI
Shares are the same, with determinations of a client's Total Fund Investment
and Total Investment made according to the same schedule, as described in the
Prospectus.
Shares of one class will always convert into shares of another class
on the basis of the relative net asset value of the two classes, without the
imposition of any sales load, fee or other charge. The conversion of a client's
investment from one class of shares to another is not a taxable event, and will
not result in the realization of gain or loss that may exist in Fund shares
held by the client. The client's tax basis in the new class of shares will
equal their basis in the old class before conversion. The conversion of shares
from one class to another class of shares may be suspended if the opinion of
counsel obtained by the Trust that the conversion does not constitute a taxable
event under current federal income tax law is no longer available.
Certain special rules will be applied by the Adviser with respect to
clients who owned shares of the Funds upon the creation of multiple classes on
May 31, 1996. First, all clients existing on May 31, 1996 will receive Class
III Shares on June 1, 1996 regardless of the size of their GMO investment.
Second, the conversion of existing clients to any class of shares with a higher
Shareholder Service Fee will not occur until July 31, 1997, based on the
client's Total Investment as of such date. Further, existing 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 (despite the normal $35 million
minimum), provided such client makes no subsequent redemptions or withdrawals
other than of amounts attributable to market appreciation of their account
value as of June 1, 1996. Existing clients whose Total Investment as of May 31,
1996
-23-
is less than $7 million but greater than $0 will be eligible to convert to
Class II Shares rather than Class I Shares on July 31, 1997, provided that such
client makes no subsequent redemptions or withdrawals other than of amounts
attributable to market appreciation of their account value as of June 1, 1996.
Clients making additional investments prior to June 1, 1997, such that their
Total Investment on June 1, 1997 is $35 million or more, will remain eligible
for Class III Shares.
DIVIDENDS
Dividends paid by the Trust with respect to its Class I, Class II,
Class III, Class IV, Class V and Class VI Shares, to the extent any dividends
are paid, will be calculated in the same manner, at the same time and will be
in the same amount, except that any Service Fee payments relating to a class of
shares will be borne exclusively by that class and, if applicable, Class
Expenses relating to a class shall be borne exclusively by that class.
VOTING RIGHTS
Each share of the Trust entitles the shareholder of record to one
vote. Each class of shares of the Trust will vote separately as a class on
matters for which class voting is required under applicable law.
RESPONSIBILITIES OF THE TRUSTEES
On an ongoing basis, the Trustees will monitor the Trust for the
existence of any material conflicts among the interests of the six classes of
shares. The Trustees shall further monitor on an ongoing basis the use of
waivers or reimbursement of expenses by the Adviser to guard against
cross-subsidization between classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop.
REPORTS TO THE TRUSTEES
The Adviser and the Shareholder Servicer will be responsible for
reporting any potential or existing conflicts among the six classes of shares
to the Trustees.
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AMENDMENTS
The Plan may be amended from time to time in accordance with the
provisions and requirements of Rule 18f-3 under the Act.
Adopted this ____ day of ___________, 1996
By:________________________
William R. Royer
Clerk
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SCHEDULE 3.6
SERIES
- ------
GMO Core Fund
GMO Tobacco-Free Core Fund
GMO Value Fund
GMO Growth Fund
GMO U.S. Sector Fund
GMO Small Cap Value Fund
GMO Fundamental Value Fund
GMO REIT Fund
GMO Small Cap Growth Fund
GMO International Core Fund
GMO Currency Hedged International Core Fund
GMO Foreign Fund
GMO U.S. Bond/Global Alpha Fund
GMO International Small Companies Fund
GMO Japan Fund
GMO Emerging Markets Fund
GMO Global Properties Fund
GMO Short-Term Income Fund
GMO Global Hedged Equity Fund
GMO Domestic Bond Fund
GMO International Bond Fund
GMO Currency Hedged International Bond Fund
GMO Global Bond Fund
GMO Emerging Country Debt Fund
GMO Inflation Indexed Bond Fund
GMO International Equity Allocation Fund
GMO World Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO Global Balanced Allocation Fund Pelican Fund
-26-
EXHIBIT 2
AMENDED AND RESTATED BY-LAWS
OF
GMO TRUST
ARTICLE 1
Agreement and Declaration
of Trust and Principal Office
1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to the
Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of GMO Trust (the "Trust"), the Massachusetts business
trust established by the Declaration of Trust.
1.2 Principal Office of the Trust. The principal office of the Trust shall be
located in Boston, Massachusetts.
ARTICLE 2
Meetings of Trustees
2.1 Regular Meetings. Regular meetings of the Trustees may be held without call
or notice at such places and at such times as the Trustees may from time to time
determine, provided that notice of the first regular meeting following any such
determination shall be given to absent Trustees.
2.2 Special Meetings. Special meetings of the Trustees may be held, at any time
and at any place designated in the call of the meeting, when called by the
Chairman of the Board, if any, the President-Domestic or the Treasurer or by two
or more Trustees, sufficient notice thereof being given to each Trustee by the
Clerk or an Assistant Clerk or by the officer or the Trustees calling the
meeting.
2.3 Notice. It shall be sufficient notice to a Trustee of a special meeting to
send notice by mail at least forty-eight hours or by telegram at least
twenty-four hours before the meeting addressed to the Trustee at his usual or
last known business or residence address or to give notice to him in person or
by telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any Trustee if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement
the lack of notice to him. Neither notice of a meeting nor a waiver of a notice
need specify the purposes of the meeting.
2.4 Quorum. At any meeting of the Trustees a majority of the Trustees then in
office shall constitute a quorum. Any meeting may be adjourned from time to time
by a majority of the votes cast upon the question, whether or not a quorum is
present, and the meeting may be held as adjourned without further notice.
2.5 Action by Vote. When a quorum is present at any meeting, a majority of
Trustees present may take any action, except when a larger vote is expressly
required by law, by the Declaration of Trust or by these By-Laws.
2.6 Action by Writing. Except as required by law, any action required or
permitted to be taken at any meeting of the Trustees may be taken without a
meeting if a majority of the Trustees (or such larger proportion thereof as
shall be required by any express provision of the Declaration of Trust or these
By-Laws) consent to the action in writing and such written consents are filed
with the records of the meetings of Trustees. Such consent shall be treated for
all purposes as a vote taken at a meeting of Trustees.
2.7 Presence through Communications Equipment. Except as required by law, the
Trustees may participate in a meeting of Trustees by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting.
ARTICLE 3
Officers
3.1 Enumeration; Qualification. The officers of the Trust shall be a
President-Domestic, a President-International, a Treasurer, a Clerk, and such
other officers, if any, as the Trustees from time to time may in their
discretion elect. The Trust may also have such agents as the Trustees from time
to time may in their discretion appoint. If a Chairman of the Board is elected,
he shall be a Trustee and may but need not be a Shareholder; and any other
officer may be but none need be a Trustee or Shareholder. Any two or more
offices may be held by the same person.
3.2 Election and Tenure. The President-Domestic, the President-International,
the Treasurer, the Clerk and such other officers as the Trustees may in their
discretion from time to time elect shall each be elected by the Trustees to
serve until his successor is elected or qualified, or until he sooner dies,
resigns, is removed or becomes disqualified. Each officer shall hold office and
each agent shall retain authority at the pleasure of the Trustees.
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3.3 Powers. Subject to the other provisions of these By-Laws, in addition to the
duties and powers set forth herein and in the Declaration of Trust and in
addition to such duties and powers as may be determined by the Trustees, the
President-Domestic shall have such duties and powers with respect to the GMO
Core Fund, the GMO Growth Fund, the GMO Value Fund, the GMO Small Cap Growth
Fund, the GMO Fundamental Value Fund, the GMO Tobacco-Free Core Fund, the
Pelican Fund, the GMO Short-Term Income Fund, the GMO U.S. Sector Fund, the GMO
Small Cap Value Fund, the GMO Inflation Indexed Bond Fund, the GMO REIT Fund,
the GMO Global (U.S.+) Equity Allocation Fund and the GMO Domestic Bond Fund of
the Trust as are commonly incident to the President of a Massachusetts business
corporation as if each such Fund were organized as a separate Massachusetts
business corporation; the President-International shall have such duties and
powers with respect to the GMO International Core Fund, the GMO International
Small Companies Fund, the GMO International Bond Fund, the GMO Currency Hedged
International Bond Fund, the GMO Global Bond Fund, the GMO Japan Fund, the GMO
Emerging Markets Fund, the GMO Global Properties Fund, the GMO Currency Hedged
International Core Fund, the GMO Foreign Fund, the GMO Emerging Country Debt
Fund, the GMO Global Hedged Equity Fund, the GMO International Equity Allocation
Fund, the GMO World Equity Allocation Fund, the GMO Global Balanced Allocation
Fund and the GMO U.S. Bond/Global Alpha Fund as are commonly incident to the
president of a Massachusetts business corporation as if each such Fund were
organized as a separate Massachusetts business corporation; and each other
officer shall have such duties and powers as are commonly incident to the office
occupied by him or her as if the Trust were organized as a Massachusetts
business corporation. Notwithstanding any powers granted to the
President-International, to the extent required in the particular circumstances,
the President-Domestic shall have such powers with respect to the Trust as a
whole as are commonly incident to the president of a Massachusetts business
corporation as if the Trust were organized as a Massachusetts business
corporation.
3.4 Presidents and Vice Presidents. The President-Domestic and the President-
International shall each have the duties and powers specified in these By-Laws
and shall have such other duties and powers as may be determined by the
Trustees.
Any Vice Presidents shall have such duties and powers as shall be designated
from time to time by the Trustees.
3.5 Chief Executive Officer. The Chief Executive Officer of the Trust shall be
the Chairman of the Board, if any, the President-Domestic or such other officer
as is designated by the Trustees and shall, subject to the control of the
Trustees, have general charge and supervision of the business of the Trust and,
unless there is a Chairman of the Board, or except as the Trustees (or the
Chairman of the Board if the Trustees do not act) shall otherwise determine,
preside at all meetings of the stockholders and of the Trustees. If no such
designation is made, the President-Domestic shall be the Chief Executive
Officer.
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3.6 Chairman of the Board. If a Chairman of the Board of Trustees is elected, he
shall have the duties and powers specified in these By-Laws and shall have such
other duties and powers as may be determined by the Trustees. The Chairman of
the Board shall, unless the Trustees (or the Chairman of the Board if the
Trustees do not act) shall otherwise determine, preside at all meetings of the
stockholders and of the Trustees.
3.7 Treasurer. The Treasurer shall be the chief financial and accounting officer
of the Trust, and shall, subject to the provisions of the Declaration of Trust
and to any arrangement made by the Trustees with a custodian, investment adviser
or manager or transfer, shareholder servicing or similar agent, be in charge of
the valuable papers, books of account and accounting records of the Trust, and
shall have such other duties and powers as may be designated from time to time
by the Trustees or by the Chief Executive Officer.
3.8 Clerk. The Clerk shall record all proceedings of the Shareholders and the
Trustees in books to be kept therefor, which books or a copy thereof shall be
kept at the principal office of the Trust. In the absence of the Clerk from any
meeting of the Shareholders or Trustees, an assistant Clerk, or if there be none
or if he is absent, a temporary clerk chosen at such meeting shall record the
proceedings thereof in the aforesaid books.
3.9 Resignations and Removals. Any officer may resign at any time by written
instrument signed by him and delivered to the President-Domestic or the Clerk or
to a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. The Trustees may remove any
officer with or without cause. Except to the extent expressly provided in a
written agreement with the Trust, no officer resigning and no officer removed
shall have any right to any compensation for any period following his
resignation or removal, or any right to damages on account of such removal.
ARTICLE 4
Indemnification
4.1 Trustees, Officers, etc. The Trust shall indemnify each of its Trustees and
officers (including persons who serve at the Trust's request as directors,
officers or trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceedings, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of any alleged act or
omission as a Trustee or officer or by reason
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of his being or having been such a Trustee or officer, except with respect to
any matter as to which such Covered Person shall have been finally adjudicated
in any such action, suit or other proceeding not to have acted in good faith in
the reasonable belief that such Covered Person's action was in the best interest
of the Trust and except that no Covered Person shall be indemnified against any
liability to the Trust or its Shareholders to which such Covered Person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office. Expenses, including counsel fees so incurred by any
such Covered Person, may be paid from time to time by the Trust in advance of
the final disposition of any such action, suit or proceeding on the condition
that the amounts so paid shall be repaid to the Trust if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article.
4.2 Compromise Payment. As to any matter disposed of by a compromise payment by
any such Covered Person referred to in Section 4.1 above, pursuant to a consent
decree or otherwise, no such indemnification either for said payment or for any
other expenses shall be provided unless such compromise shall be approved as in
the best interests of the Trust, after notice that it involved such
indemnification, (a) by a disinterested majority of the Trustees then in office;
or (b) by a majority of the disinterested Trustees then in office; or (c) by any
disinterested person or persons to whom the question may be referred by the
Trustees, provided that in the case of approval pursuant to clause (b) or (c)
there has been obtained an opinion in writing of independent legal counsel to
the effect that such Covered Person appears to have acted in good faith in the
reasonable belief that his or her action was in the best interests of the Trust
and that such indemnification would not protect such person against any
liability to the Trust or its Shareholders to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of office; or (d) by
vote of Shareholders holding a majority of the Shares entitled to vote thereon,
exclusive of any Shares beneficially owned by any interested Covered Person.
Approval by the Trustees pursuant to clause (a) or (b) or by any disinterested
person or persons pursuant to clause (c) of this Section shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in
the best interests of the Trust or to have been liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
4.3 Indemnification Not Exclusive. The right of indemnification hereby provided
shall not be exclusive of or affect any other rights to which any such Covered
Person may be entitled. As used in this Article 4, the term "Covered Person"
shall include such person's heirs, executors and administrators; an "interested
Covered Person" is one against whom the action, suit or other proceeding in
question or another action, suit or other proceeding
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on the same or similar grounds is then or has been pending; and a "disinterested
Trustee" or "disinterested person" is a Trustee or a person against whom none of
such actions, suits or other proceedings or another action, suit or other
proceeding on the same or similar grounds is then or has been pending. Nothing
contained in this Article shall affect any rights to indemnification to which
personnel of the Trust, other than Trustees and officers, and other persons may
be entitled by contract or otherwise under law, nor the power of the Trust to
purchase and maintain liability insurance on behalf of any such person.
ARTICLE 5
5.1 General. The Trustees and officers shall render reports at the time and in
the manner required by the Declaration of Trust or any applicable law. Officers
shall render such additional reports as they may deem desirable or as may from
time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1 General. Except as from time to time otherwise provided by the Trustees, the
initial fiscal year of the Trust shall end on such date as is determined in
advance or in arrears.
ARTICLE 7
Seal
7.1 General. The seal of the Trust shall consist of a flat-faced die with the
word "Massachusetts", together with the name of the Trust and the year of its
organization cut or engraved thereon, but, unless otherwise required by the
Trustees, the seal shall not be necessary to be placed on, and its absence shall
not impair the validity of, any document, instrument or other paper executed and
delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 General. Except as the Trustees may generally or in particular cases
authorize the execution thereof in some other manner, all checks, notes, drafts
and other obligations and all registration statements and amendments thereto and
all applications and amendments thereto to the Securities and Exchange
Commission shall be signed by the Chairman, if any, the President-Domestic, the
President-International, any Vice President or the Treasurer or any of such
other officers or agents as shall be designated for that purpose by a vote of
the Trustees.
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ARTICLE 9
Provisions Relating to the
Conduct of the Trust's Business
9.1 Certain Definitions. When used herein the following words shall have the
following meanings: "Distributor" shall mean any one or more partnerships,
corporations, firms or associations which have distributor's or principal
underwriter's contracts in effect with the Trust providing that redeemable
shares of any class or series issued by the Trust shall be offered and sold by
such Distributor. "Adviser" shall mean any partnership, corporation, firm or
association which may at the time have an advisory or management contract with
the Trust.
9.2 Limitation on Dealings with Officers or Trustees. The Trust will not lend
any of its assets to the Distributor or Adviser or to any officer or director of
the Distributor or Adviser or any officer or Trustee of the Trust and shall not
permit any officer or Trustee or any officer or director of the Distributor or
Adviser, to deal for or on behalf of the Trust with himself as principal or
agent, or with any partnership, association or corporation in which he has a
financial interest; provided that the foregoing provisions shall not prevent (a)
officers and Trustees of the Trust or officers and directors of the Distributor
or Adviser from buying, holding or selling shares in the Trust or from being
partners, officers or directors of or otherwise financially interested in the
Distributor or the Adviser; (b) a purchase or sale of securities or other
property if such transaction is permitted by or is exempt or exempted from the
provisions of the Investment Company Act of 1940 and does not involve any
commission or profit to any securities dealer who is, or one or more of whose
partners, shareholders, officers or directors is, an officer or Trustee of the
Trust or an officer or director of the Distributor or Adviser; (c) employment of
legal counsel, registrars, transfer agents, shareholder servicing agents,
dividend disbursing agents or custodians who are or any one of which has a
partner, shareholder, officer or director who is, an officer or Trustee of the
Trust or an officer or director of the Distributor or Adviser if only customary
fees are charged for services to the Trust; (d) sharing of statistical,
research, legal and management expenses and office hire and expenses with any
other investment company in which an officer or Trustee of the Trust or an
officer or director of the Distributor or Adviser is an officer or director or
otherwise financially interested.
9.3 Limitation on Dealing in Securities of the Trust by Certain Officers,
Trustees, Distributor or Adviser. Neither the Distributor nor Adviser, nor any
officer or Trustee of the Trust or officer, director or partner of the
Distributor or Adviser shall take long or short positions in securities issued
by the Trust; provided, however, that:
(a) The Distributor may purchase from the Trust and otherwise deal in
shares issued by the Trust pursuant to the terms of its contract with the Trust;
-7-
(b) Any officer or Trustee of the Trust or officer or director or
partner of the Distributor or Adviser or any trustee or fiduciary for the
benefit of any of them may at any time, or from time to time, purchase from the
Trust or from the Distributor shares issued by the Trust at the price available
to the public or to such officer, Trustee, director, partner or fiduciary, no
such purchase to be in contravention of any applicable state or federal
requirement; and
(c) The Distributor or the Adviser may at any time, or from time to
time, purchase for investment shares issued by the Trust.
9.4 Securities and Cash of the Trust to be Held by Custodian Subject to Certain
Terms and Conditions.
(a) All securities and cash owned by the Trust shall, as hereinafter
provided, be held by or deposited with one or more banks or trust companies
having (according to its last published report) not less than $2,000,000
aggregate capital, surplus and undivided profits (any such bank or trust company
being hereby designated as "Custodian"), provided such a Custodian can be found
ready and willing to act. The Trust may, or may permit any Custodian to, deposit
all or any part of the securities owned by any class or series of shares of the
Trust in a system for the central handling of securities established by a
national securities exchange or national securities association registered with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, or such other person as may be permitted by said Commission, including,
without limitation, a clearing agency registered under Section 17A of said
Securities Exchange Act of 1934, pursuant to which system all securities of any
particular class or series of any issue deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry, without
physical delivery of such securities.
(b) The Trust shall enter into a written contract with each Custodian
regarding the powers, duties and compensation of such Custodian with respect to
the cash and securities of the Trust held by such Custodian. Said contract and
all amendments thereto shall be approved by the Trustees.
(c) The Trust shall upon the resignation or inability to serve of any
Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve, use its
best efforts to obtain a successor Custodian;
(ii) require that the cash and securities owned by any class
or series of shares of the Trust and in the possession of the resigning or
disqualified Custodian be delivered directly to the successor Custodian; and
-8-
(iii) in the event that no successor Custodian can be found,
submit to the shareholders, before permitting delivery of the cash and
securities owned by any class or series of shares of the Trust and in the
possession of the resigning or disqualified Custodian otherwise than to a
successor Custodian, the question whether that class or series shall be
liquidated or shall function without a Custodian.
9.5 Determination of Net Asset Value. The Trustees or any officer or officers or
agent or agents of the Trust designated from time to time for this purpose by
the Trustees shall determine at least once daily the net income and the value of
all the assets attributable to any class or series of shares of the Trust on
each day upon which the New York Stock Exchange is open for unrestricted trading
or at such other times as the Trustees shall, consistent with the 1940 Act and
the rules of the Commission, designate. In determining asset values, all
securities for which representative market quotations are readily available
shall be valued at market value and other securities and assets shall be valued
at fair value, all as determined in good faith by the Trustees or an officer or
officers or agent or agents, as aforesaid, in accordance with accounting
principles generally accepted at the time. Notwithstanding the foregoing, the
assets belonging to any class or series of shares of the Trust may, if so
authorized by the Trustees, be valued in accordance with the amortized cost
method, subject to the power of the Trustees to alter the method for determining
asset values. The value of such assets so determined, less total liabilities
belonging to that class or series of shares (exclusive of capital stock and
surplus) shall be the net asset value until a new asset value is determined by
the Trustees or such officers or agents. In determining the net asset value the
Trustees or such officers or agents may include in liabilities such reserves for
taxes, estimated accrued expenses and contingencies in accordance with
accounting principles generally accepted at the time as the Trustees or such
officers or agents may in their best judgment deem fair and reasonable under the
circumstances. The manner of determining net asset value may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
it to any other method prescribed or permitted by applicable law or regulation.
Determinations of net asset value made by the Trustees or such officers or
agents in good faith shall be binding on all parties concerned. The foregoing
sentence shall not be construed to protect any Trustee, officer or agent of the
Trust against any liability to the Trust or its security holders 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.
ARTICLE 10
Amendment to the By-Laws
10.1 General. These By-Laws may be amended or repealed, in whole or in part, by
a majority of the Trustees then in office at any meeting of the Trustees.
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ARTICLE 11
Meetings of Shareholders
11.1 Presence through Communications Equipment. Except as required by law, the
Shareholders of the Trust may participate in a meeting of Shareholders by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other at the same time
and participation by such means shall constitute presence in person at a
meeting. Participation by such means shall be pursuant to reasonable procedures
approved by the officers of the Trust in connection with such meeting.
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EXHIBIT 5
MANAGEMENT CONTRACT
-------------------
Management Contract executed as of April __, 1997 between GMO TRUST, a
Massachusetts business trust (the "Trust") on behalf of its GMO U.S. Bond/Global
Alpha Fund (the "Fund"), and GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC, a
Massachusetts limited liability company (the "Manager").
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Trust and to
such policies as the Trustees may determine, the Manager will, at its expense,
(i) furnish continuously an investment program for the Fund and will make
investment decisions on behalf of the Fund and place all orders for the purchase
and sale of its portfolio securities and (ii) furnish office space and
equipment, provide bookkeeping and clerical services (excluding determination of
net asset value, shareholder accounting services and the fund accounting
services for the Fund being supplied by Investors Bank & Trust Company) and pay
all salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and By-laws
of the Trust and the Fund's stated investment objective, policies and
restrictions.
(b) In placing orders for the portfolio transactions of the 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. In using its best efforts to obtain for
the Fund the most favorable price and execution available, the Manager shall
consider all factors it deems relevant, 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 financial strength and stability of the
broker. Subject to such policies as the Trustees may determine, the Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Contract or otherwise solely by reason of its having caused a
Fund to pay a broker or dealer that provides brokerage and research services 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, if the Manager determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Manager's overall
responsibilities with respect to the Trust and to other clients of the Manager
as to which the Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to pay any
expenses of or for the Trust or of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any person
controlled by or under common control with the Manager, and that the Manager and
any person controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and persons
controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's
services rendered, for the facilities furnished and for the expenses borne by
the Manager pursuant to Section 1, a fee, computed and paid monthly at the
annual rate of 0.40% of the Fund's average daily net asset value. Such average
daily net asset value of the Fund shall be determined by taking an average of
all of the determinations of such net asset value during such month at the close
of business on each business day during such month while this Contract is in
effect. Such fee shall be payable for each month within five (5) business days
after the end of such month.
In the event that expenses of the Fund for any fiscal year should
exceed the expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of the Trust
are qualified for offer and sale, the compensation due the Manager for such
fiscal year shall be reduced by the amount of such excess by a reduction or
refund thereof. In the event that the expenses of the Fund exceed any expense
limitation which the Manager may, by written notice to the Trust, voluntarily
declare to be effective with respect to the Fund, subject to such terms and
conditions as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the Fund's
expenses to the extent required by such expense limitation.
-2-
If the Manager shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS
CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4)
until terminated as follows:
(a) Either party hereto may at any time terminate this Contract by not
more than sixty days' written notice delivered or mailed by registered mail,
postage prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on the second anniversary of
its execution, or upon the expiration of one year from the effective date of the
last such continuance, whichever is later; provided, however, that if the
continuance of this Contract is submitted to the shareholders of the Fund for
their approval and such shareholders fail to approve such continuance of this
Contract as provided herein, the Manager may continue to serve hereunder in a
manner consistent with the Investment Company Act of 1940 and the rules and
regulations thereunder.
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
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6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of the Fund means the affirmative vote, at a duly
called and held meeting of shareholders, (a) of the holders of 67% or more of
the shares of the Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the outstanding shares of the
Fund entitled to vote at such meeting are present in person or by proxy, or (b)
of the holders of more than 50% of the outstanding shares of the Fund entitled
to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and the phrase
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and regulations
thereunder.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, or to
any shareholder of the Trust, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. INITIALS "GMO".
The Manager owns the initials "GMO" which may be used by the Trust only
with the consent of the Manager. The Manager consents to the use by the Trust of
the name "GMO Trust" or any other name embodying the initials "GMO", in such
forms as the Manager shall in writing approve, but only on condition and so long
as (i) this Contract shall remain in full force and (ii) the Trust shall fully
perform, fulfill and comply with all provisions of this Contract expressed
herein to be performed, fulfilled or complied with by it. No such name shall be
used by the Trust at any time or in any place or for any purposes or under any
conditions except as in this section provided. The foregoing authorization by
the Manager to the Trust to use said initials as part of a business or name is
not exclusive of the right of the Manager itself to use, or to authorize others
to use, the same; the Trust acknowledges and agrees that as between the Manager
and the Trust, the Manager has the exclusive right so to authorize others to use
the same; the Trust acknowledges and agrees that as between the Manager and the
Trust, the Manager has the exclusive right so to use, or authorize others to
use, said initials and the Trust agrees to take such action as may reasonably be
requested by the Manager to give full effect to the provisions of this section
(including, without limitation, consenting to such use of said initials).
Without limiting the generality of the foregoing, the Trust agrees that, upon
any termination of this Contract by either party or upon the violation
-5-
of any of its provisions by the Trust, the Trust will, at the request of the
Manager made within six months after the Manager has knowledge of such
termination or violation, use its best efforts to change the name of the Trust
so as to eliminate all reference, if any, to the initials "GMO" and will not
thereafter transact any business in a name containing the initials "GMO" in any
form or combination whatsoever, or designate itself as the same entity as or
successor to an entity of such name, or otherwise use the initials "GMO" or any
other reference to the Manager. Such covenants on the part of the Trust shall be
binding upon it, its trustees, officers, stockholders, creditors and all other
persons claiming under or through it.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
-6-
IN WITNESS WHEREOF, GMO TRUST and GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC have each caused this instrument to be signed in duplicate on
its behalf by its duly authorized representative, all as of the day and year
first above written.
GMO TRUST
By_______________________________________
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By_______________________________________
Title:
-7-
EXHIBIT 8
April ___, 1997
Investors Bank & Trust Company
Financial Product Services
One Lincoln Plaza
Boston, MA 02205-1537
Re: Custodian Agreement dated August 1, 1991 by and among
GMO Trust, Grantham, Mayo, Van Otterloo & Co. LLC
and Investors Bank & Trust Company
-----------------------------------------------------
Ladies and Gentlemen:
GMO Trust (the "Trust") hereby notifies you that it has amended an
existing series of the Trust, namely, the GMO Global Fund, which will become the
"GMO U.S. Bond/Global Alpha Fund" (the "New Fund"). The Trust and the Manager
(as defined in the Agreement) desire that you serve as custodian of the assets
of the New Fund under the terms of the Agreement.
If you agree to so serve as custodian for the New Fund, kindly sign and
return to the Trust the enclosed counterpart hereof, whereupon the New Fund
shall be deemed a "Fund" under the Agreement. This letter agreement shall
constitute an amendment to the Agreement and, as such, a binding agreement among
the Trust, the Manager and you in accordance with its terms.
Very truly yours,
GMO TRUST
By__________________________________
Name:
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By__________________________________
Name:
Title:
The foregoing is hereby accepted and agreed.
INVESTORS BANK & TRUST COMPANY
By__________________________________
Name:
Title:
EXHIBIT 9.1
April ___ , 1997
Investors Bank & Trust Company
Financial Product Services
One Lincoln Plaza
Boston, MA 02205-1537
Re: Transfer Agency and Service Agreement dated August 1, 1991
by and among GMO Trust, Grantham, Mayo, Van Otterloo &
Co. LLC and Investors Bank & Trust Co. (the "Agreement")
----------------------------------------------------------
Ladies and Gentlemen:
Pursuant to Article 17 of the Agreement, GMO Trust (the "Company")
hereby notifies you that it has amended an existing series of shares, namely,
the "GMO Global Fund" which will become the "GMO U.S. Bond/Global Alpha Fund"
(the "New Fund"), with respect to which the Company and the manager (as defined
in the Agreement) desire that you serve as transfer agent under the terms of the
Agreement.
If you agree to so serve as transfer agent for the New Fund, kindly
sign and return to the Company the enclosed counterpart hereof, whereupon the
New Fund shall be deemed a "Fund" under the Agreement. This letter agreement
shall constitute an amendment to the Agreement and, as such, a binding agreement
among the Trust, the Manager and you in accordance with its terms.
Very truly yours,
GMO TRUST
By__________________________________
Name:
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By__________________________________
Name:
Title:
The foregoing is hereby accepted and agreed.
INVESTORS BANK & TRUST COMPANY
By__________________________________
Name:
Title:
Exhibit 9.2
DRAFT
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
NOTIFICATION OF FEE WAIVER AND
EXPENSE LIMITATION
------------------
NOTIFICATION made , 1997 by GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC, a Massachusetts general partnership (the "Advisor"), to GMO TRUST, a
Massachusetts business trust (the "Trust").
WITNESSETH:
WHEREAS, the Advisor has organized the Trust to serve primarily as an
investment vehicle for certain large institutional accounts; and
WHEREAS, the Advisor believes it would benefit from a high sales volume
of shares of the Trust in that such a volume would maximize the Advisor's fee as
investment advisor to each series of the Trust constituting a separate
investment portfolio set forth below (each a "Fund" and, collectively, the
"Funds"); and
WHEREAS, the Advisor has agreed to furnish certain services or to bear
the costs thereof so as to enable the Funds to offer competitive returns with
respect to investments in the Funds.
NOW, THEREFORE, pursuant to Section 3 of each Management Contract (each
a "Management Contract") currently in effect between the Advisor and the Trust,
on behalf of each Fund, the Advisor hereby notifies the Trust that the Advisor
shall voluntarily, until further notice, reduce its compensation due under each
Management Contract, and, if necessary, 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 GMO
Emerging Markets Fund, GMO Emerging Country Debt Fund, GMO Global Hedged Equity
Fund and GMO Global Properties Fund, excluding custodial fees; and, in the case
of the International Equity Allocation Fund, World Equity Allocation Fund,
Global (U.S.+) Equity Allocation Fund and Global Balanced Allocation Fund,
excluding expenses indirectly incurred by investment in other Funds of the
Trust), will not exceed the following annual rate of such Fund's average daily
net asset value:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GMO Core Fund 0.33% GMO Foreign Fund 0.60%
GMO Value Fund 0.46% GMO International Small Companies Fund 0.60%
GMO Growth Fund 0.33% GMO Japan Fund 0.54%
GMO U.S. Sector Fund 0.33% GMO Emerging Markets Fund 0.81%
GMO Small Cap Value Fund 0.33% GMO Short-Term Income Fund 0.05%
GMO Fundamental Value Fund 0.60% GMO Global Hedged Equity Fund 0.50%
GMO REIT Fund 0.54% GMO Domestic Bond Fund 0.10%
GMO Small Cap Growth Fund 0.33% GMO International Bond Fund 0.25%
GMO International Core Fund 0.54% GMO U.S. Bond/Global Alpha Fund 0.25%
GMO Currency Hedged International Core Fund 0.54% GMO Currency Hedged International Bond Fund FundFund 0.25%
GMO Emerging Country Debt Fund 0.35% GMO Global Bond Fund 0.19%
GMO Inflation Indexed Bond Fund 0.10% GMO World Equity Allocation Fund 0.00%
GMO International Equity Allocation Fund 0.00% GMO Global (U.S.+) Equity Allocation Fund 0.00%
GMO Global Properties Fund 0.60% GMO Balanced Allocation Fund 0.00%
Pelican Fund 0.95%
</TABLE>
Please be advised that all previous notifications by the Advisor with
respect to expense limitations regarding any of the Funds shall hereafter be
null and void and of no further force and effect.
IN WITNESS WHEREOF, the Advisor has executed this Notification of
Expense Limitation on the day and year first above written.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By:
--------------------------------
Title: Partner
The foregoing is hereby accepted:
GMO TRUST
on behalf of each
Fund named above
By:
-----------------------------------
Title: President-Quantitative
EXHIBIT 9.3
AMENDED AND RESTATED SERVICING AGREEMENT
The Servicing Agreement executed as of May 30, 1996 between GMO TRUST,
a Massachusetts business trust (the "Trust") on behalf of each of its Class I,
Class II, Class III, Class IV, Class V and Class VI (each a "Class" and
collectively the "Classes") Shares (the "Shares") of each Fund listed on Exhibit
I hereto, (collectively, the "Funds"), and GRANTHAM, MAYO, VAN OTTERLOO & CO., a
Massachusetts general partnership (the "Shareholder Servicer"), is hereby
amended and restated on February ___, 1997 by the Trustees:
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY SERVICING AGENT TO THE TRUST.
(a) The Shareholder Servicer will, at its expense, provide direct
client service, maintenance and reporting to shareholders of each Class of
Shares of each Fund set forth on Exhibit 1 hereto, such services and reporting
to 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.
(b) The Shareholder Servicer shall not be obligated under this
agreement to pay any expenses of or for the Trust or of or for the Fund not
expressly assumed by the Shareholder Servicer pursuant to this Section 1.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Shareholder Servicer, and in any
person controlled by or under common control with the Shareholder Servicer, and
that the Shareholder Servicer and any person controlled by or under common
control with the Shareholder Servicer may have an interest in the Trust. It is
also understood that the Shareholder Servicer and persons controlled by or under
common control with the Shareholder Servicer may have advisory, servicing,
distribution or other contracts with other organizations and persons, and may
have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE SERVICING AGENT.
Each Class of Shares of each Fund will pay to the Shareholder Servicer
as compensation for the Shareholder Servicer's services rendered and for the
expenses borne by the Shareholder Servicer with respect to such Class of Shares
of such Fund pursuant to Section 1, a fee, computed and accrued daily, and paid
monthly or at such other intervals as the Trustees shall determine, at the
annual rate of such Class' average daily net asset value set forth on the Fee
Rate Schedule attached as Exhibit II hereto. Such fee shall be payable for each
month (or other interval) within five (5) business days after the end of such
month (or other interval).
If the Servicing Agent shall serve for less than the whole of a month
(or other interval), the foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS
CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; provided, however, in the event of
consolidation or merger in which the Shareholder Servicer is not the surviving
corporation or which results in the acquisition of substantially all the
Shareholder Servicer's outstanding stock by a single person or entity or by a
group of persons and/or entities acting in concert, or in the event of the sale
or transfer of substantially all the Shareholder Servicer's assets, the
Shareholder Servicer may assign any such agreement to such surviving entity,
acquiring entity, assignee or purchaser, as the case may be. This Contract shall
not be amended unless such amendment is approved by the vote, cast in person at
a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Shareholder Servicer.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4)
until terminated as follows:
(a) Either party hereto may at any time terminate this Contract (or
this Contract's application to one or more Classes or Funds) by not more than
sixty days' written notice delivered or mailed by registered mail, postage
prepaid, to the other party, or
(b) If (i) a majority of the Trustees of the Trust, and (ii) a majority
of the Trustees of the Trust who are not interested persons of the Trust or of
the Shareholder Servicer, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on the second anniversary of
its execution, or
-2-
upon the expiration of one year from the effective date of the last such
continuance, whichever is later.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and the phrase
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and regulations
thereunder.
7. NONLIABILITY OF SERVICING AGENT.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Shareholder Servicer, or reckless disregard of its obligations
and duties hereunder, the Shareholder Servicer shall not be subject to any
liability to the Trust, or to any shareholder of the Trust, for any act or
omission in the course of, or connected with, rendering services hereunder.
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
-3-
IN WITNESS WHEREOF, GMO TRUST and GRANTHAM, MAYO, VAN OTTERLOO & CO.
have each caused this instrument to be signed in duplicate on its behalf by its
duly authorized representative, all as of the day and year first above written.
GMO TRUST
By_______________________________________
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO.
By_______________________________________
Title:
-4-
EXHIBIT I
GMO Core Fund
GMO Tobacco-Free Core Fund
GMO Value Fund
GMO Growth Fund
GMO U.S. Sector Fund
GMO Small Cap Value Fund
GMO Fundamental Value Fund
GMO Small Cap Growth Fund
GMO REIT Fund
GMO International Core Fund
GMO Currency Hedged International Core Fund
GMO Foreign Fund
GMO U.S. Bond/Global Alpha Fund
GMO International Small Companies Fund
GMO Japan Fund
GMO Emerging Markets Fund
GMO Global Properties Fund
GMO Domestic Bond Fund
GMO Global Hedged Equity Fund
GMO Short-Term Income Fund
GMO International Bond Fund
GMO Currency Hedged International Bond Fund
GMO Global Bond Fund
GMO Emerging Country Debt Fund
GMO Inflation Indexed Bond Fund
GMO International Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO World Equity Allocation Fund
GMO Global Balanced Allocation Fund
-5-
SERVICE FEE SCHEDULE EXHIBIT II
- -------------------- ----------
CLASS I SHARES
FUND SERVICE FEE
GMO Core Fund 0.28%
GMO Tobacco-Free Core Fund 0.28%
GMO Value Fund 0.28%
GMO Growth Fund 0.28%
GMO U.S. Sector Fund 0.28%
GMO Small Cap Value Fund 0.28%
GMO Fundamental Value Fund 0.28%
GMO Small Cap Growth Fund 0.28%
GMO REIT Fund 0.28%
GMO International Core Fund 0.28%
GMO Currency Hedged International Core Fund 0.28%
GMO Foreign Fund 0.28%
GMO U.S. Bond/Global Alpha Fund 0.28%
GMO International Small Companies Fund 0.28%
GMO Japan Fund 0.28%
GMO Emerging Markets Fund 0.28%
GMO Global Properties Fund 0.28%
GMO Domestic Bond Fund 0.28%
GMO Global Hedged Equity Fund 0.28%
GMO International Bond Fund 0.28%
GMO Currency Hedged International Bond Fund 0.28%
GMO Global Bond Fund 0.28%
GMO Emerging Country Debt Fund 0.28%
GMO Inflation Indexed Bond Fund 0.28%
GMO International Equity Allocation Fund 0.13%
GMO Global (U.S.+) Equity Allocation Fund 0.13%
GMO World Equity Allocation Fund 0.13%
GMO Global Balanced Allocation Fund 0.13%
-6-
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS II SHARES
FUND SERVICE FEE
GMO Core Fund 0.22%
GMO Tobacco-Free Core Fund 0.22%
GMO Value Fund 0.22%
GMO Growth Fund 0.22%
GMO U.S. Sector Fund 0.22%
GMO Small Cap Value Fund 0.22%
GMO Fundamental Value Fund 0.22%
GMO Small Cap Growth Fund 0.22%
GMO REIT Fund 0.22%
GMO International Core Fund 0.22%
GMO Currency Hedged International Core Fund 0.22%
GMO Foreign Fund 0.22%
GMO U.S. Bond/Global Alpha Fund 0.22%
GMO International Small Companies Fund 0.22%
GMO Japan Fund 0.22%
GMO Emerging Markets Fund 0.22%
GMO Global Properties Fund 0.22%
GMO Domestic Bond Fund 0.22%
GMO Global Hedged Equity Fund 0.22%
GMO International Bond Fund 0.22%
GMO Currency Hedged International Bond Fund 0.22%
GMO Global Bond Fund 0.22%
GMO Emerging Country Debt Fund 0.22%
GMO Inflation Indexed Bond Fund 0.22%
GMO International Equity Allocation Fund 0.07%
GMO Global (U.S.+) Equity Allocation Fund 0.07%
GMO World Equity Allocation Fund 0.07%
GMO Global Balanced Allocation Fund 0.07%
-7-
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS III SHARES
FUND SERVICE FEE
GMO Core Fund 0.15%
GMO Tobacco-Free Core Fund 0.15%
GMO Value Fund 0.15%
GMO Growth Fund 0.15%
GMO U.S. Sector Fund 0.15%
GMO Small Cap Value Fund 0.15%
GMO Fundamental Value Fund 0.15%
GMO Small Cap Growth Fund 0.15%
GMO REIT Fund 0.15%
GMO International Core Fund 0.15%
GMO Currency Hedged International Core Fund 0.15%
GMO Foreign Fund 0.15%
GMO U.S. Bond/Global Alpha Fund 0.15%
GMO International Small Companies Fund 0.15%
GMO Japan Fund 0.15%
GMO Emerging Markets Fund 0.15%
GMO Global Properties Fund 0.15%
GMO Domestic Bond Fund 0.15%
GMO Short-Term Income Fund 0.15%
GMO Global Hedged Equity Fund 0.15%
GMO International Bond Fund 0.15%
GMO Currency Hedged International Bond Fund 0.15%
GMO Global Bond Fund 0.15%
GMO Emerging Country Debt Fund 0.15%
GMO Inflation Indexed Bond Fund 0.15%
GMO International Equity Allocation Fund 0.00%
GMO Global (U.S.+) Equity Allocation Fund 0.00%
GMO World Equity Allocation Fund 0.00%
GMO Global Balanced Allocation Fund 0.00%
-8-
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS IV SHARES
FUND SERVICE FEE
- ---- -----------
GMO Core Fund 0.12%
GMO Value Fund 0.12%
GMO Growth Fund 0.12%
GMO U.S. Sector Fund 0.12%
GMO International Core Fund 0.11%
GMO Emerging Markets Fund 0.10%
CLASS V SHARES
FUND SERVICE FEE
- ---- -----------
GMO Core Fund 0.09%
GMO Value Fund 0.09%
GMO Growth Fund 0.09%
GMO U.S. Sector Fund 0.09%
GMO International Core Fund 0.07%
GMO Emerging Markets Fund 0.05%
CLASS VI SHARES
FUND SERVICE FEE
- ---- -----------
GMO Core Fund 0.07%
GMO Value Fund 0.07%
GMO Growth Fund 0.07%
GMO U.S. Sector Fund 0.07%
GMO International Core Fund 0.04%
GMO Emerging Markets Fund 0.02%
-9-
