Filed pursuant to Rule 497(c)
GMO TRUST
GMO TRUST (the "Trust"), 40 Rowes Wharf, Boston, Massachusetts 02110,
is an open-end management investment company offering twenty-nine (29) separate
portfolios with this Prospectus (collectively, the "FUNDS"). The Trust offers
one additional portfolio, the Pelican Fund, pursuant to a separate prospectus.
Each Fund has its own investment objective and strategies. GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO") is the investment manager of all
Funds. The Manager has a Consulting Agreement with Dancing Elephant, Ltd. (the
"Consultant") with respect to management of the GMO Emerging Markets Fund. The
Trust offers "diversified" and "non-diversified" portfolios, as defined in the
Investment Company Act of 1940 (the "1940 Act"). The definition and potential
risks of "non-diversified" portfolios are discussed under "Description and Risks
of Fund Investments -- Diversified and Non-Diversified Portfolios" on page 54. A
TABLE OF CONTENTS APPEARS ON PAGE 6 OF THIS PROSPECTUS. Brief descriptions of
the Funds begin on page 2.
GMO FUNDS
DOMESTIC EQUITY FUNDS INTERNATIONAL EQUITY FUNDS
Core Fund International Core Fund
Tobacco-Free Core Fund Currency Hedged International
Value Fund Core Fund
Growth Fund Foreign Fund
U.S. Sector Fund International Small Companies Fund
Small Cap Value Fund Japan Fund
Small Cap Growth Fund Emerging Markets Fund
Fundamental Value Fund Global Properties Fund
REIT Fund
FIXED INCOME FUNDS ASSET ALLOCATION FUNDS
Domestic Bond Fund International Equity Allocation
U.S. Bond/Global Alpha A Fund Fund
International Bond Fund World Equity Allocation Fund
Currency Hedged International Global (U.S.+) Equity Allocation
Bond Fund Fund
Global Bond Fund Global Balanced Allocation Fund
Emerging Country Debt Fund
Short-Term Income Fund
Global Hedged Equity Fund
Inflation Indexed Bond Fund
MULTIPLE CLASSES
Each Fund (except the Short-Term Income Fund) offers three CLASSES of
shares: CLASS I, CLASS II AND CLASS III. The Short-Term Income Fund offers only
Class III Shares. Eligibility for the classes is generally based on the total
amount of assets that a client has invested with GMO (with Class I requiring the
least total assets and Class III the most), all as described more fully herein.
See "Multiple Classes-- Eligibility for Classes" on page 70.
NOTE: CLASS III SHARES ARE THE CONTINUATION OF THE TRUST'S SINGLE CLASS
OF SHARES THAT EXISTED PRIOR TO JUNE 1, 1996, AND BEAR THE SAME TOTAL OPERATING
EXPENSES AS THAT ORIGINAL CLASS OF SHARES.
The classes differ solely with regard to (i) whether GMO or the GMO
FUNDS Division provides client service and reporting to shareholders of the
class and (ii) the level of SHAREHOLDER SERVICE FEE borne by the class. These
differences are described briefly below and in more detail elsewhere in this
Prospectus. ALL CLASSES OF A FUND HAVE AN INTEREST IN THE SAME UNDERLYING
ASSETS, ARE MANAGED BY GMO, AND PAY THE SAME INVESTMENT MANAGEMENT FEE.
INVESTMENT MANAGER
GMO
Grantham, Mayo, Van Otterloo & Co. LLC
CLIENT SERVICE PROVIDER SHAREHOLDER SERVICE FEE
GMO GMO FUNDS DIVISION The level of Shareholder
Service Fee for each class
Class III Shares Class I and Class II Shares is set forth at the bottom
of the following page and
Tel.: (617) 330-7500 Tel.: (617) 790-5000 described more fully under
Fax: (617) 439-4192 Fax: (617) 439-4290 "Multiple Classes --
Shareholder Service Fees"
on page 70.
This Prospectus concisely describes the information which investors
ought to know before investing. Please read this Prospectus carefully and keep
it for further reference. A Statement of Additional Information dated April 7,
1997, as revised from time to time, is available free of charge by writing to
GMO Funds Division, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling
(617) 790-5000. The Statement, which contains more detailed information about
each Fund, has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated by reference into this Prospectus.
THE EMERGING COUNTRY DEBT FUND MAY INVEST WITHOUT LIMIT, THE
INTERNATIONAL BOND, INFLATION INDEXED BOND, CURRENCY HEDGED INTERNATIONAL BOND
AND U.S. BOND/GLOBAL ALPHA A FUNDS MAY INVEST UP TO 25% OF THEIR NET ASSETS AND
THE DOMESTIC BOND, REIT, CURRENCY HEDGED INTERNATIONAL CORE, GLOBAL PROPERTIES
AND FOREIGN FUNDS MAY INVEST UP TO 5% OF THEIR NET ASSETS IN LOWER- RATED BONDS,
COMMONLY KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A
GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. INVESTORS SHOULD
CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS. PLEASE
SEE "DESCRIPTION AND RISKS OF FUND INVESTMENTS -- LOWER RATED SECURITIES."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS APRIL 7, 1997
GMO MUTUAL FUNDS
The Funds offered by this Prospectus are described briefly below and in
more detail throughout this Prospectus. GMO Mutual Funds can generally be
classified as Domestic Equity Funds, International Equity Funds and Fixed Income
Funds. The Trust also offers four Asset Allocation Funds that invest in varying
amounts in other Funds of the Trust.
DOMESTIC EQUITY FUNDS
The Trust offers the following nine domestic equity portfolios which are
collectively referred to as the "DOMESTIC EQUITY FUNDS."
GMO CORE FUND (the "CORE FUND") is a diversified portfolio that seeks a
total return greater than that of the Standard & Poor's 500 Stock Index (the
"S&P 500") through investment of substantially all of its assets in common
stocks chosen from the Wilshire 5000 Index (the "Wilshire 5000") and primarily
in common stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange (the "Large Cap 1200").
GMO TOBACCO-FREE CORE FUND (the "TOBACCO-FREE CORE FUND") is a diversified
portfolio that seeks a total return greater than that of the S&P 500 through
investment of substantially all of its assets in common stocks chosen from the
Wilshire 5000 and primarily in common stocks chosen from the Large Cap 1200
which are not Tobacco Producing Issuers. A "Tobacco Producing Issuer" is an
issuer which derives more than 10% of its gross revenues from the production of
tobacco-related products.
GMO VALUE FUND (the"VALUE FUND") is a non-diversified portfolio that seeks
a total return greater than that of the S&P 500 through investment of
substantially all of its assets in common stocks chosen from the Wilshire 5000
and primarily in common stocks chosen from the Large Cap 1200. Strong
consideration is given to common stocks whose current prices, in the opinion of
the Manager, do not adequately reflect the on-going business value of the
underlying company.
GMO GROWTH FUND (the "GROWTH FUND") is a non-diversified portfolio that
seeks long-term growth of capital through investment of substantially all of its
assets in common stocks chosen from the Wilshire 5000 and primarily in the
equity securities of companies chosen from the Large Cap 1200. Current income is
only an incidental consideration.
GMO U.S. SECTOR FUND (the "U.S. SECTOR FUND") is a non-diversified
portfolio that seeks a total return greater than that of the S&P 500 through
investment of substantially all of its assets in common stocks chosen from the
Wilshire 5000 and primarily in common stocks chosen from among the 1,800
companies with the largest equity capitalization whose securities are listed on
a United States national securities exchange.
GMO SMALL CAP VALUE FUND (the "SMALL CAP VALUE FUND") (formerly the GMO
Core II Secondaries Fund) is a diversified portfolio that seeks long-term growth
of capital through investment primarily in companies whose equity capitalization
ranks in the lower two-thirds of the 1,800 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange. Current income is only an incidental consideration.
GMO SMALL CAP GROWTH FUND (the "SMALL CAP GROWTH FUND") is a
non-diversified portfolio that seeks long-term growth of capital through
investment primarily in companies whose equity capitalization ranks in the lower
two-thirds of the 1,800 companies with the largest equity capitalization whose
securities are listed on a United States national securities exchange. Current
income is only an incidental consideration.
GMO FUNDAMENTAL VALUE FUND (the "FUNDAMENTAL VALUE FUND") is a diversified
portfolio that seeks long-term capital growth through investment primarily in
equity securities. Consideration of current income is secondary to this
principal objective.
GMO REIT FUND (the "REIT FUND") is a non-diversified portfolio that seeks
maximum total return through investment primarily in real estate investment
trusts ("REITs").
INTERNATIONAL EQUITY FUNDS
The Trust offers the following seven international equity portfolios which
are collectively referred to as the "INTERNATIONAL EQUITY FUNDS."
GMO INTERNATIONAL CORE FUND (the "INTERNATIONAL CORE FUND") is a
diversified portfolio that seeks maximum total return through investment in a
portfolio of common stocks of non-U.S.
issuers.
- --------------------------------------------------------------------------------
CLASSES AND FEES
ALL FUNDS (EXCEPT ELIGIBILITY
ASSET ALLOCATION FUNDS) REQUIREMENT* SHAREHOLDER SERVICE FEE**
- ----------------------- ------------ -------------------------
Class I $1 million 0.28%
Class II $10 million 0.22%
Class III $35 million 0.15%
ASSET ALLOCATION FUNDS ONLY
- ---------------------------
Class I $1 million 0.13%***
Class II $10 million 0.07%***
Class III $35 million 0.00%***
- ---------------------------
* More detailed explanation of eligibility criteria is provided on page 4 and
under "Multiple Classes -- Eligibility for Classes."
** As noted above, all classes of shares of a Fund pay the same investment
management fee.
*** The Asset Allocation Funds will indirectly bear an additional Shareholder
Service Fee of 0.15%. Thus, the total Shareholder Service Fee borne by
Class I, Class II and Class III Shares of the Asset Allocation Funds is the
same as that borne by Class I, Class II or Class III Shares, respectively,
of the other Funds. See "Investment Objectives and Policies -- Asset
Allocation Funds."
-2-
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (THE "CURRENCY HEDGED
INTERNATIONAL CORE FUND") is a non-diversified portfolio that seeks maximum
total return through investment in a portfolio of common stocks of non-U.S.
issuers and through management of the Fund's foreign currency positions. The
Fund has similar policies to the International Core Fund, except that the
Currency Hedged International Core Fund will maintain currency hedges with
respect to a substantial portion of the foreign currency exposure represented in
the Fund's benchmark while the International Core Fund will generally hedge only
a limited portion of the currency exposure of that benchmark.
GMO FOREIGN FUND (the "FOREIGN FUND") is a non-diversified portfolio that
seeks maximum total return through investment in a portfolio of equity
securities of non-U.S. issuers.
GMO INTERNATIONAL SMALL COMPANIES FUND (the "INTERNATIONAL SMALL
COMPANIES FUND") is a diversified portfolio that seeks maximum total return
through investment primarily in equity securities of foreign issuers whose
equity securities are traded on a major stock exchange of a foreign country
("foreign stock exchange companies") and whose equity capitalization at the time
of investment, when aggregated with the equity capitalizations of all foreign
stock exchange companies in that country whose equity capitalizations are
smaller than that of such company, is less than 50% of the aggregate equity
capitalization of all foreign stock exchange companies in such country.
GMO JAPAN FUND (the "JAPAN FUND") is a non-diversified portfolio that
seeks maximum total return through investment in Japanese securities, primarily
in common stocks of Japanese companies.
GMO EMERGING MARKETS FUND (the "EMERGING MARKETS FUND") is a
non-diversified portfolio that seeks long term capital appreciation consistent
with what the Manager believes to be a prudent level of risk through investment
in equity and equity- related securities traded in the securities markets of
newly industrializing countries in Asia, Latin America, the Middle East,
Southern Europe, Eastern Europe and Africa.
GMO GLOBAL PROPERTIES FUND (the "GLOBAL PROPERTIES FUND") is a
non-diversified portfolio that seeks long term capital growth primarily through
investment in securities of issuers throughout the world which are engaged in or
related to the real estate industry or which own significant real estate assets.
Consideration of current income is secondary to this principal objective.
FIXED INCOME FUNDS
The Trust offers the following nine domestic and international fixed
income portfolios which are collectively referred to as the "FIXED INCOME
FUNDS."
GMO DOMESTIC BOND FUND (the "DOMESTIC BOND FUND") is a non-diversified
portfolio that seeks high total return through investment primarily in U.S.
Government Securities. The Fund may also invest a significant portion of its
assets in other investment grade bonds (including convertible bonds) denominated
in U.S. dollars. The Fund's portfolio will generally have a duration of
approximately four to six years (excluding short-term investments).
GMO U.S. BOND/GLOBAL ALPHA A FUND (the "U.S. BOND/GLOBAL ALPHA A FUND")
is a non-diversified portfolio that seeks high total return primarily through
investment in investment- grade bonds (including convertible bonds) issued by
the U.S. government, its agencies and instrumentalities, as well as those issued
by a wide range of private U.S. issuers. The Fund also expects to invest in
sovereign debt (bonds and loans) of Emerging Countries and foreign bonds, and
may hedge some or all of its exposure to domestic or foreign markets including
foreign currency exposure.
GMO INTERNATIONAL BOND FUND (the "INTERNATIONAL BOND FUND") is a
non-diversified portfolio that seeks high total return by investing primarily in
investment grade bonds (including convertible bonds) denominated in various
currencies including U.S. dollars or in multicurrency units. The Fund seeks to
provide a total return greater than that provided by the international fixed
income securities market generally.
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (the "CURRENCY HEDGED
INTERNATIONAL BOND FUND") is a non-diversified portfolio with the same
investment objectives and policies as the International Bond Fund except that
the Currency Hedged International Bond Fund will generally attempt to hedge
substantially all of its foreign currency risk while the International Bond Fund
will generally not hedge any of its foreign currency risk. Despite the otherwise
identical objectives and policies, the composition of the two portfolios may
differ substantially at any given time.
GMO GLOBAL BOND FUND (the "GLOBAL BOND FUND") is a non-diversified
portfolio that seeks high total return by investing primarily in investment
grade bonds (including convertible bonds) denominated in various currencies
including U.S. dollars or in multicurrency units. The Fund seeks to provide a
total return greater than that provided by the global fixed income securities
market generally.
GMO EMERGING COUNTRY DEBT FUND (the "EMERGING COUNTRY DEBT FUND") is a
non-diversified portfolio that seeks high total return by investing primarily in
sovereign debt (bonds and loans) of countries in Asia, Latin America, the Middle
East and Africa, as well as any country located in Europe which is not in the
European community ("Emerging Countries").
GMO SHORT-TERM INCOME FUND (the "SHORT-TERM INCOME FUND") is a
non-diversified portfolio that seeks current income to the extent consistent
with the preservation of capital and liquidity through investment in a portfolio
of high quality short-term instruments. The Short-Term Income Fund intends to
invest in short-term securities, but it is not a "money market fund."
GMO GLOBAL HEDGED EQUITY FUND (the "GLOBAL HEDGED EQUITY FUND") is a
non-diversified portfolio that seeks total return consistent with minimal
exposure to general equity market risk.
GMO INFLATION INDEXED BOND FUND (the "INFLATION INDEXED BOND FUND") is a
non-diversified portfolio that seeks maximum total return by investing primarily
in foreign and U.S. government bonds that are indexed or otherwise linked to
general measures of inflation in the country of issue. The availability of such
bonds is currently limited to a small number of countries.
-3-
ASSET ALLOCATION FUNDS
The Trust offers the following four asset allocation portfolios (the
"ALLOCATION FUNDS"). The Allocation Funds operate as "funds of funds" in that,
pursuant to management provided by the Manager, these Funds make investments in
other Funds of the Trust.
GMO INTERNATIONAL EQUITY ALLOCATION FUND (the "INTERNATIONAL EQUITY
ALLOCATION FUND") is a diversified portfolio that seeks a total return greater
than the return of the EAFE-Lite Extended benchmark. The Fund will pursue its
objective by investing to varying extents primarily in Class III Shares of the
various International Equity Funds of the Trust. The Fund may also invest up to
15% of its net assets in Class III Shares of the various Fixed Income Funds of
the Trust.
GMO WORLD EQUITY ALLOCATION FUND (the "WORLD EQUITY ALLOCATION FUND") is
a diversified portfolio that seeks a total return greater than the return of the
World-Lite Extended benchmark. The Fund will pursue its objective by investing
to varying extents primarily in Class III Shares of the various Domestic Equity
and International Equity Funds of the Trust. The Fund may also invest up to 15%
of its net assets in Class III Shares of the various Fixed Income Funds of the
Trust.
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (the "GLOBAL (U.S.+) EQUITY
ALLOCATION FUND") is a diversified portfolio that seeks a total return greater
than the return of the GMO Global (U.S.+) Equity benchmark, which has a greater
weighting of U.S. stocks (S&P 500) than the World-Lite Extended benchmark. The
Fund will pursue its objective by investing to varying extents primarily in
Class III Shares of the various Domestic Equity and International Equity Funds
of the Trust. The Fund may also invest up to 15% of its net assets in Class III
Shares of the various Fixed Income Funds of the Trust.
GMO GLOBAL BALANCED ALLOCATION FUND (the "GLOBAL BALANCED ALLOCATION
FUND") is a diversified portfolio that seeks a total return greater than the
return of the GMO Global Balanced benchmark. The Fund will pursue its objective
by investing to varying extents primarily in Class III Shares of the various
Domestic Equity, International Equity and Fixed Income Funds of the Trust.
- --------------------------------------------------------------------------------
Investors should consider the risks associated with an investment in the
Funds. For information concerning the types of investment practices in which a
particular Fund may engage, see "Investment Objectives and Policies." For more
information concerning such investment practices and their associated risks, see
"Description and Risks of Fund Investments."
- --------------------------------------------------------------------------------
CLASS ELIGIBILITY
For full details of the class eligibility criteria summarized below and
an explanation of how conversions between classes will occur, see "Multiple
Classes - Eligibility for Classes" and "Multiple Classes - Conversions Between
Classes," beginning on page 70.
CLASS I AND CLASS II SHARES:
Recognizing that institutional and individual investors with assets under
GMO's management totalling less than $35 million have different service and
reporting needs than larger client relationships, GMO has created the GMO Funds
Division. GMO Funds Division delivers institutional-quality client services to
clients investing between $1 million and $35 million. These services include
professional and informative reporting, and access to meaningful analysis and
explanation.
Class I Shares. Class I Shares are available to any investor who commits (after
May 31, 1996) assets to GMO management to establish a "Total Investment" (as
defined) with GMO of between $1 million and $10 million. In addition, all
defined contribution retirement or pension plans are eligible only for Class I
shares regardless of the size of their investment. Class I Shares will receive
client service and reporting from GMO Funds Division and will bear a Shareholder
Service Fee of 0.28%.
Class II Shares. Class II Shares are available to any investor who (i) has less
than $7 million (but more than $0) under the management of GMO as of May 31,
1996, or (ii) commits (after May 31, 1996) assets to GMO management to establish
a "Total Investment" (as defined) with GMO of between $10 million and $35
million. Class II Shares will receive client service and reporting from GMO
Funds Division and will bear a Shareholder Service Fee of 0.22%.
Purchasers of Class I and Class II Shares should follow purchase
instructions for such classes described under "Purchase of Shares" and direct
questions to the Trust at (617) 790-5000.
CLASS III SHARES:
GMO provides direct client service and reporting to owners of Class III
Shares. These clients generally must have a "Total Investment" (as defined) with
GMO of at least $35 million. Class eligibility requirements for existing clients
of GMO as of May 31, 1996 are governed by special rules described in this
Prospectus.
Class III Shares. Class III Shares are available to any investor who (i) has at
least $7 million under the management of GMO as of May 31, 1996, or (ii) commits
(after May 31, 1996) assets to GMO management to establish a "Total Investment"
(as defined) with GMO of at least $35 million. Class III Shares of the Short
Term Income Fund are available to any investor with a "Total Investment" of at
least $1 million. Class III Shares will receive client service and reporting
directly from GMO, and will bear a Shareholder Service Fee of 0.15% of average
net assets. Note: Class III Shares are a redesignation of the single class of
shares that has been offered by each Fund since inception. Class III Shares bear
the same rate of total operating expenses as they did before the redesignation.
Purchasers of Class III Shares should follow purchase instructions
described under "Purchase of Shares" and direct questions to the Trust at (617)
330-7500.
-4-
BENCHMARKS AND INDEXES
As is evident throughout this Prospectus, many of the Funds are managed,
and/or meant to be measured, relative to a specified index or benchmark. Some
general information about these benchmarks and indexes is provided in the table
below. While Funds may be managed relative to these benchmarks or indexes, it is
important to note that none of the Funds is managed as an "index fund" or
"index-plus fund", and the actual composition of a Fund's portfolio may and will
differ substantially from that of its benchmark. It is also important to note
that the Manager may change a Fund's specified index or benchmark from time to
time.
Note: Some Funds are managed against currency hedged versions of some of
the indexes below. In such cases, the benchmark is calculated with the
assumption that any gains or losses incurred due to changes in the value of the
foreign currencies in which the securities comprising the index are denominated
relative to the U.S. dollar are offset by gains and losses on fully effective
currency hedging transactions. While these Funds expect to be measured against
such an index, the Funds (including those identified as "currency hedged") will
take active currency positions relative to the hedged benchmark. Such positions
may be created directly - through currency or forward currency positions or
indirectly - by overweighting the investment in securities denominated in that
currency without a corresponding increase in the level of currency hedging.
<TABLE>
<CAPTION>
Abbreviation Full Name Sponsor or Publisher Description
- ------------ --------- -------------------- -----------
<S> <C> <C> <C>
S&P 500 Standard & Poor's 500 Stock Standard & Poor's Well-known, independently maintained and published U.S.
Index Corporation large capitalization stock index
Wilshire 5000 Wilshire 5000 Stock Index Wilshire Associates, Independently maintained and published broadly populated
Inc. U.S. stock index
Lehman Brothers Lehman Brothers Government Lehman Brothers Well-known,independently maintained and published
Government Bond Index government bond index, regularly used as a comparative
fixed income benchmark
EAFE Morgan Stanley Capital Morgan Stanley Well-known, independently maintained and published large
International Europe, Capital International capitalization international stock index
Australia and Far East Index
EAFE-Lite GMO EAFE-Lite Index GMO A modification of EAFE where GMO reduces the market
capitalization of Japan by 40% relative to EAFE
EAFE-Lite GMO EAFE-Lite Extended GMO A modification of EAFE-Lite where GMO adds those
Extended Index additional countries represented in the IFC Investable
Index
MSCI World Morgan Stanley Capital Morgan Stanley An independently maintained and published global
International World Index Capital International (including U.S.) equity index
World-Lite GMO World-Lite Extended GMO A modification of MSCI World where GMO reduces the market
Extended Index capitalization of Japan by 40% relative to MSCI World and
adds those additional countries represented in the IFC
Investable Index
GMO Global GMO Global (U.S.+) Equity GMO A composite benchmark computed by GMO and comprised 75% by
(U.S. +) Equity Index S&P 500 and 25% by EAFE-Lite Extended
Index
GMO Global GMO Global Balanced Index GMO A composite benchmark computed by GMO and comprised 48.75%
Balanced Index by S&P 500, 16.25% by EAFE-Lite Extended and 35% by Lehman
Brothers Government
MSRI Morgan Stanley REIT Index Morgan Stanley & Well-known, independently maintained and published equity
Co., Inc. real estate index.
Salomon 3 Month Salomon 3 Month Treasury- Salomon Brothers Independently maintained and published short-term bill
T-Bill Index Bill Index index.
J.P. Morgan Non- J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published index composed of
U.S. Government Government Bond Index non-U.S. government bonds with maturities of one year or
Bond Index more.
J.P. Morgan Non- J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published index composed of
U.S. Government Government Bond Index non-U.S.government bonds with maturities of one year or
Bond Index (Hedged) more that are currency-hedged into U.S. dollars.
(Hedged)
J.P. Morgan Global J.P. Morgan Global J.P. Morgan Independently maintained and published index composed of
Government Bond Government Bond Index government bonds of 14 developed countries, including the
Index U.S., with maturities of one year or more.
J.P. Morgan J.P. Morgan Emerging J.P. Morgan Independently maintained and published index composed of
Emerging Markets Market Bond Index Plus debt securities of 14 countries, which includes Brady
Bond Index+ bonds, sovereign debt, local debt and Eurodollar debt, all
of which are dollar denominated.
</TABLE>
-5-
<TABLE>
<CAPTION>
Abbreviation Full Name Sponsor or Publisher Description
- ------------ --------- -------------------- -----------
<S> <C> <C> <C>
Lehman Brothers Lehman Brothers Aggregate Lehman Brothers Well known, independently maintained and published index
Aggregate Bond Bond Index comprised of fixed rate debt issues, having a maturity of
Index at least one year, ratedinvestment grade or higher by
Moody's Investors Service, Standard & Poor's Corporation,
or Fitch Investors Service.
GPR LIFE Index Global Property Global Property Independently maintained and published broadly populated
Research/Limberg Institute Research BV global real estate stock index. Includes companies
of Financial Economics exceeding $50 million in market capitalization in 26
Global Real Estate Securities countries.
Index
Russell 1000 Russell 1000 Growth Index Frank Russell Independently maintained and published index composed of
Growth Index Company the 1,000 largest U.S. companies based on total market
capitalization with higher price-to-book ratios and
higher forecasted growth values.
Russell 1000 Value Russell 1000 Value Index Frank Russell Independently maintained and published index composed of
Index Company the 1,000 largest U.S. companies based on total market
capitalization with lower price-to-book ratios and lower
forecasted growth values.
Russell 2000 Russell 2000 Growth Index Frank Russell Independently maintained and published index composed of
Growth Index Company the bottom two-thirds of the 3,000 largest U.S. companies
based on total market capitalization with higher price-to-
book ratios and higher forecasted growth values.
Russell 2000 Value Russell 2000 Value Index Frank Russell Independently maintained and published index composed of
Index Company the bottom two-thirds of the 3,000 largest U.S. companies
based on total market capitalization with lower price-to-
book ratios and lower forecasted growth values.
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE OF FEES AND EXPENSES.............................................................8
FINANCIAL HIGHLIGHTS.....................................................................16
INVESTMENT OBJECTIVES AND POLICIES.......................................................30
DOMESTIC EQUITY FUNDS....................................................................30
Core Fund............................................................................30
Tobacco-Free Core Fund...............................................................30
Value Fund...........................................................................31
Growth Fund..........................................................................32
U.S. Sector Fund.....................................................................32
Small Cap Value Fund.................................................................33
Small Cap Growth Fund................................................................33
Fundamental Value Fund...............................................................34
REIT Fund............................................................................35
INTERNATIONAL EQUITY FUNDS...............................................................36
International Core Fund..............................................................36
Currency Hedged International Core
Fund...............................................................................37
Foreign Fund.........................................................................38
International Small Companies Fund ..................................................38
Japan Fund...........................................................................39
Emerging Markets Fund................................................................40
Global Properties Fund...............................................................41
FIXED INCOME FUNDS.......................................................................42
Domestic Bond Fund...................................................................43
U.S. Bond/Global Alpha A Fund........................................................43
International Bond Fund..............................................................44
Currency Hedged International
Bond Fund..........................................................................45
Global Bond Fund.....................................................................46
Emerging Country Debt Fund...........................................................46
Short-Term Income Fund...............................................................47
Global Hedged Equity Fund............................................................48
Inflation Indexed Bond Fund......................................................51
ASSET ALLOCATION FUNDS...................................................................52
International Equity Allocation Fund.................................................52
World Equity Allocation Fund.........................................................53
Global (U.S.+) Equity Allocation Fund................................................53
Global Balanced Allocation Fund......................................................53
DESCRIPTION AND RISKS OF FUND
INVESTMENTS......................................................................54
Portfolio Turnover.......................................................................54
Diversified and Non-Diversified Portfolios...............................................54
Certain Risks of Foreign Investments.....................................................54
General..............................................................................54
Emerging Markets.....................................................................54
Direct Investment in Russian Securities..............................................55
Securities Lending.......................................................................55
Depository Receipts......................................................................55
Convertible Securities...................................................................55
Futures and Options......................................................................56
Options..............................................................................56
Writing Covered Options..............................................................56
Futures..............................................................................57
Index Futures........................................................................58
Interest Rate Futures................................................................58
Options on Futures Contracts.........................................................59
Uses of Options, Futures and Options
on Futures.............................................................................59
Risk Management......................................................................59
Hedging..............................................................................59
Investment Purposes..................................................................59
Synthetic Sales and Purchases....................................................60
Swap Contracts and Other Two-Party Contracts.............................................60
Swap Contracts...................................................................60
Interest Rate and Currency Swap Contracts........................................60
-6-
Equity Swap Contracts and Contracts for
Differences.............................................................61
Interest Rate Caps, Floors and Collars....................................61
Foreign Currency Transactions ...................................................62
Repurchase Agreements............................................................63
Debt and Other Fixed Income Securities
Generally......................................................................63
Temporary High Quality Cash Items................................................63
U.S. Government Securities and Foreign
Government Securities..........................................................63
Mortgage-Backed and Other Asset-Backed
Securities.....................................................................64
Collateralized Mortgage Obligations
("CMOs"); Strips and Residuals..........................................64
Adjustable Rate Securities.......................................................65
Lower Rated Securities...........................................................65
Brady Bonds......................................................................65
Zero Coupon Securities...........................................................65
Indexed Securities...............................................................66
Firm Commitments.................................................................66
Loans, Loan Participations and Assignments.......................................66
Reverse Repurchase Agreements and Dollar
Roll Agreements................................................................67
Illiquid Securities..............................................................67
Special Asset Allocation Fund Considerations.....................................67
ADDITIONAL INVESTMENT RESTRICTIONS.......................................................68
Fundamental Restrictions.........................................................68
Non-Fundamental Restrictions.....................................................69
MULTIPLE CLASSES.........................................................................69
Shareholder Service Fees.........................................................70
Client Service - GMO and GMO Funds Division......................................70
Eligibility for Classes..........................................................70
Conversions Between Classes......................................................70
PURCHASE OF SHARES.......................................................................71
Purchase Procedures..............................................................72
REDEMPTION OF SHARES.....................................................................73
DETERMINATION OF NET ASSET VALUE.........................................................74
DISTRIBUTIONS............................................................................74
TAXES....................................................................................75
Withholding on Distributions to Foreign
Investors......................................................................75
Foreign Tax Credits..............................................................76
Tax Implications of Certain Investments..........................................76
Loss of Regulated Investment Company Status......................................76
MANAGEMENT OF THE TRUST..................................................................76
ORGANIZATION AND CAPITALIZATION
OF THE TRUST...........................................................................78
CERTAIN FINANCIAL INFORMATION RELATING
TO THE GMO FOREIGN FUND................................................................79
APPENDIX A...............................................................................80
RISKS AND LIMITATIONS OF OPTIONS, FUTURES
AND SWAPS..............................................................................80
Limitations on the Use of Options and Futures
Portfolio Strategies...........................................................80
Risk Factors in Options Transactions.............................................80
Risk Factors in Futures Transactions.............................................80
Risk Factors in Swap Contracts, OTC Options ...........
and other Two-Party Contracts..................................................81
Additional Regulatory Limitations on the Use of
Futures and Related Options, Interest Rate Floors,
Caps and Collars and Interest Rate and
Currency Swap Contracts........................................................81
APPENDIX B...............................................................................83
COMMERCIAL PAPER AND CORPORATE DEBT
RATINGS..........................................................................83
Commercial Paper Ratings ........................................................83
Corporate Debt Ratings...........................................................83
Standard & Poor's Corporation.............................................83
Moody's Investors Service, Inc............................................83
</TABLE>
-7-
SCHEDULE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
Shareholder
GMO Fund Name Transaction Expenses Annual Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
You would pay the
Cash Inv. following expenses on
Purchase Redemption Mgmt. a $1,000 investment You would pay the
Premium(as Fees (as a Fees Share- assuming 5% annual following expenses
a percentage percentage after holder TOTAL return with on the same
of amount of amount Fee Service Other OPERATING redemption at the end investment assuming
invested)1 redeemed)1 Waiver9 Fee3 Expenses9 EXPENSES9 of each time period: no redemption:
- ------------------------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yr. 5 Yr. 10 Yr. 1 Yr. 3 Yr. 5 Yr. 10 Yr.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC EQUITY FUNDS
Core Fund
---------
Class I .14%3 None .30% .28% .03% .61% $ 8 $21 $35 $78 $ 8 $21 $35 $78
Class II .14%3 None .30% .22% .03% .55% $ 7 $19 $32 $70 $ 7 $19 $32 $70
Class III .14%3 None .30% .15% .03% .48% $ 6 $17 $28 $62 $ 6 $17 $28 $62
Tobacco-Free Core Fund
----------------------
Class I .14%3 None .15% .28% .18% .61% $ 8 $21 $35 $78 $ 8 $21 $35 $78
Class II .14%3 None .15% .22% .18% .55% $ 7 $19 $32 $70 $ 7 $19 $32 $70
Class III .14%3 None .15% .15% .18% .48% $ 6 $17 $28 $62 $ 6 $17 $28 $62
Value Fund
----------
Class I .14%3 None .41% .28% .05% .74% $ 9 $25 $42 $93 $ 9 $25 $42 $93
Class II .14%3 None .41% .22% .05% .68% $ 8 $23 $39 $86 $ 8 $23 $39 $86
Class III .14%3 None .41% .15% .05% .61% $ 8 $21 $35 $78 $ 8 $21 $35 $78
Growth Fund
-----------
Class I .14%3 None .28% .28% .05% .61% $ 8 $21 $35 $78 $ 8 $21 $35 $78
Class II .14%3 None .28% .22% .05% .55% $ 7 $19 $32 $70 $ 7 $19 $32 $70
Class III .14%3 None .28% .15% .05% .48% $ 6 $17 $28 $62 $ 6 $17 $28 $62
U.S. Sector Fund
----------------
Class I .14%3 None .27% .28% .06% .61% $ 8 $21 $35 $78 $ 8 $21 $35 $78
Class II .14%3 None .27% .22% .06% .55% $ 7 $19 $32 $70 $ 7 $19 $32 $70
Class III .14%3 None .27% .15% .06% .48% $ 6 $17 $28 $62 $ 6 $17 $28 $62
Small Cap Value Fund
--------------------
Class I .50%3 .50%3 .22% .28% .11% .61% $16 $30 $45 $88 $11 $24 $39 $81
Class II .50%3 .50%3 .22% .22% .11% .55% $16 $28 $42 $81 $11 $23 $36 $74
Class III .50%3 .50%3 .22% .15% .11% .48% $15 $26 $38 $73 $10 $20 $32 $65
-8-
Small Cap Growth Fund
---------------------
Class I .50%3 .50%3 .27% .28% .06%12 .61% $16 $30 $11 $24
Class II .50%3 .50%3 .27% .22% .06%12 .55% $16 $28 $11 $23
Class III .50%3 .50%3 .27% .15% .06%12 .48% $15 $26 $10 $20
Fundamental Value Fund
----------------------
Class I .15%5 None .55% .28% .05% .88% $10 $30 $50 $110 $10 $30 $50 $110
Class II .15%5 None .55% .22% .05% .82% $10 $28 $47 $103 $10 $28 $47 $100
Class III .15%5 None .55% .15% .05% .75% $9 $25 $43 $94 $9 $25 $43 $94
REIT Fund
---------
Class I .50%3 .50%3 .28% .28% .26%12 .82% $19 $37 $13 $31
Class II .50%3 .50%3 .28% .22% .26%12 .76% $18 $35 $13 $29
Class III .50%3 .50%3 .28% .15% .26%12 .69% $17 $33 $12 $27
INTERNATIONAL EQUITY FUNDS
International Core Fund
-----------------------
Class I .60%3 None .45%14 .28% .10%15 .83%14,15 $14 $32 $52 $108 $14 $32 $52 $108
Class II .60%3 None .45%14 .22% .10%15 .77%14,15 $14 $30 $49 $101 $14 $30 $49 $101
Class III .60%3 None .45%14 .15% .10%15 .70%14,15 $13 $28 $45 $93 $13 $28 $45 $93
Currency Hedged
International Core Fund
-----------------------
Class I .60%3 None .41% .28% .13%12 .82% $14 $32 $14 $32
Class II .60%3 None .41% .22% .13%12 .76% $14 $30 $14 $30
Class III .60%3 None .41% .15% .13%12 .69% $13 $28 $13 $28
Foreign Fund
------------
Class I None None .44% .28% .16%12 .88% $9 $28 $9 $28
Class II None None .44% .22% .16%12 .82% $8 $26 $8 $26
Class III None None .44% .15% .16%12 .75% $8 $24 $8 $24
-9-
International Small
Companies Fund
--------------
Class I 1.00%3 .60%3 .41% .28% .20%15 .89%15 $25 $45 $66 $127 $19 $38 $59 $119
Class II 1.00%3 .60%3 .41% .22% .20%15 .83%15 $25 $43 $63 $120 $18 $36 $56 $112
Class III 1.00%3 .60%3 .41% .15% .20%15 .76%15 $24 $41 $59 $112 $18 $34 $52 $103
Japan Fund
----------
Class I .40%5 .61%5 .23%11 .28% .31% .82%11 $19 $37 $57 $114 $12 $30 $49 $105
Class II .40%5 .61%5 .23%11 .22% .31% .76%11 $18 $35 $54 $107 $12 $28 $46 $98
Class III .40%5 .61%5 .23%11 .15% .31% .69%11 $17 $33 $50 $99 $11 $26 $42 $90
Emerging Markets Fund
---------------------
Class I 1.60%4 .40%4,7 .77%16 .28% .37% 1.42%16 $34 $65 $97 $189 $30 $60 $92 $184
Class II 1.60%4 .40%4,7 .77%16 .22% .37% 1.36%16 $34 $63 $94 $183 $30 $58 $89 $177
Class III 1.60%4 .40%4,7 .77%16 .15% .37% 1.29%16 $33 $61 $90 $175 $29 $56 $86 $169
Global Properties Fund
----------------------
Class I .60%19 .30%19 .48% .28% .24%12 1.00% $19 $41 $16 $38
Class II .60%19 .30%19 .48% .22% .24%12 .94% $19 $39 $16 $36
Class III .60%19 .30%19 .48% .15% .24%12 .87% $18 $37 $15 $34
FIXED INCOME FUNDS
Domestic Bond Fund
------------------
Class I None None .04% .28% .06% .38% $4 $12 $21 $48 $4 $12 $21 $48
Class II None None .04% .22% .06% .32% $3 $10 $18 $41 $3 $10 $18 $41
Class III None None .04% .15% .06% .25% $3 $8 $14 $32 $3 $8 $14 $32
U.S. Bond/Global Alpha A Fund
-----------------------------
Class I .15%4 None .15% .28% .10%12 .53% $7 $18 $7 $18
Class II .15%4 None .15% .22% .10%12 .47% $6 $17 $6 $17
Class III .15%4 None .15% .15% .10%12 .40% $6 $14 $6 $14
10
International Bond Fund
-----------------------
Class I .15%4 None .12% .28% .13% .53% $7 $18 $31 $68 $7 $18 $31 $68
Class II .15%4 None .12% .22% .13% .47% $6 $17 $28 $61 $6 $17 $28 $61
Class III .15%4 None .12% .15% .13% .40% $6 $14 $24 $52 $6 $14 $24 $52
Currency Hedged
International Bond Fund
-----------------------
Class I .15%4 None .11% .28% .14% .53% $7 $18 $31 $68 $7 $18 $31 $68
Class II .15%4 None .11% .22% .14% .47% $6 $17 $28 $61 $6 $17 $28 $61
Class III .15%4 None .11% .15% .14% .40% $6 $14 $24 $52 $6 $14 $24 $52
Global Bond Fund
----------------
Class I .15%4 None .00% .28% .19%12 .47% $6 $17 $28 $61 $6 $17 $28 $61
Class II .15%4 None .00% .22% .19%12 .41% $6 $15 $24 $53 $6 $15 $24 $53
Class III .15%4 None .00% .15% .19%12 .34% $5 $12 $21 $45 $5 $12 $21 $45
Emerging Country
Debt Fund
---------
Class I .50%4 .25%4,8 .30%10 .28% .16% .74%10 $15 $31 $49 $100 $13 $29 $46 $96
Class II .50%4 .25%4,8 .30%10 .22% .16% .68%10 $15 $29 $46 $93 $12 $27 $43 $89
Class III .50%4 .25%4,8 .30%10 .15% .16% .61%10 $14 $27 $42 $85 $11 $24 $39 $81
Short-Term Income Fund
----------------------
Class III None None .00%13 .15% .05% .20%13 $2 $6 $11 $26 $2 $6 $11 $26
Global Hedged Equity Fund
-------------------------
Class I .50%3 1.40%6 .44% .28% .19% .91% $29 $50 $72 $137 $14 $34 $55 $116
Class II .50%3 1.40%6 .44% .22% .19% .85% $28 $48 $69 $130 $14 $32 $52 $109
Class III .50%3 1.40%6 .44% .15% .19% .78% $27 $46 $65 $122 $13 $30 $48 $101
Inflation Indexed
Bond Fund
---------
Class I .10%4 .10%4 .00% .28% .13%12 .38% $6 $14 $5 $13
Class II .10%4 .10%4 .00% .22% .13%12 .32% $5 $12 $4 $11
Class III .10%4 .10%4 .00% .15% .13%12 .25% $5 $10 $4 $9
11
ASSET ALLOCATION FUNDS
International Equity
Allocation Fund
---------------
Class I .80%17 .10%17 .00%18 .13%18 .00%18 .13%18 $10 $13 $9 $12
Class II .80%17 .10%17 .00%18 .07%18 .00%18 .07%18 $10 $11 $9 $10
Class III .80%17 .10%17 .00%18 .00%18 .00%18 .00%18 $9 $9 $8 $18
World Equity Allocation
Fund
--------------------
Class I .69%17 .09%17 .00%18 .13%18 .00%18 .13%18 $9 $12 $8 $11
Class II .69%17 .09%17 .00%18 .07%18 .00%18 .07%18 $8 $10 $8 $9
Class III .69%17 .09%17 .00%18 .00%18 .00%18 .00%18 $8 $8 $7 $7
Global (U.S.+) Equity
Allocation Fund
---------------
Class I .42%17 .05%17 .00%18 .13%18 .00%18 .13%18 $6 $9 $6 $8
Class II .42%17 .05%17 .00%18 .07%18 .00%18 .07%18 $5 $7 $5 $6
Class III .42%17 .05%17 .00%18 .00%18 .00%18 .00%18 $5 $5 $4 $4
Global Balanced
Allocation Fund
------------------------
Class I .31%17 .03%17 .00%18 .13%18 .00%18 .13%18 $5 $7 $4 $7
Class II .31%17 .03%17 .00%18 .07%18 .00%18 .07%18 $4 $6 $4 $5
Class III .31%17 .03%17 .00%18 .00%18 .00%18 .00%18 $3 $3 $3 $3
</TABLE>
Footnotes begin on page 13 and are important to understanding this table.
Unless otherwise noted, Annual Operating Expenses shown are based on actual
expenses for the year ended February 29, 1996.
The purpose of the foregoing tables is to assist in understanding the various
costs and expenses of each Fund that are borne by holders of Fund shares. THE
FIVE PERCENT ANNUAL RETURN AND EXPENSE NUMBERS USED ARE NOT REPRESENTATIONS OF
FUTURE PERFORMANCE OR EXPENSES. SUBJECT TO THE MANAGER'S UNDERTAKING TO WAIVE
ITS FEE AND/OR BEAR CERTAIN EXPENSES FOR EACH FUND AS DESCRIBED IN THE TABLES,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. Where a
purchase premium and/or redemption fee is indicated as being charged by a Fund
in certain instances, the foregoing examples assume the payment of such purchase
premium and/or redemption fee even though such purchase premium and/or
redemption fee is not applicable in all cases. (See "Purchase of Shares" and
"Redemption of Shares").
-12-
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums and redemption fees apply only to cash transactions
as set forth under "Purchase of Shares" and "Redemption of Shares"
respectively. These fees are paid to and retained by the Fund itself
and are designed to allocate transaction costs caused by shareholder
activity to the shareholder generating the activity, rather than to the
Fund as a whole. As described in greater detail in footnotes below, for
certain Funds the Manager may reduce purchase premiums and/or
redemption fees if the Manager determines there are minimal brokerage
and/or other transaction costs caused by a particular purchase or
redemption. However, the instances in which such fees may be properly
waived are extremely limited.
Normally, no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases
involving transfers of large positions in markets where the costs of
re-registration and/or other transfer expenses are high, the
International Core Fund, Currency Hedged International Core Fund,
International Small Companies Fund, Japan Fund and Global Hedged Equity
Fund may each charge a premium of up to 0.10%, and the Emerging Markets
Fund may charge a premium of up to 0.20%.
2. Shareholder Service Fee ("SSF") paid to GMO for providing client
services and reporting services. For Class III Shares, the SSF is 0.15%
of daily net assets. Class III Shares are a redesignation of the single
class of shares that has been offered by each Fund since inception.
Total Operating Expenses for Class III Shares are capped at the same
levels as for the single class of shares that existed prior to such
redesignation and the creation of additional classes. The expense caps
are detailed in footnote 9 below.
The level of SSF is the sole economic distinction between the various
classes of Fund shares. A lower SSF for larger investments reflects
that the cost of servicing client accounts is lower for larger accounts
when expressed as a percentage of the account. See "Multiple Classes -
Shareholder Service Fees" for more information.
3. The purchase premium and/or redemption fee for this Fund may generally
not be waived due to offsetting transactions, and may be waived in only
rare circumstances. The premium or fee will only be waived for this
Fund (i) if the purchase or redemption is part of a transfer from or to
another Fund where the Manager is able to transfer securities among the
Funds to effect the transaction, (ii) during periods (expected to exist
only rarely) when the Manager determines that the Fund is either
substantially overweighted or underweighted with respect to its cash
position so that a redemption or purchase will not require a securities
transaction, or (iii) in certain other instances (not including the
incidence of offsetting transactions) where it is compelling to the
Manager that the purchase or redemption will not result in transaction
costs to the Fund. Any waiver with respect to this Fund must be
arranged in advance with the Manager.
Prior to May 31, 1996, the premium or fee would generally be waived if,
usually due to offsetting transactions, a purchase or redemption
resulted in minimal brokerage and/or other transaction costs. After May
31, 1996, the Fund discontinued the policy of waiving these charges due
to general offsetting transactions. Accordingly, the amount of the
stated purchase premium and/or redemption fee is lower than the premium
or fee charged prior to May 31, 1996, reflecting the savings of
occasional offsetting transactions. The new approach allows all
purchasers or sellers to benefit proportionately by offsetting
transactions and other common circumstances that mitigate transaction
costs, rather than tracking the savings back to the particular buyers
and sellers.
4. The stated purchase premium and/or redemption fee for this Fund will
always be charged in full except that the relevant purchase premium or
redemption fee will be reduced by 50% with respect to any portion of a
purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. The Manager examines
each purchase and redemption of shares eligible for such treatment to
determine if circumstances exist to waive a portion of the purchase
premium or redemption fee. Absent a clear determination that
transaction costs will be reduced or absent for the purchase or
redemption, the full premium or fee will be charged.
5. The Manager may waive or reduce purchase premiums and/or redemption
fees for this Fund if there are minimal brokerage and transaction costs
incurred in connection with a transaction due to offsetting
transactions or otherwise.
6. May be eliminated if it is not necessary to incur costs relating to the
early termination of hedging transactions to meet redemption requests.
7. Applies only to shares acquired on or after June 1, 1995 (including
shares acquired by reinvestment of dividends or other distributions on
or after such date).
-13-
8. Applies only to shares acquired on or after July 1, 1995 (including
shares acquired by reinvestment of dividends or other distributions on
or after such date).
9. The Manager has voluntarily undertaken to reduce its management fees
and to bear certain expenses with respect to each Fund until further
notice to the extent that a Fund's total annual operating expenses
(excluding Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses and transfer taxes; and, in the
case of the Emerging Markets Fund, Emerging Country Debt Fund, Global
Hedged Equity Fund and Global Properties Fund, excluding custodial
fees; and, in the case of the Asset Allocation Funds, excluding
expenses indirectly incurred by investment in other Funds of the Trust)
would otherwise exceed the percentage of that Fund's daily net assets
specified below. 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 these stated
limitations. Absent such undertakings, management fees for each Fund
and the annual operating expenses for each class would be as shown
below.
<TABLE>
<CAPTION>
Voluntary Management Fee Total Class
Fund Expense Limit (Absent Waiver) Operating Expenses (Absent Waiver)
Class I Class II Class III
<S> <C> <C> <C> <C> <C>
Core Fund .33% .525% .835% .775% .705%
Tobacco-Free Core Fund .33% .50% .96% .90% .83%
Value Fund .46% .70% 1.03% .97% .90%
Growth Fund .33% .50% .83% .77% .70%
U.S. Sector Fund .33% .49% .83% .77% .70%
Small Cap Value Fund .33% .50% .89% .83% .76%
Small Cap Growth Fund .33% .50% .84% .78% .71%
Fundamental Value Fund .60% .75% 1.08% 1.02% .95%
REIT Fund .54% .75% 1.29% 1.23% 1.16%
International Core Fund .54% .75% 1.13% 1.07% 1.00%
Currency Hedged International Core Fund .54% .75% 1.16% 1.10% 1.03%
Foreign Fund .60% .75% 1.19% 1.13% 1.06%
International Small Companies Fund .60% 1.25% 1.73% 1.67% 1.60%
Japan Fund .54% .75% 1.34% 1.28% 1.21%
Emerging Markets Fund .81% 1.00% 1.65% 1.59% 1.52%
Global Properties Fund .60% .75% 1.27% 1.21% 1.14%
Domestic Bond Fund .10% .25% .59% .53% .46%
U.S. Bond/Global Alpha A Fund .25% .40% .78% .72% .65%
International Bond Fund .25% .40% .81% .75% .68%
Currency Hedged International Bond Fund .25% .50% .92% .86% .79%
Global Bond Fund .19% .35% .82% .76% .69%
Emerging Country Debt Fund .35% .50% .94% .88% .81%
Short-Term Income Fund .05% .25% -- -- .45%
Global Hedged Equity Fund .50% .65% 1.12% 1.06% .99%
Inflation Indexed Bond Fund .10% .25% .66% .60% .53%
International Equity Allocation Fund .00% .00% .29% .23% .16%
World Equity Allocation Fund .00% .00% .29% .23% .16%
Global (U.S.+) Equity Allocation Fund .00% .00% .29% .23% .16%
Global Balanced Allocation Fund .00% .00% .29% .23% .16%
</TABLE>
10. Figure based on actual expenses for the fiscal year ended February 29,
1996, but restated to give effect to a change in the fee waiver and/or
expense limitation of the Fund, which change was effective as of March
1, 1996.
-14-
11. Figure based on actual expenses for the fiscal year ended February 29,
1996, but restated to give effect to a change in the fee waiver and/or
expense limitation of the Fund, which change was effective as of March
14, 1996.
12. Based on estimated amounts for the Fund's first fiscal year.
13. Figure based on actual expenses for the fiscal year ended February 29,
1996, but restated to give effect to a change in the fee waiver and/or
expense limitation of the Fund, which change was effective as of
February 7, 1996.
14. Figure based on actual expenses for the fiscal year ended February 29,
1996, but restated to give effect to a change in the fee waiver and/or
expense limitation of the Fund, which change was effective as of June
27, 1995.
15. Includes a nonrecurring expense incurred during the fiscal year ended
February 29, 1996.
16. Figure based on actual expenses for the fiscal year ended February 29,
1996, but restated to give effect to a change in the fee waiver and/or
expense limitation of the Fund, which change was effective as of May
31, 1996.
17. Effective October 16, 1996, each of the Asset Allocation Funds began
charging purchase premiums and redemption fees for cash transactions.
This is done to ensure that the cost of purchase premiums or redemption
fees paid to underlying Funds caused by shareholder transactions in the
Asset Allocation Funds is paid by the shareholders generating the
transactions, rather than by the other Asset Allocation Fund
shareholders. This is consistent with the purpose of all of the Trust's
purchase premiums and redemption fees.
Each of the Asset Allocation Funds invests in various other Funds with
different levels of purchase premiums and redemption fees, which
reflect the trading costs of different asset classes. Therefore, the
purchase premium and redemption fee of each Asset Allocation Fund has
initially been computed as the weighted average of the premiums and
fees, respectively, of the underlying Funds in which the Asset
Allocation Fund is invested, based on actual investments by each Asset
Allocation Fund as of October 8, 1996. The amount of purchase premium
and redemption fee for each Asset Allocation Fund will be adjusted
approximately annually based on underlying Funds owned by each Asset
Allocation Fund during the prior year. The Manager may, but is not
obligated to, adjust the purchase premium and/or redemption fee for an
Asset Allocation Fund more frequently if the Manager believes in its
discretion that circumstances warrant. For more information concerning
which underlying Funds a particular Asset Allocation Fund may invest
in, see "Investment Objectives and Policies -- Asset Allocation Funds."
18. Asset Allocation Funds invest primarily in other Funds of the Trust
(referred to here as "underlying Funds"). Therefore, in addition to the
fees and expenses directly incurred by the Asset Allocation Funds
(which are shown in the Schedule of Fees and Expenses), the Asset
Allocation Funds will also incur fees and expenses indirectly as
shareholders of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and the Allocation Funds may own
different proportions of underlying Funds at different times, the
amount of fees and expenses indirectly incurred by the Asset Allocation
Funds will vary. The Manager believes that, under normal market
conditions, the total amount of fees and expenses that will be
indirectly incurred by the Asset Allocation Funds because of investment
in underlying Funds will fall within the ranges set forth below:
<TABLE>
<CAPTION>
Fund Low Typical High
<S> <C> <C> <C>
International Equity Allocation Fund .76% .83% .89%
World Equity Allocation Fund .68% .75% .85%
Global (U.S.+) Equity Allocation Fund .57% .63% .74%
Global Balanced Allocation Fund .48% .57% .69%
</TABLE>
19. It is expected that the purchase premiums and redemption fees for this
Fund will be eliminated once the net assets of the Fund exceed $100
million. However, even thereafter, the Fund will reserve the right to
charge a purchase premium of up to 0.60% and a redemption fee of up to
0.30% on purchases or redemptions of amounts that are equal to or
greater than 5% of the Fund's net assets.
-15-
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
DOMESTIC EQUITY FUNDS
- ---------------------
CORE FUND
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
------- -------- -------------------------------------------------------------
PERIOD FROM PERIOD FROM
JULY 2, 1996 JUNE 7, 1996
(COMMENCEMENT (COMMENCEMENT SIX MONTHS
OF OPERATIONS) TO OF OPERATIONS)TO ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 AUGUST 31, 1996 AUGUST 31, 1996 -----------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995 1994 1993
----------- ----------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 18.97 $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 15.73 $ 15.96
----------- ----------- ---------- --------- ---------- ---------- --------
Income (loss) from investment
operations:
Net investment income2 0.04 0.07 0.18 0.41 0.41 0.42 0.45
Net realized and unrealized gain
(loss) on investments (0.67) (0.60) 0.04 5.49 0.66 1.59 1.13
----------- ----------- ---------- --------- ---------- ---------- --------
Total from investment
operations (0.63) (0.53) 0.22 5.90 1.07 2.01 1.58
----------- ----------- ---------- --------- ---------- ---------- --------
Less distributions to
shareholders:
From net investment
income -- (0.10) (0.19) (0.42) (0.39) (0.43) (0.46)
From net realized gains -- (1.16) (1.16) (1.47) (1.01) (1.53) (1.35)
----------- ----------- ---------- --------- ---------- ---------- --------
Total distributions -- (1.26) (1.35) (1.89) (1.40) (1.96) (1.81)
----------- ----------- ---------- --------- ---------- ---------- --------
Net asset value, end of period $ 18.34 $ 18.33 $ 18.33 $ 19.46 $ 15.45 $ 15.78 $ 15.73
=========== ========= ========== ========== ========== ========== =========
Total Return3 (3.32)% (2.89)% 0.89% 39.08% 7.45% 13.36% 10.57%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $ 5,996 $ 25,377 $3,015,902 $3,179,314 $2,309,248 $1,942,005 $1,892,955
Net expenses to average
daily net assets2 0.61%4 0.55%4 0.48%4 0.48% 0.48% 0.48% 0.49%
Net investment income to
average daily net assets2 1.38%4 1.40%4 1.85%4 2.25% 2.63% 2.56% 2.79%
Portfolio turnover rate 35% 35% 35% 77% 99% 40% 54%
Average commission rate paid $ 0.0306 $ 0.0306 $ 0.0306 N/A N/A N/A N/A
1 The per share amounts have been restated to reflect a ten for one split
effective December 31, 1990.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
TOBACCO-FREE CORE FUND
<TABLE>
<CAPTION>
CLASS III
-----------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ----------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 19921
----------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.93 $ 10.65 $ 11.07 $ 11.35 $ 10.50 $ 10.00
------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income2 0.12 0.28 0.23 0.34 0.31 0.12
Net realized and unrealized gain on
investments 0.074 3.71 0.50 1.18 0.84 0.44
------- ------- ------- ------- ------- -------
Total from investment operations 0.19 3.99 0.73 1.52 1.15 0.56
------- ------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.12) (0.25) (0.28) (0.35) (0.30) (0.06)
From net realized gains (1.04) (1.46) (0.87) (1.45) -- --
------- ------- ------- ------- ------- -------
Total distributions (1.16) (1.71) (1.15) (1.80) (0.30) (0.06)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 11.96 $ 12.93 $ 10.65 $ 11.07 $ 11.35 $ 10.50
======= ======= ======= ======= ======= =======
Total Return3 1.18% 38.64% 7.36% 14.12% 11.20% 5.62%
Ratios/Supplemental Data:
Net assets, end of period (000's) $54,011 $57,485 $47,969 $55,845 $85,232 $75,412
Net expenses to average daily net assets2 0.48%5 0.48% 0.48% 0.48% 0.49% 0.49%5
Net investment income to average daily
net assets2 1.87%5 2.25% 2.52% 2.42% 2.88% 3.77%5
Portfolio turnover rate 49% 81% 112% 38% 56% 0%
Average commission rate paid $0.0278 N/A N/A N/A N/A N/A
1 For the period from the commencement of operations, October 31, 1991 to February
29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.02,
$.03, $.03, $.03, $.02 and $.01 per share for the six months ended August 31,
1996, for the fiscal years ended 1996, 1995, 1994, and 1993 and for the period
ended February 29, 1992, respectively.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended August 31, 1996 due to the timing of purchases and redemptions of
Fund shares in relation to fluctuating market values of the investments of the
Fund.
5 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
16
<TABLE>
<CAPTION>
CLASS III
- --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
- --------------------------------------------------------------------------------
1992 19911 19901 19891 19881 19871
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$ 15.13 $ 13.90 $ 14.47 $ 13.43 $ 15.24 $ 12.64
---------- ---------- ---------- ---------- ---------- --------
0.43 0.43 0.65 0.54 0.45 0.34
1.55 1.74 2.43 0.96 (0.92) 3.15
---------- ---------- ---------- ---------- ---------- --------
1.98 2.17 3.08 1.50 (0.47) 3.49
---------- ---------- ---------- ---------- ---------- --------
(0.42) (0.51) (0.70) (0.46) (0.38) (0.46)
(0.73) (0.43) (2.95) -- (0.96) (0.43)
---------- ---------- ---------- ---------- ---------- --------
(1.15) (0.94) (3.65) (0.46) (1.34) (0.89)
---------- ---------- ---------- ---------- ---------- --------
$ 15.96 $ 15.13 $ 13.90 $ 14.47 $ 13.43 $ 15.24
========== ========== ========== ========== ========== ========
13.62% 16.52% 21.19% 11.49% (3.20)% 28.89%
$2,520,710 $1,613,945 $1,016,965 $1,222,115 $1,010,014 $909,394
0.50% 0.50% 0.50% 0.50% 0.52% 0.53%
2.90% 3.37% 3.84% 4.02% 3.23% 3.06%
39% 55% 72% 51% 46% 75%
N/A N/A N/A N/A N/A N/A
</TABLE>
17
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ---------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 19911
----------- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 14.25 $ 12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25 $ 10.00
-------- -------- -------- -------- ---------- -------- --------
Income from investment
operations:
Net investment income2 0.16 0.39 0.41 0.43 0.38 0.40 0.12
Net realized and unrealized
gain on
investments (0.03) 3.71 0.32 1.27 0.98 1.11 2.16
-------- -------- -------- -------- ---------- -------- --------
Total from investment
operations 0.13 4.10 0.73 1.70 1.36 1.51 2.28
-------- -------- -------- -------- ---------- -------- --------
Less distributions to
shareholders:
From net investment income (0.16) (0.39) (0.45) (0.40) (0.38) (0.41) (0.03)
From net realized gains (0.97) (1.51) (1.71) (1.32) (0.42) (0.41) --
-------- -------- -------- -------- ---------- -------- --------
Total distributions (1.13) (1.90) (2.16) (1.72) (0.80) (0.82) (0.03)
-------- -------- -------- -------- ---------- -------- --------
Net asset value, end of period $ 13.25 $ 14.25 $ 12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25
======== ======== ======== ======== ========== ======== ========
Total Return3 0.69% 35.54% 6.85% 13.02% 11.01% 12.96% 22.85%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $314,418 $317,612 $350,694 $679,532 $1,239,536 $644,136 $190,664
Net expenses to average daily
net assets 2 0.61%4 0.61% 0.61% 0.61% 0.62% 0.67% 0.70%4
Net investment income to
average daily net assets2 2.32%4 2.66% 2.86% 2.70% 3.15% 3.75% 7.89%4
Portfolio turnover rate 25% 65% 77% 35% 50% 41% 23%
Average commission rate paid $ 0.0486 N/A N/A N/A N/A N/A N/A
1 For the period from the commencement of operations, November 14,1990 to
February 28, 1991.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.02, $.02, $.02, $.01, $.01 and $.01 per share for the six months ended
August 31, 1996, for the fiscal years ended 1996, 1995, 1994, 1993, and 1992
and for the period ended February 28, 1991, respectively.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 --------------------------------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 19891
----------- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 5.65 $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49 $ 10.00
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Income from investment
operations:
Net investment
income2 0.04 0.08 0.06 0.06 0.07 0.19 0.25 0.26 0.03
Net realized and
unrealized gain on
investments 0.12 1.54 0.38 0.11 0.17 1.63 2.61 2.40 0.46
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Total from
investment
operations 0.16 1.62 0.44 0.17 0.24 1.82 2.86 2.66 0.49
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Less distributions to
shareholders:
From net investment
income (0.05) (0.07) (0.06) (0.06) (0.08) (0.23) (0.25) (0.23) --
From net realized
gains (0.43) (0.35) (0.07) (0.52) (1.43) (10.31) (0.71) (0.28) --
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Total distributions (0.48) (0.42) (0.13) (0.58) (1.51) (10.54) (0.96) (0.51) --
-------- -------- -------- -------- -------- -------- ---------- -------- -------
Net asset value, end
of period $ 5.33 $ 5.65 $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49
======== ======== ======== ======== ======== ======== ========== ======== =======
Total Return3 2.43% 37.77% 10.86% 4.13% 3.71% 20.47% 24.24% 25.35% 4.90%
Ratios/Supplemental
Data:
Net assets, end of
period (000's) $321,551 $391,366 $239,006 $230,698 $168,143 $338,439 $1,004,345 $823,891 $291,406
Net expenses to
average daily net
assets2 0.48%4 0.48% 0.48% 0.48% 0.49% 0.50% 0.50% 0.50% 0.08%
Net investment income
to average daily
net assets2 1.35%4 1.54% 1.50% 1.38% 1.15% 1.38% 1.91% 2.34% 0.52%
Portfolio turnover
rate 33% 76% 139% 57% 36% 46% 45% 57% 0%
Average commission
rate paid $ 0.0308 N/A N/A N/A N/A N/A N/A N/A N/A
1 For the period from the commencement of operations, December 28, 1988 to
February 28, 1989.
2 Net of fees and expenses voluntarily waived or borne by the Manager of less
than $.01 per share for each period presented.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
18
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
U.S. SECTOR FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ---------------------------------------------
(UNAUDITED) 1996 1995 1994 19931
----------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.63 $ 11.06 $ 11.26 $ 10.38 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income2 0.12 0.29 0.28 0.29 0.05
Net realized and unrealized gain on investments 0.09 3.90 0.49 1.21 0.33
-------- -------- -------- -------- --------
Total from investment operations 0.21 4.19 0.77 1.50 0.38
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.14) (0.29) (0.27) (0.30) --
From net realized gains (1.96) (1.33) (0.70) (0.32) --
-------- -------- -------- -------- --------
Total distributions (2.10) (1.62) (0.97) (0.62) --
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.74 $ 13.63 $ 11.06 $ 11.26 $ 10.38
======== ======== ======== ======== ========
Total Return3 1.05% 38.90% 7.56% 14.64% 3.80%
Ratios/Supplemental Data:
Net assets, end of period (000's) $225,508 $211,319 $207,291 $167,028 $169,208
Net expenses to average daily net assets2 0.48%4 0.48% 0.48% 0.48% 0.48%4
Net investment income to average daily net assets2 1.90%4 2.27% 2.61% 2.56% 3.20%4
Portfolio turnover rate 48% 84% 101% 53% 9%
Average commission rate paid $ 0.0286 N/A N/A N/A N/A
1 For the period from the commencement of operations, January 4, 1993 to
February 28, 1993.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
SMALL CAP VALUE FUND*
<TABLE>
<CAPTION>
CLASS III
---------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ---------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 19921
----------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.89 $ 13.61 $ 14.31 $ 12.68 $ 11.12 $ 10.00
-------- -------- -------- -------- -------- -------
Income from investment operations:
Net investment income2 0.15 0.23 0.20 0.21 0.22 0.04
Net realized and unrealized gain 0.49 3.20 0.34 2.14 1.59 1.08
-------- -------- -------- -------- -------- -------
Total from investment operations 0.64 3.43 0.54 2.35 1.81 1.12
-------- -------- -------- -------- -------- -------
Less distributions to shareholders:
From net investment income (0.13) (0.23) (0.20) (0.22) (0.21) --
From net realized gains (0.23) (2.92) (1.04) (0.50) (0.04) --
-------- -------- -------- -------- -------- -------
Total distributions (0.36) (3.15) (1.24) (0.72) (0.25) 0.00
-------- -------- -------- -------- -------- -------
Net asset value, end of period $ 14.17 $ 13.89 $ 13.61 $ 14.31 $ 12.68 $ 11.12
======== ======== ======== ======== ======== =======
Total Return3 4.57% 27.18% 4.48% 18.97% 16.46% 11.20%
Ratios/Supplemental Data:
Net assets, end of period (000's) $330,377 $231,533 $235,781 $151,286 $102,232 $58,258
Net expenses to average daily net assets2 0.48%4 0.48% 0.48% 0.48% 0.49% 0.49%4
Net investment income to average daily
net assets2 2.24%4 1.67% 1.55% 1.66% 2.02% 2.19%4
Portfolio turnover rate 5% 135% 54% 30% 3% 0%
Average commission rate paid $ 0.0309 N/A N/A N/A N/A N/A
1 For the period from commencement of operations, December 31, 1991 to February
29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $0.01,
$0.02, $0.01, $0.02, $0.02 and $0.01 per share for the six months ended August
31, 1996, for the fiscal years ended 1996, 1995, 1994 and 1993 and for the
period ended February 29, 1992, respectively.
3 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
4 Annualized.
* Effective December 1, 1996, the "GMO Core II Secondaries Fund" has been
renamed the "GMO Small Cap Value Fund."
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
19
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FUNDAMENTAL VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ---------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 19921
----------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82 $ 10.00
-------- -------- -------- -------- ------- -------
Income from investment operations:
Net investment income2 0.18 0.37 0.34 0.27 0.30 0.11
Net realized and unrealized gain on
investments 0.03 3.26 0.55 1.64 1.32 0.77
-------- -------- -------- -------- ------- -------
Total from investment operations 0.21 3.63 0.89 1.91 1.62 0.88
-------- -------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income (0.15) (0.37) (0.32) (0.28) (0.30) (0.06)
From net realized gains (0.63) (0.76) (0.52) (0.85) (0.43) --
-------- -------- -------- -------- ------- -------
Total distributions (0.78) (1.13) (0.84) (1.13) (0.73) (0.06)
-------- -------- -------- -------- ------- -------
Net asset value, end of period $ 14.47 $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82
======== ======== ======== ======== ======= =======
Total Return3 1.29% 29.95% 7.75% 16.78% 15.66% 8.87%
Ratios/Supplemental Data:
Net assets, end of period (000's) $203,243 $212,428 $182,871 $147,767 $62,339 $32,252
Net expenses to average daily net assets2 0.75%4 0.75% 0.75% 0.75% 0.73% 0.62%4
Net investment income to average daily
net assets2 2.35%4 2.61% 2.84% 2.32% 2.77% 3.43%4
Portfolio turnover rate 9% 34% 49% 65% 83% 33%
Average commission rate paid $ 0.0554 N/A N/A N/A N/A N/A
1 For the period from the commencement of operations, October 31, 1991 to
February 29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.01, $.01, $.01, $.03 and $.03 per share for the six months ended August 31,
1996, for fiscal years ended 1996, 1995, 1994, and 1993 and for the period
ended February 29, 1992, respectively.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Annualized.
</TABLE>
REIT FUND
<TABLE>
<CAPTION>
CLASS III
-----------------
PERIOD FROM
MAY 31, 1996
(COMMENCEMENT OF
OPERATIONS) TO
AUGUST 31, 1996
---------------
<S> <C>
Net asset value, beginning of period $ 10.00
--------
Income from investment operations:
Net investment income1 0.08
Net realized and unrealized gain 0.52
--------
Total from investment operations 0.60
--------
Net asset value, end of period $ 10.60
========
Total Return2 6.00%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 79,111
Net expenses to average daily net assets1 0.69%3
Net investment income to average daily net assets1 6.14%3
Portfolio turnover rate 1%
Average commission rate paid $0.0338
1 Net of fees and expenses voluntarily waived or borne by the Manager of $0.01
per share.
2 Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
3 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
20
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL EQUITY FUNDS
- --------------------------
INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 -------------------------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989 19881
----------- ---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 24.62 $ 22.32 $ 25.56 $ 18.51 $18.80 $18.73 $18.79 $ 17.22 $14.76 $ 15.00
---------- ------- ------- ------- ------ ------ ------ -------- ------ -------
Income (loss) from invest-
ment operations:
Net investment income2 0.43 0.36 0.27 0.29 0.29 0.29 0.55 0.49 0.45 0.18
Net realized and unreal-
ized gain (loss) on
investments (0.34) 3.09 (1.57) 7.44 (0.04) 0.22 0.69 1.93 3.37 (0.03)
---------- ------- ------- ------- ------ ------ ------ -------- ------ -------
Total for investment
operations 0.09 3.45 (1.30) 7.73 0.25 0.51 1.24 2.42 3.82 0.15
---------- ------- ------- ------- ------ ------ ------ -------- ------ -------
Less distributions to share-
holders:
From net investment
income (0.07) (0.39) (0.35) (0.27) (0.20) (0.28) (0.54) (0.55) (0.45) (0.05)
From net realized gains (0.46) (0.76) (1.59) (0.41) (0.34) (0.16) (0.76) (0.30) (0.91) (0.34)
---------- ------- ------- ------- ------ ------ ------ -------- ------ -------
Total distributions (0.53) (1.15) (1.94) (0.68) (0.54) (0.44) (1.30) (0.85) (1.36) (0.39)
---------- ------- ------- ------- ------ ------ ------ -------- ------ -------
Net asset value, end of
period $ 24.18 $ 24.62 $ 22.32 $ 25.56 $18.51 $18.80 $18.73 $ 18.79 $17.22 $14.76
========== ======= ======= ======= ====== ====== ====== ======== ====== ======
Total Return3 0.32% 15.72% (5.31)% 42.10% 1.43% 2.84% 7.44% 13.99% 26.35% 1.07%
Ratios/Supplemental
Data:
Net assets, end of period
(000's) $4,253,262 $4,538,036 $2,591,646 $2,286,431 $918,332 $414,341 $173,792 $101,376 $35,636 $11,909
Net expenses to
average daily net assets2 0.69%5 0.71%4 0.70% 0.71%4 0.70% 0.70% 0.78% 0.80% 0.88% 0.70%5
Net investment income to
average daily net assets2 3.38%5 1.93% 1.48% 1.48% 2.36% 2.36% 3.32% 3.17% 3.19% 1.27%5
Portfolio turnover rate 52% 14% 53% 23% 23% 35% 81% 45% 37% 129%
Average commission rate paid $ 0.0061(6) n/a n/a n/a n/a n/a n/a n/a n/a n/a
1 For the period from the commencement of operations, April 7, 1987 to February
29, 1988.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.03,
$.03, $.03, $.03, $.03, $.02, $.01, $.02, $.05 and $.08 per share for the six
months ended August 31, 1996, for the fiscal years ended 1996, 1995, 1994,
1993, 1992, 1991, 1990, and 1989 and for the period ended February 29, 1988,
respectively.
3 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
4 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
5 Annualized.
6 The Average commission rate paid will vary depending on the markets in which
trades are executed.
</TABLE>
CURRENCY HEDGED INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------
PERIOD FROM
JUNE 30, 1995
SIX MONTHS ENDED (COMMENCEMENT OF
AUGUST 31, 1996 OPERATIONS) TO
(UNAUDITED) FEBRUARY 29, 1996
----------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 11.54 $ 10.00
-------- --------
Income from investment operations:
Net investment income1 0.15 0.23
Net realized and unrealized gain on investments5 0.12 1.44
-------- --------
Total from investment operations 0.27 1.67
-------- --------
Less distributions to shareholders from:
Net investment income (0.04) (0.06)
Net realized gains (0.24) (0.07)
-------- --------
Total distributions (0.28) (0.13)
-------- --------
Net asset value, end of period $ 11.53 $ 11.54
======== ========
Total Return2 2.21% 16.66%
Ratios/Supplemental Data:
Net assets, end of period (000's) $508,171 $407,277
Net expenses to average daily net assets1 0.69%3 0.69%3
Net investment income to average daily net assets1 3.42%3 1.89%3
Portfolio turnover rate 36% 7%
Average commission rate paid $0.0059(4) N/A
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
and $.05 per share for the six months ended August 31, 1996 and for the period
ended February 29, 1996, respectively.
2 Calculation excludes purchase premiums. The total return would have been lower
had certain expenses not been waived during the period shown.
3 Annualized.
4 The Average commission rate paid will vary depending on the markets in which
trades are executed.
5 Tne amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended August 31, 1996 due to the timing of purchases and redemptions of
Fund shares in relation to fluctuating market values of the investments of the
Fund.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
21
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FOREIGN FUND*
<TABLE>
<CAPTION>
CLASS I CLASS III | GMO POOL PERFORMANCE INFORMATION**
----------- ------------- | (UNAUDITED)
PERIOD FROM PERIOD FROM | -----------------------------------------
JULY 10, 1996 JUNE 28, 1996 |
(COMMENCEMENT OF (COMMENCEMENT OF |
OPERATIONS) TO OPERATIONS) TO | YEAR ENDED JUNE 30,(a)
AUGUST 31, 1996 AUGUST 31, 1996 | ------------------------------------------
(UNAUDITED) (UNAUDITED) | 1996 1995 1994 1993 1992
----------- ----------- | ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of |
period $ 9.88 $ 10.00 | $ 8.90 $ 8.52 $ 6.88 $ 6.72 $ 5.94
-------- -------- | ------ ------ ------ ------ ------
Income (loss) from investment |
operations: |
Net investment income 0.021 0.031 | 0.27(b) 0.27(b) 0.15(b) 0.23(b) 0.21(b)
Net realized and unrealized gain |
(loss) on investments (0.09) (0.22) | 1.07 0.37 1.65 0.15 0.79
-------- -------- | ------ ------ ------ ------ ------
Total from investment operations (0.07) (0.19) | 1.34 0.64 1.80 0.38 1.00
-------- -------- | ------ ------ ------ ------ ------
Less distributions to shareholders: |
From net investment income 0 0 | (0.24) (0.26) (0.16) (0.22) (0.22)
-------- -------- | ------ ------ ------ ------ ------
Net asset value, end of period $ 9.81 $ 9.81 | $10.00 $ 8.90 $ 8.52 $ 6.88 $ 6.72
======== ======== | ====== ====== ====== ====== ======
Total Return (0.71)%2 (1.90)%2 | 14.25%(c) 6.82%(c) 25.43%(c) 5.10%(c) 16.22%(c)
Ratios/Supplemental Data: |
Net assets, end of period (000's) $ 3,476 $566,259 | N/A N/A N/A N/A N/A
Net expenses to average daily net |
assets 0.88%1,3 0.75%1,3 | N/A N/A N/A N/A N/A
Net investment income to average |
daily net assets 1.22%1,3 1.81%1,3 | N/A N/A N/A N/A N/A
Portfolio turnover rate 2% 2% | N/A N/A N/A N/A N/A
Average commission rate paid $0.0165(4) $0.0165(4) | N/A N/A N/A N/A N/A
1 Net of fees and expenses voluntarily waived or borne by the Manager of less of
than $0.01 per share.
2 The total return would have been lower had certain expenses not been waived
during the period shown.
3 Annualized.
4 The average broker commission rate will vary depending on the markets in which
trades are executed.
(a) The fiscal year end of the GMO Pool was June 30.
(b) Expenses for the GMO Pool were paid directly by its unitholders.
(c) Net of annual total GMO Pool expenses of 0.83% paid directly by unitholders.
* The GMO Foreign Fund (the "Foreign Fund") commenced operations on June 28,
1996 subsequent to a transaction involving, in essence, the reorganization of
the GMO International Equities Pool of The Common Fund for Nonprofit
Organizations (the "GMO Pool") as the Foreign Fund. For more information, see
"Certain Financial Information Relating to the GMO Foreign Fund."
** All information relating to the time periods prior to June 28, 1996 relates
to the GMO Pool. Total return figures are based on historical earnings but
past performance data is not necessarily indicative of future performance of
the Foreign Fund. The per unit information for the GMO Pool has been restated
to conform to the Foreign Fund's initial net asset value of $10.00 per share
on such date. The GMO Pool was not a registered investment company as it was
exempt from registration under the 1940 Act and therefore was not subject to
certain investment restrictions imposed by the 1940 Act. If the GMO Pool had
been registered under the 1940 Act, its performance may have been adversely
affected. The GMO Pool's performance information is also presented as the
performance of the Foreign Fund for periods prior to June 28, 1996 by
including the total return of the GMO Pool; such information does not
constitute the financial highlights of the Foreign Fund. For more information
relating to the GMO Pool and the reorganization of the Foreign Fund, see
"Certain Financial Information Relating to the GMO Foreign Fund."
</TABLE>
The above information is unaudited. The information relating to the period
ending August 31, 1996 should be read in conjunction with the other unaudited
financial statements and related notes which are included in the Foreign Fund's
Semi-Annual Report, and which are incorporated by reference in the Trust's
Statement of Additional Information. The GMO Pool had only one class of
outstanding units. Expenses charged to GMO Pool unitholders were fixed at a
level below that of the Foreign Fund's Class I Shares and above that of its
Class III Shares. No Class II Shares of the Foreign Fund were outstanding during
the period ended August 31, 1996.
22
<TABLE>
<CAPTION>
GMO POOL PERFORMANCE INFORMATION**
(UNAUDITED)
- ----------------------------------------------------------------------------
YEAR ENDED JUNE 30,(a)
- ----------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$ 7.04 $ 5.71 $ 5.05 $ 5.10 $ 3.83 $ 2.11
------- ------ ------ ------ ------ ------
0.30(b) 0.29(b) 0.23(b) 0.18(b) 0.14(b) 0.12(b)
(1.09) 1.32 0.66 (0.04) 1.27 1.71
------- ------ ------ ------ ------ ------
(0.80) 1.60 0.89 0.14 1.41 1.83
------- ------ ------ ------ ------ ------
(0.30) (0.28) (0.23) (0.19) (0.14) (0.12)
------- ------ ------ ------ ------ ------
$ 5.94 $ 7.04 $ 5.71 $ 5.05 $ 5.10 $ 3.83
======= ====== ====== ====== ====== ======
(11.99)%(c) 27.53%(c) 17.04%(c) 1.96%(c) 36.38%(c) 86.92%(c)
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
</TABLE>
23
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL SMALL COMPANIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 -------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 19921
----------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.95 $ 11.95 $ 14.45 $ 8.91 $ 9.62 $ 10.00
-------- -------- -------- -------- ------- -------
Income (loss) from investment operations:
Net investment income2 0.17 0.18 0.18 0.15 0.35 0.06
Net realized and unrealized gain (loss) on
investments 0.10 1.16 (1.52) 5.59 (0.68) (0.43)
-------- -------- -------- -------- ------- -------
Total from investment operations 0.27 1.34 (1.34) 5.74 (0.33) (0.37)
-------- -------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income (0.04) (0.17) (0.20) (0.12) (0.38) (0.01)
In excess of net investment income -- (0.02) -- -- -- --
From net realized gains (0.20) (0.15) (0.96) (0.08) -- --
-------- -------- -------- -------- ------- -------
Total distributions (0.24) (0.34) (1.16) (0.20) (0.38) (0.01)
-------- -------- -------- -------- ------- -------
Net asset value, end of period $ 12.98 $ 12.95 $ 11.95 $ 14.45 $ 8.91 $ 9.62
======== ======== ======== ======== ======= =======
Total Return3 1.96% 11.43% (9.66)% 64.67% (3.30)% (3.73)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $226,426 $218,964 $186,185 $132,645 $35,802 $24,467
Net expenses to average daily net assets2 0.75%5 0.76%4 0.76%4 0.75% 0.75% 0.85%5
Net investment income to average daily net
assets2 2.50%5 1.84% 1.45% 1.50% 4.02% 1.91%5
Portfolio turnover rate 6% 13% 58% 38% 20% 1%
Average commission rate paid $ 0.0005(6) N/A N/A N/A N/A N/A
1 For the period from the commencement of operations, October 15, 1991 to
February 29, 1992.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.05,
$.07, $.08, $.09, $.09 and $.05 per share for the six months ended August 31,
1996, for the fiscal years ended 1996, 1995, 1994, and 1993 and for the period
ended February 29, 1992, respectively.
3 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
4 Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
5 Annualized.
6 The average broker commission rate will vary depending on the markets in which
trades are executed.
</TABLE>
JAPAN FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 19911
----------- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.52 $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48 $ 10.00
-------- -------- ------- -------- -------- --------- -------
Income (loss) from investment
operations:
Net investment income
(loss)2 -- 3 (0.01)3 -- 3 -- 0.01 -- (0.01)
Net realized and unrealized
gain (loss) on investments (0.31) 0.79 (1.08) 3.94 (0.36) (1.74) (0.39)
-------- -------- ------- -------- -------- --------- -------
Total fromm investment
operations (0.31) 0.78 (1.08) 3.94 (0.35) (1.74) (0.40)
-------- -------- ------- -------- -------- --------- -------
Less distributions to
shareholders:
From net investment income -- -- -- -- (0.01) -- --
In excess of net investment
income -- -- -- (0.01) -- -- --
From net realized gains -- (1.38) (0.93) (0.17) -- -- --
From paid-in capital4 -- -- -- -- -- (0.01) (0.12)
-------- -------- ------- -------- -------- --------- -------
Total distributions -- (1.38) (0.93) (0.18) (0.01) (0.01) (0.12)
-------- -------- ------- -------- -------- --------- -------
Net asset value, end of
period $ 8.21 $ 8.52 $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48
======== ======== ======= ======== ======== ======== =======
Total Return5 (3.75)% 8.29% (10.62)% 53.95% (4.49)% (18.42)% (3.79)%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $263,438 $126,107 $60,123 $450,351 $306,423 $129,560 $60,509
Net expenses to average
daily net assets2 0.70%6 0.92% 0.83% 0.87% 0.88% 0.93% 0.95%6
Net investment income to
average daily net assets2 (0.02)%6 (0.13)% (0.02)% (0.01)% 0.12% (0.11)% (0.32)%6
Portfolio turnover rate 2% 23% 60% 8% 17% 25% 11%
Average commission rate paid $ 0.0061 N/A N/A N/A N/A N/A N/A
1 For the period from the commencement of operations, June 8, 1990 to February
28, 1991.
2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for the six months ended August 31, 1996, $.01 per share for the
fiscal year ended 1996, less than $.01 per share for the fiscal year ended
1995, and $.01 per share for the fiscal years ended 1994, 1993, 1992 and 1991.
3 Based on average month-end shares outstanding.
4 Return of capital for book purposes only. A distribution was required for tax
purposes to avoid the payment of federal excise tax.
5 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
6 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
24
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------------
PERIOD FROM
SIX MONTHS DECEMBER 9, 1993
ENDED YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
AUGUST 31, 1996 --------------------------- OPERATIONS) TO
(UNAUDITED) 1996 1995 FEBRUARY 28, 1994
----------- ---- ---- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.54 $ 9.52 $ 12.13 $ 10.00
---------- -------- -------- --------
Income (loss) from investment operations:
Net investment income1 0.09 0.10 0.05 0.02
Net realized and unrealized gain (loss) on
investments 0.38 1.06 (2.37) 2.11
---------- -------- -------- --------
Total from investment operations 0.47 1.16 (2.32) 2.13
---------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.08) (0.01) (0.07) (0.00)2
From net realized gains -- (0.13) (0.22) --
---------- -------- -------- --------
Total distributions (0.08) (0.14) (0.29) (0.00)
---------- -------- -------- --------
Net asset value, end of period $ 10.93 $ 10.54 $ 9.52 $ 12.13
========== ======== ======== ========
Total Return3 4.42% 12.24% (19.51%) 21.35%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,220,397 $907,180 $384,259 $114,409
Net expenses to average daily net assets1 1.18%4 1.35% 1.58% 1.64%4
Net investment income to average daily net assets1 2.13%4 1.31% 0.85% 0.87%4
Portfolio turnover rate 18% 35% 50% 2%
Average commission rate paid $ 0.0003(5) N/A N/A N/A
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for the six months ended August 31, 1996 and of less than $.01 per
share for the fiscal year ended 1996 and the period ended 1994.
2 The per share income distribution was $0.004.
3 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
4 Annualized.
5 The Average commission rate paid will vary depending on the markets in which
trades are executed.
</TABLE>
FIXED INCOME FUNDS
- ------------------
DOMESTIC BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
AUGUST 18, 1994
SIX MONTHS ENDED (COMMENCEMENT OF
AUGUST 31, 1996 YEAR ENDED OPERATIONS) TO
(UNAUDITED) FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.40 $ 10.13 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income1 0.28 0.66 0.24
Net realized and unrealized gain on investments (0.33) 0.58 0.07
-------- -------- --------
Total from investment operations (0.05) 1.24 0.31
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.31) (0.60) (0.18)
From net realized gains (0.06) (0.37) --
-------- -------- --------
Total distributions (0.37) (0.97) (0.18)
-------- -------- --------
Net asset value, end of period $ 9.98 $ 10.40 $ 10.13
======== ======== ========
Total Return2 (0.46)% 12.50% 3.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) $451,131 $310,949 $209,377
Net expenses to average daily net assets1 0.25%3 0.25% 0.25%3
Net investment income to average daily net assets1 6.10%3 6.52% 6.96%3
Portfolio turnover rate 19% 70% 65%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
2 The total returns would have been lower had certain expenses not been waived
during the periods shown.
3 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
25
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------------------
PERIOD FROM
DECEMBER 22, 1993
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
AUGUST 31, 1996 -------------------------- OPERATIONS) TO
(UNAUDITED) 1996 1995 FEBRUARY 28, 1994
----------- ---- ---- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.92 $ 9.64 $ 9.96 $ 10.00
-------- -------- -------- -------
Income (loss) from investment operations:
Net investment income1 0.41 0.62 0.98 0.08
Net realized and unrealized gain (loss) on
investments 0.58 1.55 (0.21) (0.12)
-------- -------- -------- -------
Total from investment operations 0.99 2.17 0.77 (0.04)
-------- -------- -------- -------
Less distributions to shareholders:
From net investment income (0.22) (0.59) (0.75) --
From net realized gains (0.14) (0.30) (0.34) --
-------- -------- -------- -------
Total distributions (0.36) (0.89) (1.09) --
-------- -------- -------- -------
Net asset value, end of period $ 11.55 $ 10.92 $ 9.64 $ 9.96
======== ======== ======== =======
Total Return2 9.22% 22.72% 8.23% (0.40)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $202,805 $193,920 $151,189 $39,450
Net expenses to average daily net assets1 0.40%3 0.40% 0.40% 0.40%3
Net investment income to average daily net
assets1 7.15%3 8.17% 7.51% 5.34%3
Portfolio turnover rate 47% 99% 141% 14%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.01, $.02 and $.01 per share for the six months ended August 31, 1996, for
the fiscal years ended 1996 and 1995 and for the period ended February 28,
1994, respectively.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 Annualized.
</TABLE>
CURRENCY HEDGED INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
SEPTEMBER 30, 1994
SIX MONTHS ENDED (COMMENCEMENT OF
AUGUST 31, 1996 YEAR ENDED OPERATIONS) TO
(UNAUDITED) FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.92 $ 9.99 $ 10.00
-------- -------- --------
Income (loss) from investment operations:
Net investment income1 0.32 1.05 0.24
Net realized and unrealized gain (loss) on investments 0.80 1.62 (0.09)
-------- -------- --------
Total from investment operations 1.12 2.67 0.15
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.01) (1.04) (0.16)
From net realized gains (0.03) (0.42) --
In excess of net realized gains -- (0.28) --
-------- -------- --------
Total distributions (0.04) (1.74) (0.16)
-------- -------- --------
Net asset value, end of period $ 12.00 $ 10.92 $ 9.99
======== ======== ========
Total Return2 10.32% 27.36% 1.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $349,131 $236,162 $238,664
Net expenses to average daily net assets1 0.40%3 0.40% 0.40%3
Net investment income to average daily net assets1 7.35%3 8.54% 8.46%3
Portfolio turnover rate 38% 85% 64%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.03 and $.01 per share for the six months ended August 31, 1996, for the
fiscal year ended 1996 and for the period ended February 28, 1995,
respectively.
2 Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
3 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
26
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------
PERIOD FROM
DECEMBER 28, 1995
SIX MONTHS ENDED (COMMENCEMENT OF
AUGUST 31, 1996 OPERATIONS) TO
(UNAUDITED) FEBRUARY 29, 1996
----------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 9.89 $ 10.00
------- -------
Income (loss) from investment operations:
Net investment income1 0.29 0.05
Net realized and unrealized gain (loss) on investments 0.33 (0.16)
------- -------
Total from investment operations 0.62 (0.11)
------- -------
Less distributions to shareholders:
From net investment income (0.03) --
------- -------
Total distribution (0.03) --
------- -------
Net asset value, end of period $ 10.48 $ 9.89
======= ========
Total Return2 6.22% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $63,321 $31,072
Net expenses to average daily net assets1 0.34%3 0.34%3
Net investment income to average daily net assets1 6.44%3 6.16%3
Portfolio turnover rate 22% 0%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01
per share for each period presented.
2 Calculation excludes purchase premiums. The total return would have been lower
had certain expenses not been waived during the period shown.
3 Annualized.
</TABLE>
EMERGING COUNTRY DEBT FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------------
PERIOD FROM
APRIL 19, 1994
SIX MONTHS ENDED (COMMENCMENT OF
AUGUST 31, 1996 YEAR ENDED OPERATIONS) TO
(UNAUDITED) FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 11.76 $ 8.39 $ 10.00
-------- -------- --------
Income (loss) from investment operations:
Net investment income1 0.71 1.35 0.48
Net realized and unrealized gain (loss) on investments 2.65 3.84 (1.59)
-------- -------- --------
Total from investment operations 3.36 5.19 (1.11)
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.26) (1.17) (0.40)
From net realized gains (0.50) (0.65) --
In excess of net realized gains -- -- (0.10)
-------- -------- --------
Total distributions (0.76) (1.82) (0.50)
-------- -------- --------
Net asset value, end of period $ 14.36 $ 11.76 $ 8.39
======== ======== ========
Total Return2 29.01% 63.78% (11.65%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $646,827 $615,485 $243,451
Net expenses to average daily net assets1 0.58%3 0.50% 0.50%3
Net investment income to average daily net assets1 9.51%3 12.97% 10.57%3
Portfolio turnover rate 69% 158% 104%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.02 and $.01 per share for the six months ended August 31, 1996, for the
fiscal year ended 1996 and for the period ended February 28, 1995,
respectively.
2 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
3 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
27
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28/29,
AUGUST 31, 1996 ----------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 19923 19911,2,3
----------- ---- ---- ---- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.77 $ 9.56 $ 9.79 $10.05 $ 10.11 $10.00 $ 10.00
------- ------- ------ ------ ------- ------ -------
Income (loss) from investment
operations:
Net investment income4 0.22 0.57 0.63 0.44 0.46 0.56 0.67
Net realized and unrealized gain
(loss) on investments (0.02) 0.20 (0.28) (0.09) 0.30 0.11 --
------- ------- ------ ------ ------- ------ -------
Total from investment operations 0.20 0.77 0.35 0.35 0.76 0.67 0.67
------- ------- ------ ------ ------- ------ -------
Less distributions to shareholders:
From net investment income (0.25) (0.56) (0.58) (0.46) (0.38) (0.56) (0.67)
From net realized gains -- -- -- (0.15) (0.44) -- --
------- ------- ------ ------ ------- ------ -------
Total distributions (0.25) (0.56) (0.58) (0.61) (0.82) (0.56) (0.67)
------- ------- ------ ------ ------- ------ -------
Net asset value, end of period $ 9.72 $ 9.77 $ 9.56 $ 9.79 $ 10.05 $10.11 $ 10.00
======= ======= ====== ====== ======= ====== =======
Total Return5 2.11% 8.32% 3.78% 3.54% 8.25% 11.88% 3.83%
Ratios/Supplemental Data:
Net assets, end of period (000's) $25,385 $11,066 $8,193 $8,095 $10,499 $9,257 $40,850
Net expenses to average daily net
assets4 0.20%6 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%6
Net investment income to average
daily net assets4 5.81%6 6.49% 5.02% 4.35% 4.94% 5.83% 7.88%6
Portfolio turnover rate 206% 139% 335% 243% 649% 135% --
1 For the period from the commencement of operations, April 17, 1990 to February
28, 1991.
2 The per share amounts have been restated to reflect a one for ten reverse
stock split effective December 1, 1991.
3 The Fund operated as a money market fund from April 17, 1990 until June 30,
1991. Subsequently, the Fund became a short-term income fund.
4 Net of fees and expenses voluntarily waived or borne by the manager of $.01,
$.03, $.02, $.02, $.03, $.03 and $.09 per share for the six months ended
August 31, 1996, for the fiscal years ended 1996, 1995, 1994, 1993, and 1992
and for the period ended February 28, 1991, respectively.
5 The total returns would have been lower had certain expenses not been waived
during the periods shown.
6 Annualized.
</TABLE>
GLOBAL HEDGED EQUITY FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------
PERIOD FROM
JULY 29, 1994
SIX MONTHS ENDED (COMMENCEMENT OF
AUGUST 31, 1996 YEAR ENDED OPERATIONS) TO
(UNAUDITED) FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.64 $ 10.12 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income1 0.14 0.21 0.11
Net realized and unrealized gain on investments (0.12) 0.55 0.08
-------- -------- --------
Total from investment operations 0.02 0.76 0.19
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.01) (0.24) (0.07)
-------- -------- --------
Net asset value, end of period $ 10.65 $ 10.64 $ 10.12
======== ======== ========
Total Return2 0.22% 7.54% 1.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $317,129 $382,934 $214,638
Net expenses to average daily net assets1 0.83%3 0.78% 0.92%3
Net investment income to average daily net assets1 2.37%3 2.44% 2.85%3
Portfolio turnover rate 150% 214% 194%
Average commission rate paid $0.0072(4) N/A N/A
1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01,
$.005 and $.006 per share for the six months ended August 31, 1996, for the
fiscal year ended 1996 and for the period ended February 28, 1995,
respectively.
2 Calculation excludes purchase premiums and redemption fees. The total returns
would have been lower had certain expenses not been waived during the periods
shown.
3 Annualized.
4 The average broker commission rate will vary depending on the markets in which
trades are executed.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
28
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
ASSET ALLOCATION FUNDS
- ----------------------
WORLD EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS I CLASS II
--------------- -----------------
PERIOD FROM PERIOD FROM
JUNE 28, 1996 JUNE 28, 1996
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO
AUGUST 31, 1996 AUGUST 31, 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Net asset value, beginning of period $10.00 $10.00
------ ------
Income from investment operations:
Net investment income1 0.03 0.04
Net realized and unrealized loss (0.34) (0.35)
------ ------
Total from investment operations (0.31) (0.31)
------ ------
Net asset value, end of period $ 9.69 $ 9.69
====== ======
Total Return2 (3.10)% (3.10)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $5,639 $3,994
Net expenses to average daily net assets1 0.18%3 0.12%3
Net investment income to average daily net assets1 2.00%3 2.06%3
Portfolio turnover rate 0% 0%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $0.01
per share.
2 The total return would have been lower had certain expenses not been waived
during the period shown.
3 Annualized.
</TABLE>
GLOBAL BALANCED ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS I
-----------------
PERIOD FROM
JULY 29, 1996
(COMMENCEMENT OF
OPERATIONS) TO
AUGUST 31, 1996
(UNAUDITED)
---------------
<S> <C>
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment loss1 --
Net realized and unrealized gain 0.24
------
Total from investment operations 0.24
------
Net asset value, end of period $10.24
======
Total Return2 2.40%
Ratios/Supplemental Data:
Net assets, end of period (000's) $3,073
Net expenses to average daily net assets1 0.18%3
Net investment income to average daily net assets1 (0.18)%3
Portfolio turnover rate 0%
1 Net of fees and expenses voluntarily waived or borne by the Manager of $0.01
per share.
2 The total return would have been lower had certain expenses not been waived
during the period shown.
3 Annualized.
</TABLE>
Except as otherwise noted, the above information has been audited by Price
Waterhouse LLP, independent accountants. This statement should be read in
conjunction with the other audited financial statements and related notes which
are included in the Trust's Annual Reports and unaudited financial statements
and related notes which are included in the Trust's Semi-Annual Reports, each of
which are incorporated by reference in the Trust's Statement of Additional
Information. Information is presented for each Fund, and class of shares
thereof, of the Trust which had investment operations during the reporting
periods. Information regarding Class III Shares of each Fund reflects the
operational history for each such Fund's sole outstanding class prior to the
creation of multiple classes of such Funds on May 31, 1996.
Investors in Class I or Class II Shares should be aware that the above financial
highlight tables reflect performance based on Class III expense ratios. In the
future, investors in Class I and Class II Shares will experience slightly lower
total returns than investors in Class III Shares of the same Fund as a result of
higher overall expense ratios for Class I and Class II Shares.
The Manager's discussion of the performance of each Fund in fiscal 1996, as well
as a comparison of each Fund's performance over the life of the Fund with that
of a benchmark securities index selected by the Manager, is included in each
Fund's Annual Report and Semi-Annual Report for the fiscal year ended February
29, 1996 and the six months ended August 31, 1996, respectively. Copies of the
Annual and Semi-Annual Reports are available upon request without charge.
29
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the Core Fund, the Value Fund, the
Growth Fund, the Short-Term Income Fund, the International Core Fund, and the
Japan Fund is fundamental and may not be changed without shareholder approval.
The investment objective of each other Fund may be changed without shareholder
approval. Unless specifically noted herein, the investment policies of the Funds
may be changed without shareholder approval. There can be no assurance that the
investment objective of any Fund will be achieved.
As noted in the following Fund descriptions, many of the Funds seek
total returns greater than, or select securities that are represented in,
certain benchmarks or indexes. These benchmarks or indexes may be commercially
developed and published, modifications of commercially available indexes
maintained by the Manager, or composite benchmarks maintained by the Manager
that blend commercially available indexes. A description of the various
benchmarks and indexes is set forth on pages 5 and 6.
DOMESTIC EQUITY FUNDS
CORE FUND
Current Benchmark: S&P 500
The Core Fund seeks a total return greater than that of the S&P 500
through investment in common stocks. The Core Fund expects that substantially
all of its assets will be invested in or exposed to the equity securities of at
least 125 companies chosen from among the Wilshire 5000 Index (the "WILSHIRE
5000") and that it will be invested primarily in the approximately 1,200
companies with the largest equity capitalization (i.e., number of shares
outstanding multiplied by the market price per share) at the time of investment
which are also listed on a United States national securities exchange (the
"LARGE CAP 1200"). The Core Fund may, from time to time, invest in fewer issuers
if, in the opinion of the Manager, there are not at least 125 attractive
investment opportunities from among such companies.
The Manager will select which issuers to invest in based on its
assessment of whether the common stock of the issuer is likely to perform better
than the S&P 500. Since the Core Fund's portfolio investments will not be chosen
and proportionately weighted to approximate the total return of the S&P 500, the
total return of the Core Fund may be more or less than the total return of the
S&P 500. An investment in the Fund involves risks similar to investing in common
stocks directly.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in real estate investment trusts ("REITs"),
which are described under the description of the GMO REIT Fund in this
Prospectus. The Fund may also invest up to 15% of its net assets in illiquid
securities, lend portfolio securities valued at up to one-third of total assets,
and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in domestic common
stocks, index futures, equity swap contracts and contracts for differences even
when the Manager believes that equity securities generally may underperform
other types of investments. The Fund expects that, not including the margin
deposits or the segregated accounts created in connection with index futures and
other derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
TOBACCO-FREE CORE FUND
Current Benchmark: S&P 500
The Tobacco-Free Core Fund seeks a total return greater than that of
the S&P 500 through investment in common stocks. Substantially all of the Fund's
assets will be invested in or exposed to equity securities chosen from among the
Wilshire 5000 and selected primarily from Large Cap 1200 issuers which are not
Tobacco Producing Issuers (as defined below). The Tobacco-Free Core Fund expects
that substantially all of its assets will be invested in the securities of at
least 125 companies. The Tobacco-Free Core Fund may, from time to time, invest
in fewer issuers if, in the opinion of the Manager, there are not at least 125
attractive investment opportunities from among such companies.
The Manager will select which issuers to invest in based on its
assessment of whether the common stock of the issuer is likely to perform better
than the S&P 500. Since the Tobacco- Free Core Fund's portfolio investments will
not be chosen and proportionately weighted to approximate the total return of
the S&P 500, the total return of the Tobacco-Free Core Fund may be more or less
than the total return of the S&P 500. An investment
-30-
in the Fund involves risks similar to investing in common stocks directly.
The Manager has instituted procedures to avoid investment by the
Tobacco-Free Core Fund in the securities of issuers which, at the time of
purchase, derive more than 10% of their gross revenues from the production of
tobacco-related products ("TOBACCO PRODUCING ISSUERS"). For this purpose the
Manager will subscribe to and generally rely on information services provided by
third parties, although the Manager may cause the Tobacco-Free Core Fund to
purchase securities of issuers which are identified by those third parties as
Tobacco Producing Issuers if, at the time of purchase, the Manager has received
information from the issuer to the effect that it is no longer a Tobacco
Producing Issuer.
Because of its name, the Tobacco-Free Core Fund is required to have a
fundamental policy, which cannot be changed without shareholder approval, that
under normal market conditions at least 65% of its assets will be invested in
the securities of issuers other than Tobacco Producing Issuers. This policy does
not affect the Manager's overall goal to not invest in Tobacco Producing
Issuers.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in REITs, which are described under the
description of the GMO REIT Fund in this Prospectus. The Fund may invest up to
15% of its net assets in illiquid securities, lend portfolio securities valued
at up to one-third of total assets, and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
VALUE FUND
Current Benchmark: Russell 1000 Value Index
The Value Fund seeks a total return greater than that of the Russell
1000 Value Index through investment in a broadly diversified and liquid
portfolio of common stocks. Substantially all of the Fund's assets will be
invested in or exposed to equity securities chosen from among the Wilshire 5000
and primarily from among the Large Cap 1200. The Fund expects that any income it
derives will be from dividends on common stock. The Manager will select which
issuers to invest in based on its assessment of whether the common stock of the
issuer is likely to perform better than the Russell 1000 Value Index. Strong
consideration is given to common stocks whose current prices do not adequately
reflect, in the opinion of the Manager, the ongoing business value of the
underlying company.
The Fund's investments are made in securities of companies which, in
the opinion of the Manager, are of average or above average investment quality.
Investment quality is evaluated using fundamental analysis emphasizing each
issuer's historic financial performance, balance sheet strength, management
capability and competitive position. Various valuation parameters are examined
to determine the attractiveness of individual securities. Since the Fund's
portfolio investments will not be chosen and proportionately weighted to
approximate the total return of the Russell 1000 Value Index, at times the total
return of the Value Fund may be more or less than the total return of the
Russell 1000 Value Index.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in REITs, which are described under the
description of the GMO REIT Fund. The Fund may also invest up to 15% of its net
assets in illiquid securities, lend portfolio securities valued at up to
one-third of total assets, and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of
-31-
investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GROWTH FUND
Current Benchmark: Russell 1000 Growth Index
The Growth Fund seeks long-term growth of capital. Current income is
only an incidental consideration. The Growth Fund attempts to achieve its
objective by investing in companies whose earnings per share are expected by the
Manager to grow at a rate faster than the average of the Large Cap 1200. The
Fund is designed for investors who wish to allocate a portion of their assets to
investment in growth-oriented stocks.
The Fund expects that substantially all of the Fund's assets will be
invested in or exposed to equity securities chosen from among the Wilshire 5000,
and at least 65% of its assets will be invested in the common stocks (and
securities convertible into common stocks) of issuers chosen from the Large Cap
1200. The balance of the common stocks (and securities convertible into common
stocks) held by the Fund may be less liquid investments since the companies in
question will have smaller equity capitalization and/or the securities may not
be listed on a national securities exchange.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in REITs, which are described under the
description of the GMO REIT Fund in this Prospectus. The Fund may invest up to
15% of its net assets in illiquid securities, lend portfolio securities valued
at up to one-third of total assets, and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
U.S. SECTOR FUND
Current Benchmark: S&P 500
The U.S. Sector Fund seeks a total return greater than that of the S&P
500 through investment in common stocks. Substantially all of the Fund's assets
will be invested in or exposed to equity securities chosen from among the
Wilshire 5000 and primarily from among the 1,800 companies with the largest
equity capitalization whose securities are listed on United States national
securities exchanges.
The Fund will allocate its assets, as directed by the Manager, among
major U.S. sectors (including value, growth, small/large capitalization and
defensive stocks, stocks in individual industries, etc.) and will overweight
those sectors which the Manager believes may outperform the S&P 500 generally.
The Fund may place varying degrees of emphasis on different types of companies
depending on the Manager's assessment of economic and market conditions,
including companies with superior growth prospects and/or companies whose common
stock does not, in the opinion of the Manager, adequately reflect the companies'
ongoing business value. The Fund may invest in companies with smaller equity
capitalization than the companies whose securities are purchased by the Value
Fund and the Growth Fund. The securities of small capitalization companies may
be less liquid and their market prices more volatile than those issued by
companies with larger equity capitalizations. Since the Fund's portfolio
investments will not be chosen and proportionately weighted to approximate the
S&P 500, the total return of the U.S. Sector Fund may be more or less than the
total return of the S&P 500.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in REITs, which are described under the
-32-
description of the GMO REIT Fund in this Prospectus. The Fund may invest up to
15% of its net assets in illiquid securities, lend portfolio securities valued
at up to one-third of total assets, and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
SMALL CAP VALUE FUND
Current Benchmark: Russell 2000 Value Index
The investment objective of the Small Cap Value Fund (formerly the GMO
Core II Secondaries Fund) is long-term growth of capital. Current income is only
an incidental consideration. The Small Cap Value Fund attempts to achieve its
objective by selecting its investments primarily from domestic second tier
companies. For these purposes "SECOND TIER COMPANIES" are those companies whose
equity capitalization at the time of investment by the Small Cap Value Fund
ranks in the lower two-thirds of the 1800 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange. Among these companies, the Manager will primarily select
issuers which, in the opinion of the Manager, represent favorable values
relative to their market prices.
The Small Cap Value Fund invests primarily in common stocks, although
the Fund may on rare occasions hold securities convertible into common stocks
such as convertible bonds, convertible preferred stocks and warrants. Because of
the Fund's name, under normal market conditions, at least 65% of the Fund's
total assets will be invested in or exposed to the securities of issuers with
market capitalizations believed to be equal to or less than $1.5 billion on the
date of this Prospectus. The Fund may also hold the common stocks (and
securities convertible into common stocks) of companies with smaller equity
capitalizations. Such investments may be less liquid, as the securities may not
be listed on a national securities exchange and their market prices may be more
volatile than those issued by companies with larger equity capitalizations.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in REITs, which are described under the
description of the GMO REIT Fund in this Prospectus. The Fund may invest up to
15% of its net assets in illiquid securities, lend portfolio securities valued
at up to one-third of total assets, and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts for hedging and risk management. The Fund may
also use equity swap contracts and contracts for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
SMALL CAP GROWTH FUND
Current Benchmark: Russell 2000 Growth Index
The investment objective of the Small Cap Growth Fund is long-term
growth of capital. Current income is only an incidental consideration. The Small
Cap Growth Fund attempts to achieve its objective by selecting its investments
primarily
-33-
from domestic second tier companies. Among these companies, the Manager will
primarily select stocks that it believes have above average prospects for
growth.
The Small Cap Growth Fund primarily invests in or is exposed to common
stocks, although the Fund may on rare occasions hold securities convertible into
common stocks such as convertible bonds, convertible preferred stocks and
warrants. Because of its name, under normal market conditions at least 65% of
the Fund's total assets will be invested in or exposed to the securities of
issuers with market capitalizations believed to be equal to or less than $1.5
billion on the date of this Prospectus. The Fund may also hold the common stocks
(and securities convertible into common stocks) of companies with smaller equity
capitalizations. Such investments may be less liquid, as the securities may not
be listed on a national securities exchange and their market prices may be more
volatile than those issued by companies with larger equity capitalizations.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in REITs, which are described in the
description of the GMO REIT Fund in this Prospectus. The Fund may invest up to
15% of its net assets in illiquid securities, lend portfolio securities valued
at up to one-third of total assets, and enter into repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts for hedging and risk management. The Fund may
also use equity swap contracts and contracts for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long- or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
FUNDAMENTAL VALUE FUND
The Fundamental Value Fund seeks long-term capital growth through
investment primarily in equity securities. Current income is only a secondary
consideration. It is anticipated that at least 90% of the Fund's assets will be
invested in common stocks and securities convertible into common stocks.
Although the Fund invests primarily in securities traded in the United States,
it may invest up to 25% of its assets in securities of foreign issuers and
securities traded principally outside of the United States.
The Fund invests primarily in common stocks of domestic corporations
that, in the opinion of the Manager, represent favorable values relative to
their market prices. Under normal conditions, the Fund generally, but not
exclusively, looks for companies with low price/earnings ratios and rising
earnings. The Fund focuses on established firms with capitalizations of more
than $100 million and generally does not buy issues of companies with less than
three years of operating history. The Fund seeks to maintain lower than average
equity risk levels relative to the potential for return through a portfolio with
an average historic volatility (beta) below 1.0. The S&P 500, which serves as a
standard for measuring volatility, always has average volatility (beta) of 1.0.
The Fund's beta may change with market conditions.
The Fund's Manager analyzes key economic variables to identify general
trends in the stock markets. World economic indicators, which are tracked
regularly, include U.S. industry and trade indicators, interest rates,
international stock market indexes, and currency levels. Under normal
conditions, investments are made in a variety of economic sectors, industry
segments, and individual securities to reduce the effects of price volatility in
any one area.
In making investments, the Manager takes into account, among other
things, a company's source of earnings, competitive edge, management strength,
and level of industry dominance as measured by market share. At the same time,
the Manager analyzes the financial condition of each company. The Manager
examines current and historical measures of relative value to find corporations
that are selling at discounts relative to both underlying asset values and
market pricing. The Manager then selects those companies with financial and
business characteristics that it believes will produce above-average growth in
earnings. Sell decisions are triggered when, in the opinion of the Manager, the
stock price and other fundamental considerations make further appreciation less
likely.
The Manager generally selects equities that normally trade in
sufficient volume to provide liquidity. Domestic equities are usually traded on
the New York Stock Exchange or the American Stock Exchange or in the
over-the-counter markets.
The Fund's investments in foreign securities will generally consist of
equity securities traded in principal European and Pacific Basin markets. The
Manager evaluates the economic
-34-
strength of a country, which includes its resources, markets, and growth rate.
In addition, it examines the political climate of a country as to its stability
and business policies. The Manager then assesses the strength of the country's
currency and considers foreign exchange issues in general. The Fund aims for
diversification not only among countries but also among industries in order to
enable shareholders to participate in markets that do not necessarily move in
concert with U.S.
markets.
Once the Fund has identified a rapidly expanding foreign economy, the
Fund attempts to search out growing industries and corporations, focusing on
companies with established records. Individual securities are selected based on
value indicators, such as low price to earnings ratio. Foreign securities in the
portfolio are generally listed on principal overseas exchanges.
In pursuing its objective, the Fund may invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in common stocks,
index futures, equity swap contracts and contracts for differences even when the
Manager believes that equity securities generally may underperform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total net assets will be exposed to high
quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
REIT FUND
Current Benchmark: MSRI
The investment objective of the REIT Fund is to maximize total return
primarily through investment in or exposure to real estate investment trusts
("REITs"), which are managed vehicles that invest in real estate or real
estate-related assets. The Fund seeks a total return greater than that of the
MSRI. REITs purchased by the Fund will include equity REITs, which own real
estate directly, mortgage REITs, which make construction, development or
long-term mortgage loans, and hybrid REITs, which share characteristics of
equity REITs and mortgage REITs. Equity REITs will be affected by, among other
things, changes in the value of the underlying property owned by the REITs,
while mortgage REITs will be affected by, among other things, the value of the
properties to which they have extended credit.
Since the Fund's investments are concentrated in real estate-related
securities, the value of its shares can be expected to change in light of
factors affecting the real estate industry, and may fluctuate more widely than
the value of shares of a portfolio that invests in a broader range of
industries. Factors affecting the performance of real estate may include excess
supply of real property in certain markets, changes in zoning laws, completion
of construction, changes in real estate value and property taxes, sufficient
level of occupancy, adequate rent to cover operating expenses, and local and
regional markets for competing assets. The performance of real estate may also
be affected by changes in interest rates, prudent management of insurance risks
and social and economic trends. Also, REITs are dependent upon the skill of each
REIT's management.
The Fund could under certain circumstances own real estate directly as
a result of a default on debt securities it owns or from an in-kind distribution
of real estate from a REIT. Risks associated with such ownership could include
potential liabilities under environmental laws and the costs of other regulatory
compliance. If the Fund has rental income or income from the direct disposition
of real property, the receipt of such income may adversely affect its ability to
retain its tax status as a regulated investment company and thus its ability to
avoid taxation on its income and gains distributed to its shareholders. REITs
are also subject to substantial cash flow dependency, defaults by borrowers,
self-liquidation and the risk of failing to qualify for tax-free pass-through of
income under the Internal Revenue Code and/or to maintain exempt status under
the 1940 Act. By investing in REITs indirectly through the Fund, investors bear
not only a proportionate share of the expenses of the Fund, but also,
indirectly, expenses of the REITs.
Because of its name, the REIT Fund is required to have a policy that,
under normal circumstances, at least 65% of the Fund's total assets will be
invested in or exposed to securities of REITs, although the Fund generally
intends to invest a greater portion of its assets in REIT securities. The Fund
may also invest in common and preferred stock, fixed income securities including
lower-rated fixed income securities (commonly known as "junk bonds"), invest in
securities principally traded in foreign markets and foreign currency exchange
transactions. The Fund may lend portfolio securities valued at up to one-third
of total assets, and invest in adjustable rate securities, zero coupon
-35-
securities and depository receipts of foreign issuers. The Fund may also enter
into repurchase agreements, reverse repurchase agreements and dollar roll
agreements. In addition, the Fund may invest in mortgage-backed and other
non-government issuers, including collateralized mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities. The Fund may hold a portion of its assets
in high quality money market instruments.
The Fund may buy and sell options and enter into futures contracts and
options on futures contracts for hedging, investment and risk management. In
particular, the Fund may purchase futures contracts on the S&P 500 and interest
rate futures contracts for anticipatory hedging purposes and otherwise to
provide investment exposure for cash balances. In addition, the Fund may use
interest rate and currency swap contracts, contracts for differences and
interest rate caps, floors and collars for hedging and for risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments" later in this Prospectus.
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
Current Benchmark: EAFE-Lite
The investment objective of the International Core Fund is to maximize
total return through investment in a portfolio of common stocks of non-U.S.
issuers. The Fund will usually be primarily invested in or exposed to common
stocks, including dividend-paying common stocks. Capital appreciation may be
sought through investment in common stocks, convertible bonds, convertible
preferred stocks, warrants or rights. Income may be sought through investment in
dividend-paying common stocks, convertible bonds, money market instruments or
fixed income securities such as long and medium term corporate and government
bonds and preferred stocks. Some of these fixed income securities may have
speculative qualities and the values of these securities generally fluctuate
more than those of other, less speculative fixed income securities. See
"Description and Risks of Fund Investments -- Lower Rated Securities."
The relative emphasis of the Fund on capital appreciation or income
will depend upon the views of the Manager with respect to the opportunities for
capital appreciation relative to the opportunities for income. There are no
prescribed limits on geographic asset distribution and the Fund has the
authority to invest in securities traded in securities markets of any country in
the world, although under normal market conditions at least 65% of the Fund's
total assets will be invested in or exposed to securities principally traded in
the securities markets of at least three foreign countries. The responsibility
for allocating the Fund's assets among the various securities markets of the
world is borne by the Manager. In making these allocations, the Manager will
consider such factors as the condition and growth potential of the various
economic and securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. The Fund generally
will not invest in securities of U.S. issuers, except that for temporary
defensive purposes the Fund may invest up to 100 percent of its assets in United
States securities.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management,
although the Fund's foreign currency exposure will not generally vary by more
than 30% from the foreign currency exposure of the EAFE- Lite Index. The put and
call options on currency futures written by the Fund will always be covered. For
more information on foreign currency transactions, see "Descriptions and Risks
of Fund Investments -- Foreign Currency Transactions." The stocks held by the
Fund will not be chosen to approximate the weightings of the EAFE-Lite Index.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
In addition, the Fund may invest in securities of foreign issuers
traded on U.S. exchanges and securities traded abroad, American Depositary
Receipts, European Depository Receipts and other similar securities convertible
into securities of foreign issuers. The Fund may also enter into repurchase
agreements, lend portfolio securities valued at up to 25% of total assets, and
may invest up to 15% of its net assets in illiquid securities. The Fund expects
that, not including the margin deposits or the segregated accounts created in
connection with index futures and other derivatives, less than 5% of its total
net assets will be exposed to cash or high quality money market instruments such
as securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and
-36-
contracts for differences for investment, anticipatory hedging and risk
management and to effect synthetic sales and purchases.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
CURRENCY HEDGED INTERNATIONAL CORE FUND
Current Benchmark: Currency hedged EAFE-Lite
The investment objective of the Currency Hedged International Core Fund
is to maximize total return through investment in a portfolio of common stocks
of non-U.S. issuers and through management of the Fund's currency positions. The
Fund has policies that are similar to the International Core Fund, except that
the Currency Hedged International Core Fund will employ a different strategy
with respect to foreign currency exposure. While the International Core Fund's
foreign currency exposure will not generally differ from that of the EAFE-Lite
Index by more than 30%, the Currency Hedged International Core Fund's foreign
currency exposure will generally vary no more than 30% from the currency
exposure of a fully hedged EAFE-Lite Index. That is, the Currency Hedged
International Core Fund will hedge a substantial portion (generally at least
70%) of the EAFE-Lite foreign currency exposure while the International Core
Fund will generally hedge only a limited portion (generally less than 30%) of
EAFE-Lite currency exposure.
The Currency Hedged International Core Fund may use forward foreign
currency contracts, currency futures contracts, currency swap contracts, options
on currencies and buy and sell foreign currencies for hedging, investment, and
for currency risk management. While the Fund will not hedge currency risk in the
aggregate in an amount greater than the total value of its securities
denominated in foreign currencies, because the Fund will generally hedge
currency based on benchmark weightings rather than Fund investments, the Fund
will sometimes have a net short position with respect to certain foreign
currencies. This will generally be those countries where the Fund's equity
position is underweight relative to the benchmark. The Fund's incurrence of such
net short positions using forward contracts, futures or swap contracts - to the
extent the Fund has not segregated liquid assets against such obligations - is
limited to no more than 10% of the Fund's total net assets when aggregated with
the Fund's traditional borrowings. This 10% limitation applies to the face
amount of unsegregated futures and forward contracts and related options and to
the amount of a Fund's net payment obligation that is not segregated against in
the case of swap contracts. The put and call options on currency futures written
by the Fund will always be covered. For more information on foreign currency
transactions, see "Description and Risks of Fund Investments -- Foreign Currency
Transactions." Because of its name, the Currency Hedged International Core Fund
is required to have a policy that it will maintain short currency positions with
respect to at least 65% of the foreign currency exposure represented by the
common stocks owned by the Fund.
The Fund will primarily invest in or be exposed to common stocks,
including dividend-paying common stocks. The stocks held by the Fund will not be
chosen to approximate the weightings of the EAFE-Lite Index. Capital
appreciation may be sought through investment in common stocks, convertible
bonds, convertible preferred stocks, warrants or rights. Income may be sought
through investment in dividend-paying common stocks, convertible bonds, money
market instruments or fixed income securities such as long and medium term
corporate and government bonds and preferred stocks. Some of these fixed income
securities may have speculative qualities and the values of these securities
generally fluctuate more than those of other, less speculative fixed income
securities. See "Description and Risks of Fund Investments -- Lower Rated
Securities."
The relative emphasis of the Fund on capital appreciation or income
will depend upon the views of the Manager with respect to the opportunities for
capital appreciation relative to the opportunities for income. There are no
prescribed limits on geographic asset distribution and the Fund has the
authority to invest in securities traded in securities markets of any country in
the world, although under normal market conditions the Fund will invest in
securities traded in the securities markets of at least three foreign countries.
The responsibility for allocating the Fund's assets among the various securities
markets of the world is borne by the Manager. In making these allocations, the
Manager will consider such factors as the condition and growth potential of the
various economic and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. The Fund
generally will not invest in securities of U.S. issuers, except that for
temporary defensive purposes the Fund may invest up to 100 percent of its assets
in United States securities.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
In addition, the Fund may invest in securities of foreign issuers
traded on U.S. exchanges and securities traded abroad, American Depositary
Receipts, European Depository Receipts and other similar securities convertible
into securities of foreign issuers. The Fund may also enter into repurchase
agreements, and lend portfolio securities valued at up to 25% of total assets.
The Fund may also invest up to 15% of its net assets in illiquid securities and
temporarily invest in cash and high quality money market instruments such as
securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit. The Fund
expects that, not including the margin deposits or the segregated accounts
created in connection with index futures and other derivatives, less than 5% of
its total net assets will be exposed to such high quality cash items.
-37-
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
FOREIGN FUND
The investment objective of the Foreign Fund is to maximize total
return through investment primarily in equity securities of non-U.S. issuers.
The Fund's investment strategy is based on a fundamental analysis of issuers and
country economics. The Fund will usually invest primarily in common stocks,
including dividend-paying common stocks. Capital appreciation may be sought
through investment in common stocks, convertible bonds, convertible preferred
stocks, warrants or rights. Income may be sought through investment in
dividend-paying common stocks, convertible bonds, money market instruments or
fixed income securities such as long and medium term corporate and government
bonds and preferred stocks. Some of these fixed income securities may have
speculative qualities and the values of these securities generally fluctuate
more than those of other, less speculative fixed income securities. See
"Description and Risks of Fund Investments -- Lower Rated Securities."
The relative emphasis of the Fund on capital appreciation or income
will depend upon the views of the Manager with respect to the opportunities for
capital appreciation relative to the opportunities for income. There are no
prescribed limits on geographic asset distribution and the Fund has the
authority to invest in securities traded in securities markets of any country in
the world other than the United States, although under normal market conditions
at least 65% of the Foreign Fund's total assets will be invested in securities
principally traded in the securities markets of at least three countries other
than the United States. The responsibility for allocating the Fund's assets
among the various securities markets of the world is borne by the Manager. In
making these allocations, the Manager will consider such factors as the
condition and growth potential of the various economic and securities markets,
currency and taxation considerations and other pertinent financial, social,
national and political factors.
The Fund may use forward foreign currency contracts and currency
futures contracts for the purpose of hedging the currency exposure of its
portfolio securities. The Fund is not required to hedge its currency risk and
will not normally hedge more than 90% of such risks. The Fund will not buy and
sell foreign currencies for investment purposes, but may hold foreign currencies
pending investments consistent with the Fund's investment program. The Fund may
invest in options on foreign currencies.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
In addition, the Fund may invest in securities of foreign issuers
traded on U.S. exchanges and securities traded abroad, American Depositary
Receipts, European Depository Receipts and other similar securities convertible
into securities of foreign issuers. The Fund may also enter into repurchase
agreements, lend portfolio securities valued at up to one-third of total assets,
and may invest up to 10% of its net assets in illiquid securities. The Fund may
invest up to 20% of its assets in securities of issuers in newly industrialized
countries of the type invested in by the Emerging Markets Fund.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund may write options in connection with
buy-and-write transactions and use index futures.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
INTERNATIONAL SMALL COMPANIES FUND
The International Small Companies Fund seeks to maximize total return
through investment primarily in equity securities of foreign issuers whose
equity securities are traded on a major stock exchange of a foreign country
("foreign stock exchange companies") and whose equity capitalization at the time
of investment, when aggregated with the equity capitalizations of all foreign
stock exchange companies in that country whose equity capitalizations are
smaller than that of such company, is less than 50% of the aggregate equity
capitalization of all foreign stock exchange companies in such country ("small
capitalization foreign companies"). With the exception of the International
Small Companies Fund's policy of investing in securities of small capitalization
foreign companies, and except as otherwise disclosed in this Prospectus, the
International Small Companies Fund's investment objectives and policies are the
same as those of the International Core Fund.
It is currently expected that at least 65% of the International Small
Companies Fund's assets will be invested in or exposed to common stocks of small
capitalization foreign companies. Such companies may present greater
opportunities for capital appreciation because of high potential earnings
-38-
growth, but may also involve greater risk. Small capitalization foreign
companies tend to be smaller and newer than other foreign companies and may be
dependent upon a single proprietary product or market niche. They may have
limited product lines, markets or financial resources, or may depend on a
limited management group. Typically, small capitalization foreign companies have
fewer securities outstanding and are less liquid than large companies. Their
common stock and other securities may trade less frequently and in limited
volume. The securities of small capitalization foreign companies are generally
more sensitive to purchase and sale transactions and, therefore, the prices of
such securities tend to be more volatile than the securities of larger
companies.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
The Fund also may invest in securities of foreign issuers traded on
U.S. exchanges and securities traded abroad, American Depositary Receipts,
European Depository Receipts and other similar securities convertible into
securities of foreign issuers. The Fund may also enter into repurchase
agreements, and lend portfolio securities valued at up to one-third of total
assets. The Fund may invest up to 15% of its net assets in illiquid securities
and temporarily invest in cash and high quality money market instruments such as
securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit. The Fund
expects that, not including the margin deposits or the segregated accounts
created in connection with index futures and other derivatives, less than 5% of
its total net assets will be exposed to such high quality cash items.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management.
The put and call options on currency futures written by the Fund will always be
covered.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
JAPAN FUND
The Japan Fund seeks to maximize total return through investment in a
portfolio of Japanese securities, consisting primarily of common stocks of
Japanese companies. It is currently expected that at least 90% of the net assets
of the Japan Fund will be invested in or exposed to "Japanese Securities," that
is, securities issued by entities that are organized under the laws of Japan and
that either have 50% or more of their assets in Japan or derive 50% or more of
their revenues from Japan ("Japanese Companies"). Although the Japan Fund will
primarily invest in or be exposed to common stocks of Japanese Companies, it may
also invest in other Japanese Securities, such as convertible preferred stock,
warrants or rights as well as short-term government debt securities or other
short-term prime obligations (i.e., high quality debt obligations maturing not
more than one year from the date of issuance). The Japan Fund expects that any
income it derives will be from dividend or interest payments on securities.
Unlike mutual funds which invest in the securities of many other
countries, the Japan Fund will be invested almost exclusively in Japanese
Securities. No effort will be made by the Manager to assess the Japanese
economic, political or regulatory developments or changes in currency exchange
rates for purposes of varying the portion of the Fund's assets invested in
Japanese Securities. This means that the Fund's performance will be directly
affected by political, economic, market and exchange rate conditions in Japan.
Also, since the Japanese economy is dependent to a significant extent on foreign
trade, the relationships between Japan and its trading partners and between the
yen and other currencies are expected to have a significant impact on particular
Japanese Companies and on the Japanese economy generally. Also, the Japan Fund's
investments are generally denominated in yen, whose value continually changes in
relation to the dollar. This varying relationship will also directly affect the
value of the Japan Fund's shares. The Japan Fund is designed for investors who
are willing to accept the risks associated with changes in such conditions and
relationships.
To achieve its objectives, the Fund may invest in securities of foreign
issuers traded on U.S. exchanges and securities traded abroad, American
Depositary Receipts, European Depository Receipts and other similar securities
convertible into securities of foreign issuers. The Fund may also enter into
repurchase agreements, and lend portfolio securities valued at up to one-third
of total assets. The Fund may invest up to 15% of its net assets in illiquid
securities and temporarily invest in cash and high quality money market
instruments such as securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, and bank certificates of
deposit. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures or other
derivatives, less than 5% of its total net assets
-39-
will be invested in such high quality cash items.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management.
The put and call options on currency futures written by the Fund will always be
covered.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
EMERGING MARKETS FUND
The Emerging Markets Fund seeks long-term capital appreciation
consistent with what the Manager believes to be a prudent level of risk through
investment in and exposure to equity and equity-related securities traded in the
securities markets of newly industrializing countries in Asia, Latin America,
the Middle East, Southern Europe, Eastern Europe and Africa. The Manager has
appointed Dancing Elephant, Ltd. to serve as Consultant to the Fund.
The Consultant's efforts focus on asset allocation among the selected
emerging markets. (See "Description and Risks of Fund Investments -- Certain
Risks of Foreign Investments.") In addition to considerations relating to a
particular market's investment restrictions and tax barriers, asset allocation
is based on certain other relevant factors including the outlook for economic
growth, currency exchange rates, commodity prices, interest rates, political
factors and the stage of the local market cycle in such emerging market. The
Consultant expects to allocate the Fund's investments over geographic as well as
economic sectors.
There are currently over 50 newly industrializing and developing
countries with equity markets. A number of these markets are not yet easily
accessible to foreign investors and have unattractive tax barriers or
insufficient liquidity to make significant investments by the Fund feasible or
attractive. However, many of the largest of the emerging markets have, in recent
years, liberalized access and more are expected to do so over the coming few
years if the present trend continues.
Emerging markets in which the Fund intends to invest may include the
following emerging markets ("EMERGING MARKETS"):
Asia: Bangladesh, China, India, Indonesia, Republic
of Korea, Malaysia, Myanmar, Mongolia,
Pakistan, Philippines, Sri Lanka, Republic of
China (Taiwan), Thailand, Vietnam
Latin
America: Argentina, Bolivia, Brazil, Chile, Colombia,
Costa Rica, Ecuador, Jamaica, Mexico, Peru,
Uruguay, Venezuela
Europe/
Middle East/
Africa: Botswana, Czech Republic, Ghana, Greece,
Hungary, Israel, Jordan, Kazakhstan, Kenya,
Morocco, Namibia, Nigeria, Poland, Portugal,
Russia, Slovakia, Slovenia, South Africa,
Turkey, Ukraine, Zimbabwe
The Emerging Markets Fund has a fundamental policy that, under normal
conditions, at least 65% of its total assets will be invested in equity and
equity-related securities which are predominantly traded on Emerging Market
exchanges ("Emerging Market Securities"). The Fund invests predominantly in
individual stocks listed on Emerging Market stock exchanges or in depository
receipts of such stocks listed on markets in industrialized countries or traded
in the international equity market. The Fund may also invest in shares of
companies which are not presently listed but are in the process of being
privatized by the government and, subject to a maximum aggregate investment
equal to 25% of the total assets of the Fund, shares of companies that are
traded in unregulated over-the-counter markets or other types of unlisted
securities markets. The Fund may also invest through investment funds, pooled
accounts or other investment vehicles designed to permit investments in a
portfolio of stocks listed in a particular developing country or region subject
to obtaining any necessary local regulatory approvals, particularly in the case
of countries in which such an investment vehicle is the exclusive or main
vehicle for foreign portfolio investment. Such investments may result in
additional costs, as the Fund may be required to bear a pro rata share of the
expenses of each such fund in which it invests. The Fund may also invest in
companies listed on major markets outside of the emerging markets that, based on
information obtained by the Consultant, derive at least half of their revenues
from trade with or production in developing countries. In addition, the Fund's
assets may be invested on a temporary basis in debt securities issued by
companies or governments in developing countries or
-40-
money market securities of high-grade issuers in industrialized countries
denominated in various currencies.
The Fund may also invest in bonds and money market instruments in
Canada, the United States and other markets of industrialized nations and
emerging securities markets, and, for temporary defensive purposes, may invest
without limit in cash and high quality money market instruments such as
securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit. The Fund
expects that, not including the margin deposits or the segregated accounts
created in connection with index futures and other derivatives, less than 5% of
its total net assets will be exposed to such high quality cash items. The Fund
may also invest in indexed securities, the redemption value and/or coupons of
which are indexed to the prices of other securities, securities indexes,
currencies, precious metal, or other commodities, as well as other technical
indicators.
The Fund may also invest up to 10% of its total assets through
debt-equity conversion funds established to exchange foreign bank debt of
countries whose principal repayments are in arrears into a portfolio of listed
and unlisted equities, subject to certain repatriation restrictions. The Fund
may also invest in convertible securities, enter into repurchase agreements and
lend portfolio securities valued at up to one-third of total assets. The Fund
may invest up to 15% of its net assets in illiquid securities.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management.
The put and call options on currency futures written by the Fund will always be
covered.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GLOBAL PROPERTIES FUND
Current Benchmark: GPR LIFE Index
The Global Properties Fund seeks long-term growth of capital. The Fund
pursues its objective by investing primarily in securities of issuers throughout
the world which are principally engaged in or related to the real estate
industry or which own significant real estate assets ("REAL ESTATE COMPANIES").
The Fund will seek to provide a total return greater than that of the GPR LIFE
Index, or alternative indexes such as the property composite of Salomon
Brothers' World Equity Index or the real estate stock composite of the Morgan
Stanley Capital International World Index. The Fund will not invest directly in
real estate. A Real Estate Company is principally engaged in or related to the
real estate industry if at least 50% of its assets, gross income or net profits
are attributable to ownership, construction, management or sale of residential,
commercial or industrial real estate, or to products or services that are
related to the real estate industry. For these purposes, Real Estate Companies
whose products or services are related to the real estate industry include
manufacturers and distributors of building supplies and financial institutions
which issue or service mortgages. Real Estate Companies may also include: equity
real estate investment trusts, which own real estate directly; mortgage real
estate investment trusts, which make construction, development or long-term
mortgage loans; real estate brokers or developers; and issuers with substantial
real estate holdings.
The Manager has responsibility for allocating the Fund's assets among
the various securities markets of the world. In making these allocations, the
Manager will consider such factors as the condition and growth potential of the
various economic and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. The
Manager anticipates that the Fund will give particular consideration to
investments in the United Kingdom, Western Europe, Australia, Canada, the Far
East (including Japan, Hong Kong, Singapore, Malaysia and Thailand) and the
United States. The percentage of the Fund's assets invested in particular
geographic regions will shift from time to time in accordance with the judgment
of the Manager. Because of its name, under normal market conditions, the Fund
will invest at least 65% of its total assets in securities of Real Estate
Companies principally traded in the securities markets of at least three
countries (one of which may be the United States). A substantial portion of the
assets of the Fund will be denominated or traded in foreign currencies.
Although the Fund generally invests in common stocks, it may also
invest in preferred stocks, convertible securities and fixed income securities
including lower-rated fixed income securities (commonly known as "junk bonds").
Where lower- rated debt securities are secured by real estate assets, it is
conceivable that the Fund could, in the event of default, end up holding the
underlying real estate directly. Risks associated with such ownership could
include potential liabilities under environmental laws and the costs of other
regulatory compliance. If the Fund has rental income or income from the direct
disposition of real property, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company and thus
its ability to avoid taxation on its income and gains distributed to its
shareholders. See "Taxes" below.
-41-
As indicated, the Fund expects to invest in securities of foreign
issuers traded on U.S. exchanges and securities traded abroad, and may also
invest in depository receipts and foreign exchange transactions. The Fund may
also invest in adjustable rate securities, zero coupon securities and
mortgage-backed and other asset-backed securities issued by the U.S. government,
its agencies and by non-government issuers, including collateralized mortgage
obligations ("CMO's"), strips and residuals. The Fund may lend portfolio
securities valued at up to one-third of total assets and enter into repurchase
agreements, reverse repurchase agreements and dollar roll agreements. The Fund
may also invest in indexed securities the redemption values and/or coupons of
which are indexed to the prices of other securities, securities indexes,
currencies, precious metals or other commodities, or other financial indicators.
The Fund may also enter into firm commitment agreements with banks or
broker-dealers, and may invest up to 15% of its net assets in illiquid
securities.
The Fund may use forward foreign currency contracts, currency futures
contracts, options on currencies and buy and sell foreign currencies for hedging
and for currency risk management. The put and call options on currency futures
written by the Fund will always be covered.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments" later in this Prospectus.
FIXED INCOME FUNDS
As used in several of the Fixed Income Funds' investment objectives
below, "BOND" means any fixed income obligation with an original maturity of two
years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security. (See "Description and Risks of Fund
Investments -- Uses of Options, Futures and Options on Futures -- Investment
Purposes.") Under normal market conditions, each of the Emerging Country Debt
Fund, the International Bond Fund, the Currency Hedged International Bond Fund
and the Global Bond Fund will invest at least 65% of its assets in bonds of
issuers of at least three countries (excluding the United States). However, up
to 100% of these Fixed Income Fund's assets may be denominated in U.S. dollars,
and for temporary defensive purposes, each such Fixed Income Fund may invest as
much as 100% of its assets in issuers from one or two countries, which may
include the United States. The Global Hedged Equity Fund is referred to as a
"Fixed Income Fund" despite its substantial investment in equity securities
because, as described more fully in the description of that Fund, the Global
Hedged Equity Fund attempts to hedge the general equity market risk of its
equity investments, producing a theoretical fixed income return, plus or minus
the performance of the Fund's equity holdings relative to equity markets
generally.
Global Bond Strategies: Each of the International Bond Fund, Currency
Hedged International Bond Fund, Global Bond Fund and the U.S. Bond/Global Alpha
A Fund (collectively the "GLOBAL FIXED INCOME FUNDS") utilizes the following
techniques in implementing its bond and currency strategies. Each of these Funds
will take active over-weighted and under-weighted positions with respect to
particular bond markets and currencies relative to the Fund's respective
performance benchmark. Often these active positions will be achieved using long
and short derivative positions and combinations of such positions to create
synthetic securities. The aggregate net exposure (assuming complete offset of
over-weighted and under-weighted positions across all markets) created by such
active positions will generally be small relative to a Fund's benchmark - less
than 20% for example. However, the total of the exposures may be quite large.
The total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing no netting of positions) may exceed 100% of
the value of the Fund for both bonds and currencies, which are generally
considered separately. The risk of the Funds relative to their benchmarks,
however, is expected to be significantly less than this since many markets are
correlated, so that overweighted and under-weighted positions will often offset
each other. This means that losses relative to the benchmark from a declining
bond or currency market that is over-weighted will often be offset by losses
from a correlated bond or currency market that is under-weighted.
The Funds' managers control total expected risk by incorporating the
assumption that there exist various levels of correlations of bond markets and
currency markets. For example, if two currencies were perfectly correlated
(based on the Managers' assessment), over- and under-weighted positions of equal
size would be considered to completely offset one another and would not
introduce any additional benchmark risk to the portfolio. However, the lower the
correlation, the less likely that one position will offset another, and this is
considered by the managers in assessing the risk of the Fund. Of course, the
measures of correlation used in these analyses may not be accurate predictors of
future correlation. Due to the size of the bond and currency exposures versus
the benchmark, a decline in correlation can have a significant effect on the
volatility and return of the Funds. In fact, in extreme situations where the
correlations between various bond markets and currency markets change from
positive to negative, that is, in situations in which markets were expected to
move in the same direction move in opposite directions, the Fund could
experience significant unexpected gains or losses.
Please see "Description and Risks of Fund Investments" for more
information regarding the risks of using derivative instruments to achieve
exposures.
-42-
DOMESTIC BOND FUND
Current Benchmark: Lehman Brothers Government Index
The Domestic Bond Fund seeks to earn high total return through
investment primarily in U.S. Government Securities. The Fund may also invest a
significant portion of its assets in other investment grade bonds (including
convertible bonds) denominated in U.S. dollars. The Fund's portfolio will
generally have a duration of approximately four to six years (excluding
short-term investments). The duration of a fixed income security is the weighted
average maturity, expressed in years, of the present value of all future cash
flows, including coupon payments and principal repayments. The Fund will attempt
to provide a total return greater than that generally provided by the U.S.
government securities market as measured by the Lehman Brothers Government
Index. The Fund may invest in fixed income securities of any maturity, although
the Fund expects that at least 65% of its total assets will be comprised of
"bonds" (as such term is defined earlier) of U.S. issuers. Fixed income
securities include securities issued by federal, state, local and foreign
governments, and a wide range of private issuers.
The Fund may lend portfolio securities valued at up to one-third of
total assets, invest up to 5% of its assets in lower rated securities (also
known as "junk bonds"), and invest in adjustable rate securities, zero coupon
securities and depository receipts. The Fund may also enter into repurchase
agreements, reverse repurchase agreements and dollar roll transactions. The Fund
may also enter into loan participation agreements and invest in other direct
debt instruments. In addition, the Fund may invest in mortgage-backed and other
asset-backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities.
In addition, the Fund may buy put and call options, sell (write)
covered options, and enter into futures contracts and options on futures
contracts for hedging, investment and risk management and to effect synthetic
sales and purchases. The Fund's use of options on particular securities (as
opposed to market indexes) is limited such that the time premiums paid by the
Fund on all outstanding options it has purchased may not exceed 5% of its total
assets. The Fund may also use interest rate swap contracts, contracts for
differences and interest rate caps, floors and collars for hedging, investment
and risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
U.S. BOND/GLOBAL ALPHA A FUND
Current Benchmark: Lehman Brothers Aggregate Bond Index
The U.S. Bond/Global Alpha A Fund seeks to earn a high total return
primarily through investment in investment- grade bonds (including convertible
bonds) issued by the U.S. government, its agencies and instrumentalities, as
well as those issued by a wide range of private U.S. issuers. The Fund will seek
to provide a total return greater than that generally provided by the U.S.
investment-grade bond market as measured by indexes such as the Lehman Brothers
Aggregate Bond Index, the Salomon Brothers Broad Investment-Grade Bond Index and
the Merrill Lynch Domestic Master Bond Index. The Fund intends to invest in
sovereign debt (bonds, including convertible bonds and loans) of Emerging
Countries. The Fund also intends to invest in foreign bonds and may hedge some
or all of the Fund's exposure to domestic or foreign markets, including foreign
currency exposure. Under ordinary market conditions, up to 25% of the Fund may
be invested in foreign bonds that are not hedged against foreign market and
currency risk and in debt securities of Emerging Countries. However, the hedging
of foreign bond positions will allow the Fund to seek positive return relative
to foreign bond 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) debt securities of Emerging Countries, (3) foreign bonds hedged against the
relevant foreign bond index, (4) an equal amount of domestic bonds selected to
mirror a domestic index and (5) domestic bonds selected based on the Manager's
judgment that they will outperform the domestic index, with the sum of items
(1), (2), (4) and (5) representing approximately 100% of the Fund's assets. This
means that even though the Fund generally will be managed to have not more than
25% of the Fund's net asset value exposed (without hedging) to foreign interest
rate and/or currency movements, long and short positions in foreign bonds could
account for up to 100% of the Fund's exposure relative to benchmark indexes.
The U.S. Bond/Global Alpha A Fund may invest in fixed income securities
of any maturity, although under normal market conditions at least 65% of the
Fund's total assets will be comprised of "bonds" of U.S. issuers (as such term
is defined above). Because of its name, under normal market conditions, the Fund
will also invest at least 65% of its total assets in securities principally
traded in at least three different countries (one of which may be the United
States). However, up to 100% of the Fund's assets may be denominated in U.S.
dollars, and for temporary defensive purposes, the Fund may invest as much as
100% of its assets in issuers from one or two countries, which may include the
United States. Fixed income securities include securities issued by federal,
state, local and foreign governments, and a wide range of private issuers.
-43-
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, and purchase or sell
securities on a when-issued or delayed delivery basis. To the extent permitted
by the 1940 Act, the Fund may also invest in securities of other investment
companies. As a shareholder of an investment company, the Fund may indirectly
bear service fees which are in addition to the fees the Fund pays to its own
service providers.
The Fund may lend portfolio securities valued at up to one-third of
total assets and invest in adjustable rate securities, zero coupon securities
and depositary receipts of foreign issuers. The Fund may also enter into
repurchase agreements, reverse repurchase agreements and dollar roll agreements.
In addition, the Fund may invest in mortgage-backed and other asset-backed
securities issued by the U.S. government, its agencies and by non-government
issuers, including collateral mortgage obligations ("CMO's"), strips and
residuals. The Fund may also invest in indexed securities the redemption values
and/or coupons of which are indexed to the prices of other securities,
securities indexes, currencies, precious metals or other commodities, or other
financial indicators. The Fund may also enter into firm commitment agreements
with banks or broker-dealers, and may invest up to 15% of its net assets in
illiquid securities.
The Fund may buy put and call options, sell (write) covered options,
and enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indexes) is
limited such that the time premiums paid by the Fund on all outstanding options
it has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy-and-write transactions, and use index futures on
foreign indexes for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts
for differences and interest rate caps, floors and collars for hedging,
investment and risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments" later in this Prospectus.
INTERNATIONAL BOND FUND
Current Benchmark: J.P. Morgan Non-U.S. Government Bond
Index
The International Bond Fund seeks to earn high total return through
investment primarily in investment-grade bonds (including convertible bonds)
denominated in various currencies, including U.S. dollars, or in multicurrency
units. The Fund will attempt to provide a total return greater than that
generally provided by the international fixed income securities markets as
measured by the J.P. Morgan Non-U.S. Government Bond Index. Because the Fund
will not generally attempt to hedge against an appreciation in the U.S. dollar
relative to the foreign currency in which its portfolio securities are
denominated, investors should expect that the Fund's performance will be
adversely affected by appreciation of the U.S. dollar and will be positively
affected by a decline in the U.S. dollar relative to the currencies in which the
Fund's portfolio securities are denominated.
The Fund may invest in fixed income securities of any maturity,
although under normal market conditions at least 65% of the Fund's total assets
will be comprised of "bonds" as such term is defined above. Fixed income
securities include securities issued by federal, state, local and foreign
governments, and a wide range of private issuers.
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, and purchase or sell
securities on a when-issued or delayed delivery basis. The Fund may also invest
a portion of its assets in sovereign debt (bonds, including convertible bonds
and Brady bonds, and loans) of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa (see "Emerging Country Debt
Fund") and, to the extent permitted by the 1940 Act, may invest in securities of
other investment companies. As a shareholder of an investment company, the Fund
may indirectly bear service fees which are in addition to the fees the Fund pays
to its own service providers.
The Fund may lend portfolio securities valued at up to one-third of
total assets, invest up to 25% of its assets in lower rated securities (also
known as "junk bonds"), and invest in adjustable rate securities, zero coupon
securities and depositary receipts of foreign issuers. The Fund may also enter
into repurchase agreements, reverse repurchase agreements and dollar roll
agreements. In addition, the Fund may invest in mortgage-backed and other
asset-backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities.
-44-
The Fund may buy put and call options, sell (write) covered options,
and enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indexes) is
limited such that the time premiums paid by the Fund on all outstanding options
it has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy-and-write transactions, and use index futures on
foreign indexes for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts
for differences and interest rate caps, floors and collars for hedging,
investment and risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
CURRENCY HEDGED INTERNATIONAL BOND FUND
Current Benchmark: J.P. Morgan Non-U.S. Government Bond
Index (Hedged)
The Currency Hedged International Bond Fund seeks to earn high total
return through investment primarily in investment- grade bonds (including
convertible bonds) denominated in various currencies including U.S. dollars or
in multicurrency units. The Fund will attempt to provide a total return greater
than that generally provided by the international fixed income securities
markets as measured by the J.P. Morgan Non-U.S. Government Bond Index (Hedged).
The Fund has the same objectives and policies as the International Bond Fund,
except that the Currency Hedged International Bond Fund will generally attempt
to hedge at least 75% of its foreign currency-denominated portfolio securities
against an appreciation in the U.S. dollar relative to the foreign currencies in
which the portfolio securities are denominated. However, there can be no
assurance that the Fund's hedging strategies will be totally effective.
The Fund may invest in fixed income securities of any maturity,
although under normal market conditions at least 65% of the Fund's total assets
will be comprised of "bonds" as such term is defined above. Fixed income
securities include securities issued by federal, state, local and foreign
governments, and a wide range of private issuers.
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements and purchase or sell securities
on a when-issued or delayed delivery basis. The Fund may also invest a portion
of its assets in sovereign debt (bonds, including convertible bonds and Brady
Bonds, and loans) of countries in Asia, Latin America, the Middle East, Southern
Europe, Eastern Europe and Africa (see "Emerging Country Debt Fund") and, to the
extent permitted by the 1940 Act, may invest in securities of other investment
companies. As a shareholder of an investment company, the Fund may indirectly
bear service fees which are in addition to the fees the Fund pays to its own
service providers.
The Fund may lend portfolio securities valued at up to one-third of
total assets, invest up to 25% of its assets in lower rated securities (also
known as "junk bonds"), and invest in adjustable rate securities, zero coupon
securities and depositary receipts of foreign issuers. The Fund may also enter
into repurchase agreements, reverse repurchase agreements and dollar roll
agreements. In addition, the Fund may invest in mortgage-backed and other
asset-backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities.
The Fund may buy put and call options, sell (write) covered options,
and enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indexes) is
limited such that the time premiums paid by the Fund on all outstanding options
it has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy-and-write transactions, and use index futures on
foreign indexes for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts
for differences and interest rate caps, floors and collars for hedging,
investment and risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
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GLOBAL BOND FUND
Current Benchmark: J.P. Morgan Global Government Bond
Index
The Global Bond Fund seeks to earn high total return through investment
primarily in investment-grade bonds (including convertible bonds) denominated in
various currencies, including U.S. dollars, or in multicurrency units. The Fund
will attempt to provide a total return greater than that generally provided by
the global fixed income securities markets as measured by the J.P. Morgan Global
Government Bond Index. The Fund will invest in fixed income securities of both
United States and foreign issuers. Because the Fund will not generally attempt
to hedge against an appreciation in the U.S. dollar relative to the foreign
currencies in which some of its portfolio securities are denominated, investors
should expect that the Fund's performance will be adversely affected by
appreciation of the U.S. dollar and will be positively affected by a decline in
the U.S. dollar relative to the currencies in which the Funds' portfolio
securities are denominated.
The Fund may invest in fixed income securities of any maturity,
although the Fund expects that at least 65% of its total assets will be
comprised of "bonds" as such term is defined above. Fixed income securities
include securities issued by federal, state, local and foreign governments, and
a wide range of private issuers.
Under certain adverse investment conditions, the Fund may restrict the
number of securities markets in which assets will be invested, although under
normal market circumstances it is expected that the Fund's investments will
involve securities principally traded in at least three different countries. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
securities principally traded in the United States and/or denominated in U.S.
dollars.
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, and purchase or sell
securities on a when-issued or delayed delivery basis. The Fund may also invest
a portion of its assets in sovereign debt (bonds, including convertible bonds
and Brady bonds, and loans) of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa (See "Emerging Country Debt
Fund") and, to the extent permitted by the 1940 Act, may invest in securities of
other investment companies. As a shareholder of an investment company, the Fund
may indirectly bear service fees which are in addition to the fees the Fund pays
to its own service providers.
The Fund may lend portfolio securities valued at up to one-third of
total assets, invest up to 25% of its assets in lower rated securities (also
known as "junk bonds"), and invest in adjustable rate securities, zero coupon
securities and depository receipts of foreign issuers. The Fund may also enter
into repurchase agreements, reverse repurchase agreements and dollar roll
transactions. In addition, the Fund may invest in mortgage-backed and other
asset-backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities.
The Fund may buy put and call, sell (write) covered options, and enter
into futures contracts and options on futures contracts for hedging, investment
and risk management and to effect synthetic sales and purchases. The Fund's use
of options on particular securities (as opposed to market indexes) is limited
such that the time premiums paid by the Fund on all outstanding options it has
purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy-and- write transactions, and use index futures on
foreign indexes for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging and for currency risk management. The
Fund may also use futures contracts and foreign currency forward contracts to
create synthetic bonds and synthetic foreign currency denominated securities to
approximate desired risk/return profiles where the non-synthetic security having
the desired risk/return profile is either unavailable or possesses undesirable
characteristics.
For a more detailed description of the investment practices described
in the preceding paragraphs and the risks associated with them, see "Description
and Risks of Fund Investments" later in this Prospectus.
EMERGING COUNTRY DEBT FUND
Current Benchmark: J.P. Morgan Emerging Markets Bond
Index+
The Emerging Country Debt Fund seeks to earn high total return by
investing primarily in sovereign debt (bonds, including convertible bonds, and
loans) of countries in Asia, Latin America, the Middle East and Africa, as well
as any country located in Europe which is not in the European Community
("EMERGING COUNTRIES"). In addition to considerations relating to investment
restrictions and tax barriers, allocation of the Fund's investments among
selected emerging countries will be based on certain other relevant factors
including the outlook for economic growth, currency exchange rates, interest
rates, political factors and the stage of the local market cycle. The Fund will
generally have at least 50% of its assets denominated in hard currencies such as
the U.S. dollar, Japanese yen, Italian lira, British pound, Deutschmark, French
franc and Canadian dollar. The Fund will attempt to provide a total return
-46-
greater than that generally provided by the international fixed income
securities markets as measured by the J.P. Morgan Emerging Markets Bond Index
Plus.
The Fund has a fundamental policy that, under normal market conditions,
at least 65% of its total assets will be invested in debt securities of Emerging
Countries. In addition, the Fund may invest in fixed income securities of any
maturity, although the Fund expects that at least 65% of its total assets will
be comprised of "bonds" as such term is defined above. Fixed income securities
include securities issued by federal, state, local and foreign governments, and
a wide range of private issuers.
The Emerging Country Debt Fund's investments in Emerging Country debt
instruments are subject to special risks that are in addition to the usual risks
of investing in debt securities of developed foreign markets around the world,
and investors are strongly advised to consider those risks carefully. See
"Description and Risks of Fund Investments -- Certain Risks of Foreign
Investments."
The Fund may enter into loan participation agreements and other direct
investments, forward foreign exchange agreements, invest in Brady bonds and
purchase or sell securities on a when-issued or delayed delivery basis. The Fund
may also lend portfolio securities valued at up to one-third of total assets,
invest without limit in lower rated securities (also known as "junk bonds"), and
invest in adjustable rate securities, zero coupon securities and depository
receipts of foreign issuers. The Fund may also enter into repurchase agreements,
reverse repurchase agreements and dollar roll agreements. In addition, the Fund
may invest in mortgage-backed and other asset-backed securities issued by the
U.S. government, its agencies and by non-government issuers, including
collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may
also invest in indexed securities the redemption values and/or coupons of which
are indexed to the prices of other securities, securities indexes, currencies,
precious metals or other commodities, or other financial indicators. The Fund
may also enter into firm commitment agreements with banks or broker-dealers, and
may invest up to 15% of its net assets in illiquid securities.
The Fund may buy put and call options, sell (write) covered options,
and enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indexes) is
limited such that the time premiums paid by the Fund on all outstanding options
it has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy-and-write transactions, and use index futures on
foreign indexes for investment, anticipatory hedging and risk management. In
addition, the Fund may use forward foreign currency contracts, currency futures
contracts and related options, currency swap contracts, options on currencies,
and buy and sell currencies for hedging, and for currency risk management. The
Fund may also use synthetic bonds and synthetic foreign currency denominated
securities to approximate desired risk/return profiles where the desired profile
is either unavailable or possesses undesirable characteristics.
In addition, the Fund may use interest rate swap contracts, contracts
for differences and interest rate caps, floors and collars for hedging,
investment and risk management.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments" later in this Prospectus.
SHORT-TERM INCOME FUND
Current Benchmark: Salomon 3 Month T-Bill Index
The Short-Term Income Fund seeks current income to the extent
consistent with the preservation of capital and liquidity through investment in
a portfolio of fixed income instruments rated high quality by Standard & Poor's
Corporation ("S&P") or by Moody's Investors Service, Inc. ("MOODY'S") or
considered by the Manager to be of comparable quality. The Fund will attempt to
provide a total return greater than that generally provided by the short-term
fixed income market as measured by the Salomon 3 Month T-Bill Index. While the
Short-Term Income Fund intends to invest in short-term securities, it is not a
money market fund. Debt securities held by the Fund which have a remaining
maturity of 60 days or less will be valued at amortized cost unless
circumstances dictate otherwise. See "Determination of Net Asset Value." It is
the present policy of the Short-Term Income Fund, which may be changed without
shareholder approval, to maintain at least 65% of the Fund's assets invested in
securities with remaining maturities of two years or less.
In determining whether a security is a suitable investment for the
Short-Term Income Fund, reference will be made to the quality of the security,
including its rating, at the time of purchase. The Manager may or may not
dispose of a portfolio security as a result of a change in the securities'
rating, depending on its evaluation of the security in light of the Fund's
investment objectives and policies.
The Fund may invest in prime commercial paper and master demand notes
(rated "A-1" by S&P or "Prime-1" by Moody's or, if not rated, issued by
companies having an outstanding debt issue rated at least "AA" by S&P or at
least "Aa" by Moody's), high-quality corporate debt securities (rated at least
"AA" by S&P or at least "Aa" by Moody's), and high-quality debt securities
backed by pools of commercial or consumer finance loans (rated at least "AA" by
S&P or "Aa" by Moody's) and certificates of deposit, bankers' acceptances and
other bank obligations (when and if such other bank obligations become available
in the future) issued by banks having total assets of at least $2 billion as of
the date of the bank's most recently published financial statement.
-47-
In addition to the foregoing, the Short-Term Income Fund may also
invest in certificates of deposit of $100,000 or less of domestic banks and
savings and loan associations, regardless of total assets, if the certificates
of deposit are fully insured as to principal by the Federal Deposit Insurance
Corporation. The Short-Term Income Fund may invest up to 100% of its assets in
obligations issued by banks, and up to 15% of its assets in obligations issued
by any one bank. If the bank is a domestic bank, it must be a member of the
Federal Deposit Insurance Corporation. This does not prevent the Short-Term
Income Fund from investing in obligations issued by foreign branches of domestic
banks and there is currently no limit on the Fund's ability to invest in these
obligations. If the bank is foreign, the obligation must, in the opinion of the
Manager, be of a quality comparable to the other debt securities which may be
purchased by the Short-Term Income Fund. There are special risks associated with
investments in such foreign bank obligations, including the risks associated
with foreign political, economic and legal developments and the fact that
foreign banks may not be subject to the same or similar regulatory requirements
that apply to domestic banks. (See "Description and Risks of Fund Investments -
Certain Risks of Foreign Investments.") The Short-Term Income Fund will invest
in these securities only when the Manager believes the risks are minimal. In
addition, to the extent the Short-Term Income Fund concentrates its assets in
the banking industry, including the domestic banking industry, adverse events
affecting the industry may also have an adverse effect on the Fund. Such adverse
events include, but are not limited to, rising interest rates which affect a
bank's ability to maintain the "spread" between the cost of money and any fixed
return earned on money, as well as industry-wide increases in loan default rates
and declines in the value of loan collateral such as real estate. The Fund may
also invest in U.S. Government Securities.
The Short-Term Income Fund may purchase any of the foregoing
instruments through firm commitment arrangements with domestic commercial banks
and registered broker-dealers and may enter into repurchase agreements with such
banks and broker-dealers with respect to any of the foregoing money market
instruments, longer term U.S. Government Securities or corporate debt securities
rated at least "AA" by S&P or at least "Aa" by Moody's. The Fund will only enter
into firm commitment arrangements and repurchase agreements with banks and
broker-dealers which the Manager determines present minimal credit risks.
All of the Short-Term Income Fund's investments will, at the time of
investment, have remaining maturities of five years or less and the average
maturity of the Short-Term Income Fund's portfolio securities based on their
dollar value will not exceed two years at the time of each investment. When the
Fund has purchased a security subject to a repurchase agreement, the amount and
maturity of the Fund's investment will be determined by reference to the amount
and term of the repurchase agreement, not by reference to the underlying
security. When the Fund purchases an adjustable rate security, the security's
maturity will be determined with reference to the frequency with which the rate
is adjusted. If the disposition of a portfolio security results in a
dollar-weighted average portfolio maturity in excess of two years for the Fund,
it will invest its available cash in such a manner as to reduce its
dollar-weighted average maturity to two years or less as soon as reasonably
practicable.
The Fund may also invest in foreign securities when the Manager
believes the risks are minimal, and lend portfolio securities valued at up to
one-third of total assets.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
GLOBAL HEDGED EQUITY FUND
Current Benchmark: Salomon 3 Month T-Bill Index
The Global Hedged Equity Fund seeks total return consistent with
minimal exposure to general equity market risk. Although at least 65% of the
Fund's total assets will be invested in equity securities, as a result of the
Fund's hedging techniques, the Fund expects to create a return more similar to
that received by an investment in fixed income securities. The Fund will pursue
its investment objective by investing substantially all of its assets in a
combination of (i) equity securities, (ii) derivative instruments intended to
hedge the value of the Fund's equity securities against substantially all of the
general movements in the relevant equity market(s), including hedges against
substantially all of the changes in the value of the U.S. dollar relative to the
currencies represented in the indexes used to hedge general equity market risk
and (iii) long interest rate futures contracts intended to adjust the duration
of the theoretical fixed income security embedded in the pricing of the
derivatives used for hedging the Fund's equity securities (the "THEORETICAL
FIXED INCOME SECURITY"). The Fund may also buy exchange traded or
over-the-counter put and call options and sell (write) covered options for
hedging or investment. To the extent that the Fund's portfolio strategy is
successful, the Fund is expected to achieve a total return consisting of (i) the
performance of the Fund's equity securities, relative to the relevant equity
market indexes (including appreciation or depreciation of any overweighted
currency relative to the currency weighting of the equity hedge), plus or minus
(ii) short-term capital gains or losses approximately equal to the total return
on the Theoretical Fixed Income Security, plus or minus (iii) capital gains or
losses on the Fund's interest rate futures positions minus (iv) transaction
costs and other Fund expenses. Investors should understand that, as opposed to
conventional equity portfolios, to the extent that the Fund's hedging positions
are effective, the performance of the Fund is not expected to correlate with the
movements of equity markets generally. Rather, the performance of the Fund will
tend to be a function of the total return on fixed income securities and the
performance of the Fund's equity securities relative to broad market indexes,
including changes in overweighted currencies relative to the currency weighting
of those indexes.
-48-
The Global Hedged Equity Fund has a fundamental policy that, under
normal market conditions, at least 65% of its total assets will be invested in
equity securities. In addition, under normal market conditions, the Fund will
invest in securities principally traded in the securities markets of at least
three countries. The Global Hedged Equity Fund will generally invest in at least
125 different common stocks chosen from among (i) U.S. stocks in which the Core
Fund is permitted to invest and (ii) stocks traded primarily outside of the
United States in which the International Core Fund is permitted to invest. The
Fund may invest up to 20% of its assets in securities of issuers in newly
industrializing countries of the type invested in by the Emerging Markets Fund.
The Manager will select which common stocks to purchase based on its assessment
of whether the common stock of an issuer (and/or the currency in which the stock
is traded) is likely to perform better than the broad global equity market index
(the "SELECTED EQUITY INDEX") selected by the Manager to serve as a hedge for
the Fund's portfolio as a whole.
As indicated above, the Fund will seek to hedge fully the value of its
equity holdings (measured in U.S. dollars) against substantially all movements
in the global equity markets (measured in U.S. dollars). This means that, if the
hedging strategy is successful, when the world equity markets and/or the U.S.
dollar go up or down, the Fund's net asset value will not be materially affected
by those movements in the relevant equity or currency markets generally, but
will rise or fall based primarily on whether the Fund's selected equity
securities perform better or worse than the Selected Equity Index. Those changes
will include the changes in any overweighted currency relative to the currency
weighting of the Selected Equity Index.
The Fund may use a variety of equity hedging instruments. It is
currently anticipated that the Fund will primarily use a combination of short
equity swap contracts and Index Futures for the purpose of hedging equity market
exposure, including, to the extent permitted by regulations of the Commodity
Futures Trading Commission, those traded on foreign markets. Derivative short
positions represented by the Fund's equity swap contracts will generally relate
to modified versions of the market capitalization weighted U.S., Europe,
Australia and Far East Index (or "GLOBAL INDEX") calculated by Morgan Stanley
Capital International. These modified indexes ("MODIFIED GLOBAL INDEX"), which
are maintained by the Manager, generally reduce the size of the Japanese equity
markets for purposes of the country weighting by 40% or more. The Fund generally
expects to build its currency hedging into its equity swap contracts, although
it may also attempt to hedge directly its foreign currency-denominated portfolio
securities against an appreciation in the U.S. dollar relative to the foreign
currencies in which such securities are denominated.
The Manager expects to select specific equity investments without
regard to the country weightings of the Modified Global Index and in some cases
may intentionally emphasize holdings in a particular market or traded in a
particular currency. Because the country market and currency weighting of the
Modified Global Index will generally not precisely mirror the country market
weightings represented by the Fund's equity securities, there will be an
imperfect correlation between the Fund's equity securities and the hedging
position(s). Consequently, the Fund's hedging strategies using those equity swap
contracts are expected to be somewhat imperfect. This means there is a risk that
if the Fund's equity securities decline in value as a result of general market
conditions, the hedging position(s) may not appreciate enough to offset that
decline (or may actually depreciate). Likewise, if the Fund's equity securities
increase in value, that value may be more than offset by a decline in the value
of the hedging position(s). Also, because the Manager may conclude that a
particular currency is likely to appreciate relative to the currencies
represented by the Selected Equity Index, securities traded in that particular
currency may be overweighted relative to the Selected Equity Index. Such an
overweighted position may result in a loss or reduced gain to the Fund (even
when the security appreciates in local currency) if the relevant currency
depreciates relative to the currencies represented by the Modified Global Index.
The Fund's hedging positions are also expected to increase or decrease
the Fund's gross total return by an amount approximating the total return on
relevant short-term fixed income securities referred to above as the Theoretical
Fixed Income Security. For example, as the holder of a short derivative position
on an equity index, the Fund will be obligated to pay the holder of the long
position (the "counterparty") the total return on that equity index. The Fund's
contractual obligation eliminates for the counterparty the opportunity cost that
would be associated with actually owning the securities underlying that equity
index. That opportunity cost would generally be considered the total return that
a counterparty could achieve if the counterparty's capital were invested in a
short-term fixed income security (i.e., up to 2 years maturity) rather than in
the securities underlying the Relevant Equity Index. Because the counterparty is
relieved of this cost, the pricing of the hedging instruments is designed to
compensate the holder of the short position (in this case the Fund) by paying to
the holder the total return on the Theoretical Fixed Income Security. (Another
way of thinking about this is that the holder of the short position must, in
theory, be compensated for the cost of borrowing money over some relatively
short term (generally up to 2 years) to purchase an equity portfolio matching
that holder's obligations under the hedging instrument.)
In practice, the Manager has represented that generally, if there is no
movement in the Relevant Equity Index during the term of the derivative
instrument, the Fund as the holder of the short (hedging) position would be able
to close out that position with a gain or loss equal to the total return on a
Theoretical Fixed Income Security with a principal amount equal to the face or
notional amount of the hedging instrument.
The total return on the Theoretical Fixed Income Security would be
accrued interest plus or minus the capital gain or loss on that security. In the
case of Index Futures, the Fund
-49-
would expect the Theoretical Fixed Income Security would be one with a term
equal to the remaining term of the Index Future and bearing interest at a rate
approximately equal to the weighted average interest rate for money market
obligations denominated in the currency or currencies used to settle the Index
Futures (generally LIBOR if settled in U.S. dollars). In the case of equity swap
contracts, the Manager can specify the Theoretical Fixed Income Security whose
total return will be paid to (or payable by) the Fund. In cases where the
Manager believes the implicit "duration" of the Fund's theoretical fixed income
securities is too short to provide an acceptable total return, the Fund may
enter into long interest rate futures (or purchase call options on longer
maturity fixed-income securities) which, together with the Theoretical Fixed
Income Security, creates a synthetic Theoretical Fixed Income Security with a
longer duration (but never with a duration causing the Fund's overall duration
to exceed that of 3-year U.S. Treasury obligations) (See "Description and Risks
of Fund Investments -- Use of Options, Futures and Options on Futures --
Investment Purposes"). The Fund will segregate cash, U.S. Treasury obligations
and other high grade debt obligations in an amount equal, on a marked-to- market
basis, to the Fund's obligations under the interest rate futures. Duration is
the average time until payment (or anticipated payment in the case of a callable
security) of interest and principal on a fixed income security, weighted
according to the present value of each payment.
If interest rates rise, the Fund would expect that the value of any
long interest rate future owned by the Fund would decline and that amounts
payable to the Fund under an equity swap contract in respect of the Theoretical
Fixed Income Security would decrease or that amounts payable by the Fund
thereunder would increase. Any such decline (and/or the amount of any such
decrease or increase under a short equity swap contract) could be greater than
the derivative "interest" received on the Fund's Theoretical Fixed Income
Securities. The Fund's gross return is also expected to be reduced by
transaction costs and other Fund expenses. Those expenses will generally include
currency hedging costs if interest rates outside the U.S. are higher than those
in the U.S.
For the equity swap contracts entered into by the Fund, the
counterparty will typically be a bank, investment banking firm or broker/dealer.
The counterparty will generally agree to pay the Fund (i) interest on the
Theoretical Fixed Income Security with a principal amount equal to the notional
amount of the equity swap contract plus (ii) the amount, if any, by which that
notional amount would have decreased in value (measured in U.S. Dollars) had it
been invested in the stocks comprising the equity index agreed to by the Fund
(the "Contract Index") in proportion to the composition of the Contract Index.
(The Contract Index will be the Modified Global Index except that, to the extent
short futures contracts on a particular country's equity securities are also
used by the Fund, the Contract Index may be the Modified Global Index with a
reduced weighting for that country to reflect the futures position.) The Fund
will agree to pay the counterparty (i) any negative total return on the
Theoretical Fixed Income Security plus (ii) the amount, if any, by which the
notional amount of the equity swap contract would have increased in value
(measured in U.S. Dollars) had it been invested in the stocks comprising the
Contract Index plus (iii) the dividends that would have been received on those
stocks. Therefore, the return to the Fund on any equity swap contract should be
the total return on the Theoretical Fixed Income Security reduced by the gain
(or increased by the loss) on the notional amount as if invested in the Contract
Index and reduced by the dividends on the stocks comprising the Contract Index.
The Fund will only enter into equity swap contracts on a net basis, i.e., the
two parties' obligations are netted out, with the Fund paying or receiving, as
the case may be, only the net amount of any payments. Payments under the equity
swap contracts may be made at the conclusion of the contract or periodically
during its term.
The Fund may from time to time enter into the opposite side of equity
swap contracts (i.e., where the Fund is obligated to pay the decrease (or
receive the increase) on the Contract Index increased by any negative total
return (and decreased by any positive total return) on the Theoretical Fixed
Income Security) to reduce the amount of the Fund's equity market hedging
consistent with the Fund's objective. These positions are sometimes referred to
as "long equity swap contracts." The Fund may also take long positions in index
futures for similar purposes.
The Fund may also take a long position in index futures to reduce the
amount of the Fund's equity market hedging consistent with the Fund's objective.
When hedging positions are reduced using index futures, the Fund will also be
exposed to the risk of imperfect correlations between the index futures and the
hedging positions being reduced.
The Fund will use a combination of long and short equity swap contracts
and long and short positions in index futures in an attempt to hedge generally
its equity securities against substantially all movements in the relevant equity
markets generally. The Fund will not use equity swap contracts or Relevant
Equity Index Futures to leverage the Fund.
The Fund's actual exposure to an equity market or markets will not be
completely hedged if the aggregate of the notional amount of the long equity
swap contracts (less the notional amount of any short equity swap contracts)
relating to the relevant equity index plus the face amount of the short Index
Futures (less the face amount of any long Index Futures) is less than the Fund's
total net assets invested in common stocks principally traded on such market or
markets and will tend to be overhedged if such aggregate is more than the Fund's
total net assets so invested. Under normal conditions, the Manager expects the
Fund's total net assets invested in equity securities generally to be up to 5%
more or less than this aggregate because purchases and redemptions of Fund
shares will change the Fund's total net assets frequently, because Index Futures
can only be purchased in integral multiples of an equity index and because the
Funds' positions may appreciate or depreciate over time. Also, the ability of
the Fund to hedge risk may be diminished by
-50-
imperfect correlations between price movements of the underlying equity index
with the price movements of Index Futures relating to that index and by lack of
correlation between the market weightings of the Modified Global Index, on the
one hand, and, on the other, the market weightings represented by the common
stocks selected for purchase by the Fund.
In theory, the Fund will only be able to achieve its objective with
precision if (i) the aggregate face amount of the net short Index Futures plus
the notional amount of the long equity swap contracts (less the notional amount
of any short equity swap contracts) relating to the Selected Equity Index is
precisely equal to a Fund's total net assets, (ii) there is exact price movement
correlation between any Index Futures and the relevant equity index, (iii) there
is exact price correlation between the Modified Global Index and the overall
movements of the relevant equity markets and (iv) the Fund's currency hedging
strategies are effective. As noted, in practice there are a number of risks and
cash flows which will tend to undercut these assumptions.
The purchase and sale of common stocks and Index Futures involve
transaction costs and reverse equity swap contracts require the Fund to pay
interest on the notional amount of the contract.
In addition to the practices described above, in order to pursue its
objective the Fund may invest in securities of foreign issuers traded on U.S.
exchanges and securities traded abroad, American Depositary Receipts, European
Depository Receipts and other similar securities convertible into securities of
foreign issuers. The Fund may also invest up to 15% of its net assets in
illiquid securities and temporarily invest up to 50% of its net assets in cash
and high quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit.
The Fund may also enter into repurchase agreements, and lend portfolio
securities valued at up to one-third of total assets.
In addition, for hedging purposes only the Fund may use forward foreign
currency contracts, currency futures contracts, related options and options on
currencies, and buy and sell foreign currencies.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments" later in this Prospectus.
INFLATION INDEXED BOND FUND
The Inflation Indexed Bond Fund seeks maximum total return through
investment primarily in foreign and U.S. government bonds that are indexed or
otherwise linked to general measures of inflation in the country of issue. The
Fund will invest in fixed income securities of both United States (when and if
appropriate issues become available) and foreign issuers. The availability of
inflation indexed bonds is currently limited to a small number of countries. A
bond will be deemed to be "linked" to general measures of inflation if, by such
bond's terms, principal or interest components change with general movements of
inflation in the country of issue.
The Fund may invest in fixed income securities of any maturity,
although under normal market conditions at least 65% of the Fund's total assets
will be comprised of inflation indexed "bonds" as such term is defined above.
Fixed income securities include securities issued by federal, state, local and
foreign governments, and a wide range of private issuers.
Under certain adverse investment conditions, the Fund may restrict the
number of securities markets in which assets will be invested. For temporary
defensive purposes, the Fund may invest up to 100% of its assets in securities
principally traded in the United States and/or denominated in U.S. dollars.
The Fund may enter into forward foreign exchange agreements, and
purchase or sell securities on a when-issued or delayed delivery basis.
The Fund may lend portfolio securities valued at up to one-third of
total assets, invest up to 25% of its assets in lower rated securities (also
known as "junk bonds"), and invest in adjustable rate securities, zero coupon
securities and depository receipts of foreign issuers. The Fund may also enter
into repurchase agreements, reverse repurchase agreements and dollar roll
transactions. In addition, the Fund may invest in mortgage-backed and other
asset-backed securities issued by the U.S. government, its agencies and by
non-government issuers, including collateral mortgage obligations ("CMO's"),
strips and residuals. The Fund may also invest in indexed securities the
redemption values and/or coupons of which are indexed to the prices of other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. The Fund may also enter into firm
commitment agreements with banks or broker-dealers, and may invest up to 15% of
its net assets in illiquid securities.
The Fund may buy put and call options, sell (write) covered options,
and enter into futures contracts and options on futures contracts for hedging,
investment and risk management and to effect synthetic sales and purchases. The
Fund's use of options on particular securities (as opposed to market indexes) is
limited such that the time premiums paid by the Fund on all outstanding options
it has purchased may not exceed 10% of its total assets. The Fund may also write
options in connection with buy-and-write transactions, and use index futures on
domestic and foreign indexes for investment, anticipatory hedging and risk
management. In addition, the Fund may use forward foreign currency contracts,
currency futures contracts and related options, currency swap contracts, options
on currencies, and buy and sell currencies for hedging and for currency risk
management. The Fund may also use futures contracts and
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foreign currency forward contracts to create synthetic bonds and synthetic
foreign currency denominated securities to approximate desired risk/return
profiles where the non-synthetic security having the desired risk/return profile
is either unavailable or possesses undesirable characteristics.
The Fund's investments in indexed securities may create taxable income
in excess of the cash they generate. In such cases, the Fund may be required to
sell assets to generate the cash necessary to distribute as dividends to its
shareholders all of its income and gains and therefore to eliminate any tax
liability at the Fund level. See "Taxes - Tax Implications of Certain
Investments" in this Prospectus.
For a more detailed description of the investment practices described
in the preceding paragraphs and the risks associated with them, see "Description
and Risks of Fund Investments" later in this Prospectus.
ASSET ALLOCATION FUNDS
The Asset Allocation Funds are mutual funds that invest in other Funds
of the Trust (referred to in this section as "underlying Funds") and, in doing
so, seek to outperform a specified benchmark. The Asset Allocation Funds are
able to operate in such a manner notwithstanding prohibitions in Sections
12(d)(1) and 17(a), inter alia, of the 1940 Act pursuant to an exemptive order
of the SEC. The Manager decides and manages the allocation of the assets of each
Asset Allocation Fund among a permitted subset of underlying Funds, as set forth
below. Thus, an investor in an Asset Allocation Fund receives investment
management within each of the underlying Funds and receives management with
respect to the allocation of the investment among the underlying Funds as well.
The Manager does not charge an advisory fee for asset allocation advice
provided to the Asset Allocation Funds, but receives such fees only from the
underlying Funds in which the Asset Allocation Funds invest. Stated otherwise,
there are no investment advisory fees at the Asset Allocation Fund level.
Because the underlying Funds have differing fees, certain allocations will
produce greater overall fees for GMO than others. Certain expenses, such as
custody, transfer agency and audit fees, will be incurred at the Asset
Allocation Fund level, although the Manager has agreed to voluntarily bear such
expenses until further notice.
Each Asset Allocation Fund will invest in Class III Shares of the
underlying Funds and will bear the 0.15% Shareholder Service Fees assessed
against those Class III shares. Each Asset Allocation Fund offers Class I, Class
II and Class III Shares with special lower Shareholder Service Fees that are
designed to mitigate the indirect cost of Shareholder Servicing Fees of the
Class III shares of the Underlying Funds in which the Asset Allocation Funds
invest. Thus, investors in Class I, Class II and Class III Shares of the Asset
Allocation Funds will bear, in the aggregate, direct and indirect Shareholder
Service Fees that are the same as those borne directly by Class I, Class II and
Class III Shares of the other Funds (i.e., an aggregate of 0.28%, 0.22% and
0.15% per annum, respectively). Investors should refer to "Multiple Classes"
herein for greater detail concerning the eligibility requirements and other
differences among the classes.
Investors in the Asset Allocation Funds should consider both the direct
risks associated with an investment in a "fund-of- funds," and the indirect
risks associated with an investment in the underlying Funds. See "Description
and Risks of Fund Investments -- Special Allocation Fund Considerations" for a
discussion of the risks directly associated with an investment in the Asset
Allocation Funds. Investors should also carefully review the "Investment
Objectives and Policies" description of each underlying Fund in which the
relevant Asset Allocation Fund may invest, as well as each corresponding
"Description and Risks of Fund Investments" section associated with each
underlying Fund's investment practices.
Note: Although the Asset Allocation Funds are managed relative to a specified
index, none of the Funds is managed as an index fund or an "index-plus" fund,
but rather each Fund seeks to add total return in excess of its respective
benchmark both by making bets relative to that benchmark with respect to the
allocation among the underlying Funds, and by participating in the attempt that
each of the underlying Funds makes to outperform its own respective benchmark
index. At any given time, the exposure of an Asset Allocation Fund may be
substantially different than that of its benchmark.
INTERNATIONAL EQUITY ALLOCATION FUND
The International Equity Allocation Fund seeks a total return greater
than the return of its benchmark index - the "EAFE-LITE EXTENDED INDEX." This
index has been developed by the Manager and is a modification of the EAFE-lite
Index which includes a weighting for emerging countries. See "Investment
Objectives and Policies - International Core Fund" for a description of the
EAFE-lite Index. The Fund will pursue its objective by investing to varying
extents, as determined by the Manager, primarily in Class III Shares of the
International Core Fund, Currency Hedged International Core Fund, Foreign Fund,
International Small Companies Fund, Japan Fund and Emerging Markets Fund. The
Fund may also invest up to 15% of its net assets in any combination of the
Domestic Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, Emerging Country Debt Fund, Inflation Indexed Bond Fund
and U.S. Bond/Global Alpha A Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities and high quality money market instruments such as securities issued
by the U.S. government and agencies thereof, bankers' acceptances, commercial
paper and bank certificates of deposit.
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For a detailed description of the objective and policies of each
underlying Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments" later in this Prospectus.
WORLD EQUITY ALLOCATION FUND
The World Equity Allocation Fund seeks a total return greater than the
return of its benchmark index - the "WORLD LITE EXTENDED INDEX." This index has
been developed by the Manager and is a modification of the Morgan Stanley
Capital International World Index that reduces the weighting of Japan and
includes a weighting for emerging countries. The Fund will pursue its objective
by investing to varying extents, as determined by the Manager, in Class III
Shares of the Core Fund, Value Fund, Growth Fund, U.S. Sector Fund, Fundamental
Value Fund, Small Cap Value Fund, Small Cap Growth Fund, REIT Fund,
International Core Fund, Currency Hedged International Core Fund, Foreign Fund,
International Small Companies Fund, Japan Fund and Emerging Markets Fund. The
Fund may also invest up to 15% of its net assets in any combination of the
Domestic Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, Emerging Country Debt Fund, Inflation Indexed Bond Fund
and U.S. Bond/Global Alpha Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities and high quality money market instruments such as securities issued
by the U.S. government and agencies thereof, bankers' acceptances, commercial
paper and bank certificates of deposit.
For a detailed description of the objective and policies of each
underlying Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments" later in this Prospectus.
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
The Global (U.S.+) Equity Allocation Fund seeks a total return greater
than the return of its benchmark index - the "GMO GLOBAL (U.S.+) EQUITY INDEX."
This index has been developed by the Manager and is a weighted index comprised
75% by the S&P 500 Index and 25% by the EAFE-lite Extended Index. The Fund will
pursue its objective by investing to varying extents, as determined by the
Manager, in Class III Shares of the Core Fund, Value Fund, Growth Fund, U.S.
Sector Fund, REIT Fund, Fundamental Value Fund, Small Cap Value Fund, Small Cap
Growth Fund, International Core Fund, Currency Hedged International Core Fund,
Foreign Fund, International Small Companies Fund, Japan Fund and Emerging
Markets Fund. The Fund may also invest up to 15% of its net assets in any
combination of the Domestic Bond Fund, International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, Inflation
Indexed Bond Fund and U.S. Bond/Global Alpha A Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities and high quality money market instruments such as securities issued
by the U.S. government and agencies thereof, bankers' acceptances, commercial
paper and bank certificates of deposit.
For a detailed description of the objective and policies of each
underlying Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments" later in this Prospectus.
GLOBAL BALANCED ALLOCATION FUND
The Global Balanced Allocation Fund seeks a total return greater than
the return of its benchmark index - the "GMO GLOBAL BALANCED INDEX." This index
has been developed by the Manager and is a weighted index comprised 48.75% by
the S&P 500, 16.25% by the EAFE-Lite Extended Index and 35% by the Lehman
Brothers Government Bond Index. The Fund will pursue its objective by investing
to varying extents, as determined by the Manager, in Class III Shares of the
Core Fund, Value Fund, Growth Fund, U.S. Sector Fund, Fundamental Value Fund,
Small Cap Value Fund, Small Cap Growth Fund, REIT Fund, International Core Fund,
Currency Hedged International Core Fund, Foreign Fund, International Small
Companies Fund, Japan Fund, Emerging Markets Fund, Domestic Bond Fund,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Inflation Indexed Bond Fund, Emerging Country Debt Fund and U.S.
Bond/Global Alpha A Fund. The Fund has a fundamental policy that it will, under
normal market conditions, invest in equity securities of underlying Funds such
that, under normal market conditions, at least 25% of the Fund's total assets
will indirectly be invested in fixed income senior securities.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also hold cash and invest in short-term fixed income
securities and high quality money market instruments such as securities issued
by the U.S. government and agencies thereof, bankers' acceptances, commercial
paper and bank certificates of deposit.
For a detailed description of the objective and policies of each
underlying Fund, see "Investment Objectives and Policies" herein. For a detailed
description of the investment practices referred to therein, see "Description
and Risks of Fund Investments" below.
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DESCRIPTION AND RISKS OF FUND
INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Not all Funds may engage in all practices described below. Please refer to the
"Investment Objectives and Policies" section above for determination of which
practices a particular Fund may engage in. Investors in Asset Allocation Funds
should be aware that the Asset Allocation Funds will indirectly engage in the
practices engaged in by the underlying Funds in which they are invested.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment
decisions for the Funds. The portfolio turnover rate of those Funds with at
least five months of operational history is shown under the heading "Financial
Highlights."
In any particular year, market conditions may well result in greater
rates than are presently anticipated. However, portfolio turnover for each of
the Global Properties Fund, U.S. Bond/Global Alpha A Fund, Small Cap Growth
Fund, Inflation Indexed Bond Fund, REIT Fund, Currency Hedged International Core
Fund, Global Bond Fund and Foreign Fund is not expected to exceed 150%. High
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which will be borne directly by the relevant Fund, and
may well involve realization of capital gains that would be taxable when
distributed to shareholders of the relevant Fund unless such shareholders are
themselves exempt. See "Taxes" below.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
It is a fundamental policy of each of the Core Fund, the Tobacco-Free
Core Fund, the Small Cap Value Fund, the Fundamental Value Fund, the
International Core Fund, the International Small Companies Fund, the GMO
International Equity Allocation Fund, the GMO World Equity Allocation Fund, the
GMO Global (U.S.+) Equity Allocation Fund, and the GMO Global Balanced
Allocation Fund, which may not be changed without shareholder approval, that at
least 75% of the value of each such Funds' total assets are represented by cash
and cash items (including receivables), Government securities, securities of
other investment companies, and other securities for the purposes of this
calculation limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the relevant Fund's total assets and to not more
than 10% of the outstanding voting securities of any single issuer. Each such
Fund is referred to herein as a "diversified" fund.
All other Funds are "non-diversified" funds under the 1940 Act, and as
such are not required to satisfy the "diversified" requirements stated above.
However, the Japan Fund may not own more than 10% of the outstanding voting
securities of any single issuer. As a non-diversified fund, each of these Funds
is permitted to (but is not required to) invest a higher percentage of its
assets in the securities of fewer issuers. Such concentration could increase the
risk of loss to such Funds should there be a decline in the market value of any
one portfolio security. Investment in a non-diversified fund may therefore
entail greater risks than investment in a diversified fund. All Funds, however,
must meet certain diversification standards to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit a Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the securities markets of the U.S. and developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent than in
the U.S. and developed foreign markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they
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trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries in which they trade. The economies of
countries with emerging markets may also be predominantly based on only a few
industries or dependent on revenues from particular commodities. In addition,
custodial services and other costs relating to investment in foreign markets may
be more expensive in emerging markets than in many developed foreign markets,
which could reduce a Fund's income from such securities. Finally, because
publicly traded debt instruments of emerging markets represent a relatively
recent innovation in the world debt markets, there is little historical data or
related market experience concerning the attributes of such instruments under
all economic, market and political conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. Each of the Emerging Markets
Fund, Foreign Fund, International Core Fund, Currency Hedged International Core
Fund, Global Properties Fund and U.S. Bond/Global Alpha A Fund may invest
directly in securities of Russian issuers. Investment in securities of such
issuers presents many of the same risks as investing in securities of issuers in
other emerging market economies, as described in the immediately preceding
section. However, the political, legal and operational risks of investing in
Russian issuers, and of having assets custodied within Russia, may be
particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When a Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
SECURITIES LENDING
All of the Funds (except for the Asset Allocation Funds) may make
secured loans of portfolio securities amounting to not more than one-third of
the relevant Fund's total assets, except for the International Core and Currency
Hedged International Core Funds, each of which may make loans of portfolio
securities amounting to not more than 25% of their respective total assets. The
risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. However, such
loans will be made only to broker-dealers that are believed by the Manager to be
of relatively high credit standing. Securities loans are made to broker-dealers
pursuant to agreements requiring that loans be continuously secured by
collateral in cash or U.S. Government Securities at least equal at all times to
the market value of the securities lent. The borrower pays to the lending Fund
an amount equal to any dividends or interest the Fund would have received had
the securities not been lent. If the loan is collateralized by U.S. Government
Securities, the Fund will receive a fee from the borrower. In the case of loans
collateralized by cash, the Fund typically invests the cash collateral for its
own account in interest-bearing, short-term securities and pays a fee to the
borrower. Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, the Fund retains the right to call the loans at
any time on reasonable notice, and it will do so in order that the securities
may be voted by the Fund if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. The Fund may
also call such loans in order to sell the securities involved. The Manager has
retained lending agents on behalf of several of the Funds that are compensated
based on a percentage of a Fund's return on the securities lending activity. The
Fund also pays various fees in connection with such loans including shipping
fees and reasonable custodian fees approved by the Trustees of the Trust or
persons acting pursuant to direction of the Board.
DEPOSITORY RECEIPTS
Many of the Funds may invest in American Depositary Receipts (ADRs),
Global Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with a Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their
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conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines. The Manager regards convertible securities as
a form of equity security.
FUTURES AND OPTIONS
As described under "Investment Objectives and Policies" above, many of
the Funds may use futures and options for various purposes. Such transactions
may involve options, futures and related options on futures contracts, and those
instruments may relate to particular equity and fixed income securities, equity
and fixed income indexes, and foreign currencies. The Funds may also enter into
a combination of long and short positions (including spreads and straddles) for
a variety of investment strategies, including protecting against changes in
certain yield relationships.
The use of futures contracts and options on futures contracts involves
risk. Thus, while a Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices, or currency
exchange rates may result in poorer overall performance for the Fund than if it
had not entered into any futures contracts or options transactions. Losses
incurred in transactions in futures and options on futures and the costs of
these transactions will affect a Fund's performance. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Funds' investments in futures contracts and
related options.
OPTIONS. As has been noted above, many Funds which may use options (1)
may enter into contracts giving third parties the right to buy the Fund's
portfolio securities for a fixed price at a future date (writing "covered call
options"); (2) may enter into contracts giving third parties the right to sell
securities to the Fund for a fixed price at a future date (writing "covered put
options"); and (3) may buy the right to purchase securities from third parties
("call options") or the right to sell securities to third parties ("put
options") for a fixed price at a future date.
WRITING COVERED OPTIONS. Each Fund (except for the Short-Term Income
Fund and the Asset Allocation Funds) may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by a Fund on a security gives the holder the right to buy the underlying
security from the Fund at a stated exercise price; a put option gives the holder
the right to sell the underlying security to the Fund at a stated exercise
price. In the case of options on indexes, the options are usually cash settled
based on the difference between the strike price and the value of the index.
Each such Fund will receive a premium for writing a put or call option,
which increases the Fund's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if a Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if a Fund owns the underlying
security or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option 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 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.
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Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security or securities owned by the Fund.
A Fund may write options in connection with buy-and- write
transactions; that is, a Fund may purchase a security and then write a call
option against that security. The exercise price of the call the Fund determines
to write will depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period.
Buy-and-write transactions using out- of-the-money call options may be used when
it is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upward or downward by the difference between the Fund's purchase price
of the security and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the- money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which a Fund will be able to write and purchase call and
put options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
FUTURES. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm which is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted. See
Appendix A, "Risks and Limitations of Options, Futures and Swaps" for more
information concerning these practices and their accompanying risks.
The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which
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will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a commission is paid on each completed purchase and sale
transaction.
In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds (except the Short- Term Income Fund)
may purchase futures contracts on various securities indexes ("Index Futures").
Each of the Domestic Equity Funds may purchase Index Futures on the S&P 500
("S&P 500 Index Futures") and on such other domestic stock indexes as the
Manager may deem appropriate. The Japan Fund may purchase Index Futures on the
Nikkei 225 Stock Average and on the Tokyo Stock Price Index ("TOPIX") (together
with Nikkei 225 futures contracts, "Japanese Index Futures"). The International
Core Fund, Currency Hedged International Core Fund, Foreign Fund, International
Small Companies Fund and Emerging Markets Fund may each purchase Index Futures
on foreign stock indexes, including those which may trade outside the United
States. The Domestic Bond Fund, International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, U.S.
Bond/Global Alpha A Fund and Inflation Indexed Bond Fund may each purchase Index
Futures on domestic and (except for the Domestic Bond Fund) foreign fixed income
securities indexes, including those which may trade outside the United States. A
Fund's purchase and sale of Index Futures is limited to contracts and exchanges
which have been approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled."
An Index Future that calls for physical delivery is a contract to buy an
integral number of units of the particular securities index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. While a Fund that purchases an
Index Future that calls for physical delivery is obligated to pay the face
amount on the stated date, such an Index Future may be closed out on that date
or any earlier date by selling an Index Future with the same face amount and
contract date. This will terminate the Fund's position and the Fund will realize
a profit or a loss based on the difference between the cost of purchasing the
original Index Future and the price obtained from selling the closing Index
Future. The amount of the profit or loss is determined by the change in the
value of the relevant index while the Index Future was held.
Index Futures that are "cash settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.
A Fund may close open positions on the futures exchange on which Index
Futures are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of S&P 500 Index Futures, with the Commodities Clearing House. Because the
specific procedures for trading foreign stock Index Futures on futures exchanges
are still under development, additional or different margin requirements as well
as settlement procedures may be applicable to foreign stock Index Futures at the
time a Fund purchases foreign stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the S&P 500 Index and futures markets. Secondly, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
The use of Index Futures involves risk. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Funds' investment in futures contracts.
INTEREST RATE FUTURES. For the purposes previously described, the Fixed
Income Funds (other than the Short-Term Income Fund) may engage in a variety of
transactions involving
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the use of futures with respect to U.S. Government Securities and other fixed
income securities. The use of interest rate futures involves risk. See Appendix
A, "Risks and Limitations of Options, Futures and Swaps" for a more detailed
discussion of the limits, conditions and risks of the Fund's investment in
futures contracts.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. Funds may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, a Fund may purchase
put options or write call options on futures contracts rather than selling
futures contracts. Similarly, a Fund may purchase call options or write put
options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund expects to purchase. Such options generally operate in the same manner
as options purchased or written directly on the underlying investments. See
"Descriptions and Risks of Fund Investment Practices -- Foreign Currency
Transactions" for a description of the Funds' use of options on currency
futures.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if a Fixed Income Fund wants to increase its exposure to a particular
fixed income security, the Fund may take long positions in futures contracts on
that security. Likewise, if an Equity Fund holds a portfolio of stocks with an
average volatility (beta) lower than that of the Fund's benchmark securities
index as a whole (deemed to be 1.00), the Fund may purchase Index Futures to
increase its average volatility to 1.00. In the case of futures and options on
futures, a Fund is only required to deposit the initial and variation margin as
required by relevant CFTC regulations and the rules of the contract markets.
Because the Fund will then be obligated to purchase the security or index at a
set price on a future date, the Fund's net asset value will fluctuate with the
value of the security as if it were already included in the Fund's portfolio.
Risk management transactions have the effect of providing a degree of investment
leverage, particularly when the Fund does not segregate assets equal to the face
amount of the contract (i.e., in cash settled futures contracts) since the
futures contract (and related options) will increase or decrease in value at a
rate which is a multiple of the rate of increase or decrease in the value of the
initial and variable margin that the Fund is required to deposit. As a result,
the value of the Fund's portfolio will generally be more volatile than the value
of comparable portfolios which do not engage in risk management transactions. A
Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, a Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if the Fund were fully invested in
the securities comprising the relevant index. However, a Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures equity swaps
and contracts for differences as described below does not exceed 10% of a Fund's
assets.
HEDGING. To the extent indicated elsewhere, a Fund may also enter into
options, futures contracts and buy and sell options thereon for hedging. For
example, if a Fund wants to hedge certain of its fixed income securities against
a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indexes of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. Likewise, the Equity Funds may sell equity index futures if a Fund
wants to hedge its equity securities against a general decline in the relevant
equity market(s). The Funds may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that a Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, the Fund may purchase call options or write put
options as a substitute for the purchase of futures contracts. See "Description
and Risks of Fund Investment Practices -- Foreign Currency Transactions" for
more information regarding the currency hedging practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also
enter into futures contracts and buy and sell options thereon for investment.
For example, a Fund may invest in futures when its Manager believes that there
are not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which
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may be associated with investment in the securities of multiple issuers. This
use may also permit a Fund to avoid potential market and liquidity problems
(e.g., driving up the price of a security by purchasing additional shares of a
portfolio security or owning so much of a particular issuer's stock that the
sale of such stock depresses that stock's price) which may result from increases
in positions already held by the Fund.
When any Fund purchases futures contracts for investment, it will
maintain cash, U.S. Government Securities or other high grade debt obligations
in a segregated account with its custodian in an amount which, together with the
initial and variation margin deposited on the futures contracts, is equal to the
face value of the futures contracts at all times while the futures contracts are
held.
Incidental to other transactions in fixed income securities, for
investment purposes a Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
having the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When a Fund creates a "synthetic" bond with a futures contract, it will maintain
cash, U.S. Government securities or other high grade debt obligations in a
segregated account with its custodian with a value at least equal to the face
amount of the futures contract (less the amount of any initial or variation
margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to
reduce transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization (e.g., between $300 million and $5.2 billion)
and, in the opinion of the Manager, such stocks are likely to underperform
larger capitalization stocks, the Fund might sell some or all of its
mid-capitalization stocks, buy large capitalization stocks with the proceeds and
then, when the expected trend had played out, sell the large capitalization
stocks and repurchase the mid-capitalization stocks with the proceeds. In the
alternative, the Fund may use futures to achieve a similar result with reduced
transaction costs. In that case, the Fund might simultaneously enter into short
futures positions on an appropriate index (e.g., the S&P Mid Cap 400 Index) (to
synthetically "sell" the stocks in the Fund) and long futures positions on
another index (e.g., the S&P 500) (to synthetically buy the larger
capitalization stocks). When the expected trend has played out, the Fund would
then close out both futures contract positions. A Fund will only enter into
these combined positions if (1) the short position (adjusted for historic
volatility) operates as a hedge of existing portfolio holdings, (2) the face
amount of the long futures position is less than or equal to the value of the
portfolio securities that the Fund would like to dispose of, (3) the contract
settlement date for the short futures position is approximately the same as that
for the long futures position and (4) the Fund segregates an amount of cash,
U.S. Government Securities and other high-quality debt obligations whose value,
marked-to-market daily, is equal to the Fund's current obligations in respect of
the long futures contract positions. If a Fund uses such combined short and long
positions, in addition to possible declines in the values of its investment
securities, the Fund may also suffer losses associated with a securities index
underlying the long futures position underperforming the securities index
underlying the short futures position. However, the Manager will enter into
these combined positions only if the Manager expects that, overall, the Fund
will perform as if it had sold the securities hedged by the short position and
purchased the securities underlying the long position. A Fund may also use swaps
and options on futures to achieve the same objective. For more information, see
Appendix A, "Risks and Limitations of Options, Futures and Swaps."
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
As has been described in the "Investment Objectives and Policies"
section above, many of the Funds may use swap contracts and other two-party
contracts for the same or similar purposes as they may use options, futures and
related options. The use of swap contracts and other two-party contracts
involves risk. See Appendix A, "Risks and Limitations of Options, Futures and
Swaps" for a more detailed discussion of the limits, conditions and risks of the
Funds' investments in swaps and other two-party contracts.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. A Fund
will usually enter into swaps on a net basis, i.e., the two returns are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve
the exchange of the two parties' respective commitments to pay or receive
interest on a notional principal amount (e.g., an exchange of floating rate
payments for fixed rate payments). Currency swaps involve the exchange of the
two parties' respective commitments to pay or receive fluctuations with respect
to a notional amount of two different currencies
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(e.g., an exchange of payments with respect to fluctuations in the value of the
U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. As described under
"Investment Objectives and Policies -- Fixed Income Funds -- Global Hedged
Equity Fund," equity swap contracts involve the exchange of one party's
obligation to pay the loss, if any, with respect to a notional amount of a
particular equity index (e.g., the S&P 500 Index) plus interest on such notional
amount at a designated rate (e.g., the London Inter- Bank Offered Rate) in
exchange for the other party's obligation to pay the gain, if any, with respect
to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Funds will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, a Fund will not normally enter an equity swap
contract to increase the volatility (beta) of the Fund's portfolio above 1.00,
the volatility that would be present in the stocks comprising the Fund's
benchmark index. However, a Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of a Fund's
net assets.
Contracts for differences are swap arrangements in which a Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. The Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. The Funds will only enter into contracts for differences where
payment obligations of the two legs of the contract are netted and thus based on
changes in the relative value of the baskets of securities rather than on the
aggregate change in the value of the two legs. The Funds will only enter into
contracts for differences (and analogous futures positions) when the Manager
believes that the basket of securities constituting the long leg will outperform
the basket constituting the short leg. However, it is possible that the short
basket will outperform the long basket - resulting in a loss to the Fund, even
in circumstances where the securities in both the long and short baskets
appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to
the 10% limitation mentioned above, a Fund will maintain cash, U.S. Government
Securities or other high grade debt obligations in a segregated account with its
custodian in an amount equal to the aggregate of net payment obligations on its
swap contracts and contracts for differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contacts, when
aggregated with the Index Futures and equity swaps contracts as described above,
does not exceed 10% of a Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Funds may use interest rate
caps, floors and collars for the same purposes or similar purposes as for which
they use interest rate futures contracts and related options. Interest rate
caps, floors and collars are similar to interest rate swap contracts because the
payment obligations are measured by changes in interest rates as applied to a
notional amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, each Fund will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount at least equal to its
obligations, if any, under interest rate cap, floor and collar arrangements. As
with futures contracts, when a Fund uses notional amount contracts for risk
management it is only required to segregate assets equal to its net payment
obligation, not the notional amount of the contract. In those cases, the
notional amount contract will have the effect of providing a degree of
investment leverage similar to the leverage associated with nonsegregated
futures contracts. The Funds' use of interest rate caps, floors and collars for
the same or similar purposes as those for which they use futures contracts and
related options present the same risks and similar opportunities to those
associated with futures and related options. For a description of certain
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limitations on the Funds' use of caps, floors and collars, see Appendix A,
"Risks and Limitations of Options, Futures and Swaps -- Additional Regulatory
Limitations on the Use of Futures, Related Options, Interest Rate Floors, Caps
and Collars and Interest Rate and Currency Swap Contracts." Because caps, floors
and collars are recent innovations for which standardized documentation has not
yet been developed they are deemed by the SEC to be relatively illiquid
investments which are subject to a Fund's limitation on investment in illiquid
securities. See "Description and Risks of Fund Investments -- Illiquid
Securities."
FOREIGN CURRENCY TRANSACTIONS
Funds that are permitted to invest in securities denominated in foreign
currencies may buy or sell foreign currencies, deal in forward foreign currency
contracts, currency futures contracts and related options and options on
currencies. These Funds may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active currency positions relative to both the securities portfolio of
the Fund and the Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quantity of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
These Funds may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, the Funds may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Funds may achieve the same protection for a foreign security
at reduced cost through the use of a forward foreign currency contract relating
to a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Funds
assume the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps."
A Fund is not required to enter into hedging transactions with regard
to its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Funds may be required to forego the benefits of advantageous changes in the
exchange rates.
Each of these Funds may also enter foreign currency forward contracts
for investment and currency risk management. When a Fund uses currency
instruments for such purposes, the foreign currency exposure of the Fund may
differ substantially from the currencies in which the Fund's investment
securities are denominated. However, a Fund's aggregate foreign currency
exposure will not normally exceed 100% of the value of the Fund's securities,
except that a Fund may use currency instruments without regard to this
limitation if the amount of such excess, when aggregated with futures contracts,
equity swap contracts and contracts for differences used in similar ways, does
not exceed 10% of a Fund's net assets. The U.S. Bond/Global Alpha A Fund,
International Bond Fund, the Currency Hedged International Bond Fund, the Global
Bond Fund and the Emerging Country Debt Fund may each also enter into foreign
currency forward contracts to give fixed income securities denominated in one
currency (generally the U.S. dollar) the risk characteristics of similar
securities denominated in another currency as described above under "Uses of
Options, Futures and Options on Futures--Investment Purposes" or for risk
management in a manner similar to such Funds' use of futures contracts and
related options. For a description of the particular manner in which the
Currency Hedged International Core Fund may engage in foreign currency
transactions, see "Investment Objectives and Policies -- Currency Hedged
International Core Fund."
Except to the extent that the Funds may use such contracts for risk
management, whenever a Fund enters into a
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foreign currency forward contract, other than a forward contract entered into
for hedging, it will maintain cash, U.S. Government securities or other high
grade debt obligations in a segregated account with its custodian with a value,
marked to market daily, equal to the amount of the currency required to be
delivered. A Fund's ability to engage in forward contracts may be limited by tax
considerations.
A Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which they use currency forwards.
Except to the extent that the Funds may use futures contracts and related
options for risk management, a Fund will, so long as it is obligated as the
writer of a call option on currency futures, own on a contract-for- contract
basis an equal long position in currency futures with the same delivery date or
a call option on currency futures with the difference, if any, between the
market value of the call written and the market value of the call or long
currency futures purchased maintained by the Fund in cash, U.S. Government
securities or other high grade debt obligations in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by a Fund falls below 100% of the market value of the call written by
the Fund, the Fund will maintain an amount of cash, U.S. Government securities
or other high grade debt obligations in a segregated account with its custodian
equal in value to the difference. Alternatively, the Fund may cover the call
option by owning securities denominated in the currency with a value equal to
the face amount of the contract(s) or through segregating with the custodian an
amount of the particular foreign currency equal to the amount of foreign
currency per futures contract option times the number of options written by the
Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and
broker-dealers by which the Fund acquires a security (usually an obligation of
the Government where the transaction is initiated or in whose currency the
agreement is denominated) for a relatively short period (usually not more than a
week) for cash and obtains a simultaneous commitment from the seller to
repurchase the security at an agreed-on price and date. The resale price is in
excess of the acquisition price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
an opportunity for the Fund to earn a return on temporarily available cash at no
market risk, although there is a risk that the seller may default in its
obligation to pay the agreed-upon sum on the redelivery date. Such a default may
subject the relevant Fund to expenses, delays and risks of loss including: (a)
possible declines in the value of the underlying security during the period
while the Fund seeks to enforce its rights thereto, (b) possible reduced levels
of income and lack of access to income during this period and (c) inability to
enforce rights and the expenses involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities
of any maturity, although, under normal circumstances, a Fixed Income Fund
(other than the Short-Term Income Fund) will only invest in a security if, at
the time of such investment, at least 65% of its total assets will be comprised
of bonds, as defined in "Investment Objectives and Policies -- Fixed Income
Funds" above. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future
income of a Fund investing in such securities. The net asset value of each such
Fund's shares will vary as a result of changes in the value of the securities in
its portfolio and will be affected by the absence and/or success of hedging
strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
As described under "Investment Objectives and Policies" above, many of
the Funds may temporarily invest a portion of their assets in cash or cash items
pending other investments or in connection with the maintenance of a segregated
account. These cash items must be of high quality and may include a number of
money market instruments such as securities issued by the United States
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. By investing only in high quality money market
securities a Fund will seek to minimize credit risk with respect to such
investments. The Short-Term Income Fund may make many of the same investments,
although it imposes less strict restrictions concerning the quality of such
investments. See "Investment Objectives and Policies -- Fixed Income Funds --
Short-Term Income Fund" for a general description of various types of money
market instruments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT
SECURITIES
U.S. Government Securities include securities issued or guaranteed by
the U.S. government or its authorities, agencies or
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instrumentalities. Foreign Government Securities include securities issued or
guaranteed by foreign governments (including political subdivisions) or their
authorities, agencies or instrumentalities or by supra-national agencies. U.S.
Government Securities and Foreign Government Securities have different kinds of
government support. For example, some U.S. Government Securities, such as U.S.
Treasury bonds, are supported by the full faith and credit of the United States,
whereas certain other U.S. Government Securities issued or guaranteed by federal
agencies or government-sponsored enterprises are not supported by the full faith
and credit of the United States. Similarly, some Foreign Government Securities
are supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political instability in such countries and the possible
inability of a Fund to enforce its rights against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and
the Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, a Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or both, in U.S. Government Securities and
Foreign Government Securities. These certificates of accrual and similar
instruments may be more volatile than other government securities.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed and other asset-backed securities may be issued by the
U.S. government, its agencies or instrumentalities, or by non-governmental
issuers. Interest and principal payments (including prepayments) on the
mortgages underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed security. Prepayments occur when the mortgagor on
an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying mortgages, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, there can be no certainty as to the predicted yield or average life of a
particular issue of pass-through certificates. Prepayments are important because
of their effect on the yield and price of the securities. During periods of
declining interest rates, such prepayments can be expected to accelerate and a
Fund would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses because the premium may
not have been fully amortized at the time the obligation was prepaid. As a
result of these principal prepayment features, the values of mortgage-backed
securities generally fall when interest rates rise, but their potential for
capital appreciation in periods of falling interest rates is limited because of
the prepayment feature. The mortgage-backed securities purchased by a Fund may
include Adjustable Rate Securities as such term is defined in "Descriptions and
Risks of Fund Investment Practices -- Adjustable Rate Securities" below.
Other "asset-backed securities" include securities backed by pools of
automobile loans, educational loans and credit card receivables. Mortgage-backed
and asset-backed securities of non-governmental issuers involve prepayment risks
similar to those of U.S. government guaranteed mortgage-backed securities and
also involve risk of loss of principal if the obligors of the underlying
obligations default in payment of the obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"); STRIPS AND RESIDUALS. A
CMO is a security backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs are issued in multiple classes or series which
have different maturities representing interests in some or all of the interest
or principal on the underlying collateral or a combination thereof. CMOs of
different classes are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of CMO first to mature
generally will be retired prior to its stated maturity. Thus, the early
retirement of a particular class or series of CMO held by a Fund would have the
same effect as the prepayment of mortgages underlying a mortgage-backed
pass-through security.
CMOs include securities ("Residuals") representing the interest in any
excess cash flow and/or the value of any collateral remaining on mortgages or
mortgage-backed securities from the payment of principal of and interest on all
other CMOs and the administrative expenses of the issuer. Residuals have value
only to the extent income from such underlying mortgages or mortgage-backed
securities exceeds the amounts necessary to satisfy the issuer's debt
obligations represented by all other outstanding CMOs.
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CMOs also include certificates representing undivided interests in
payments of interest-only or principal-only ("IO/PO Strips") on the underlying
mortgages. IO/PO Strips and Residuals tend to be more volatile than other types
of securities. IO Strips and Residuals also involve the additional risk of loss
of a substantial portion of or the entire value of the investment if the
underlying securities are prepaid. In addition, if a CMO bears interest at an
adjustable rate, the cash flows on the related Residual will also be extremely
sensitive to the level of the index upon which the rate adjustments are based.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that
are reset at periodic intervals, usually by reference to some interest rate
index or market interest rate. They may be U.S. Government Securities or
securities of other issuers. Some adjustable rate securities are backed by pools
of mortgage loans. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because the interest
rate is reset only periodically, changes in the interest rates on adjustable
rate securities may lag changes in prevailing market interest rates. Also, some
adjustable rate securities (or, in the case of securities backed by mortgage
loans, the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life of
the security. Because of the resetting of interest rates, adjustable rate
securities are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.
LOWER RATED SECURITIES
Certain Funds may invest some or all of their assets in securities
rated below investment grade (that is, rated below BBB by Standard & Poor's or
below Baa by Moody's) at the time of purchase, including securities in the
lowest rating categories, and comparable unrated securities ("Lower Rated
Securities"). A Fund will not necessarily dispose of a security when its rating
is reduced below its rating at the time of purchase, although the Manager will
monitor the investment to determine whether continued investment in the security
will assist in meeting the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject
to greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See Appendix B for more information concerning commercial paper
and corporate debt ratings.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been imple mented in Mexico,
Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other
countries.
Brady Bonds have been issued only recently, and for that reason do not
have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets.
Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation
components: any collateralized repayment of principal at final maturity; any
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
ZERO COUPON SECURITIES
A Fund investing in "zero coupon" fixed income securities is required
to accrue interest income on these securities at a fixed rate based on the
initial purchase price and the length to maturity, but these securities do not
pay interest in cash on a current basis. Each Fund is required to distribute the
income on these securities to its shareholders as the income accrues, even
though that Fund is not receiving the income in cash on a current basis. Thus,
each Fund may have to sell other investments to obtain cash to make income
distributions. The market value of zero coupon securities is often more volatile
than that of non-zero
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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 each Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage, since they will generally increase
or decrease in value in response to changes in market interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.
A Fund's investment in indexed securities may also create taxable
income in excess of the cash such investments generate. See "Taxes - Tax
Implications of Certain Investments" in this Prospectus.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. A Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. A Fund will only enter into firm commitment
arrangements with banks and broker-dealers which the Manager determines present
minimal credit risks. Each such Fund will maintain in a segregated account with
its custodian cash, U.S. Government Securities or other liquid high grade debt
obligations in an amount equal to the Fund's obligations under firm commitment
agreements.
LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in direct debt instruments which are interests
in amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments are subject to a Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally recognized
rating agency and yield could be adversely affected. Loans that are fully
secured offer the Fund more protections than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
borrower's obligation, or that the collateral can be liquidated. Indebtedness of
borrowers whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Borrowers that are in bankruptcy or restructuring
may never pay off their indebtedness, or may pay only a small fraction of the
amount owed. Direct indebtedness of emerging countries will also involve a risk
that the governmental entities responsible for the repayment of the debt may be
unable, or unwilling, to pay interest and repay principal when due.
When investing in a loan participation, a Fund will typically have the
right to receive payments only from the lender to the extent the lender receives
payments from the borrower, and not from the borrower itself. Likewise, a Fund
typically will be able to enforce its rights only through the lender, and not
directly against the borrower. As a result, a Fund will assume the credit risk
of both the borrower and the lender that is selling the participation.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, a Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning
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and disposing of the collateral. In addition, it is conceivable that under
emerging legal theories of lender liability, a Fund could be held liable as a
co-lender. In the case of a loan participation, direct debt instruments may also
involve a risk of insolvency of the lending bank or other intermediary. Direct
debt instruments that are not in the form of securities may offer less legal
protection to a Fund in the event of fraud or misrepresentation. In the absence
of definitive regulatory guidance, a Fund may rely on the Manager's research to
attempt to avoid situations where fraud or misrepresentation could adversely
affect the fund.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by a Fund may include letters of credit,
revolving credit facilities, or other standby financing commitments obligating
the Fund to pay additional cash on demand. These commitments may have the effect
of requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. A Fund will set aside appropriate liquid
assets in a segregated custodial account to cover its potential obligations
under standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Certain Funds may enter into reverse repurchase agreements and dollar
roll agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
A Fund which makes such investments will establish segregated accounts
with its custodian in which the Fund will maintain cash, U.S. Government
Securities or other liquid high grade debt obligations equal in value to its
obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by a Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, a Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party or its trustee or receiver whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and dollar rolls are
not considered borrowings by a Fund for purposes of a Fund's fundamental
investment restriction with respect to borrowings.
ILLIQUID SECURITIES
Each Fund (except for the Asset Allocation Funds) may purchase
"illiquid securities," i.e., securities which may not be sold or disposed of in
the ordinary course of business within seven days at approximately the value at
which the Fund has valued the investment, which include securities whose
disposition is restricted by securities laws, so long as no more than 15% (or,
in the case of the Foreign Fund only, 10%) of net assets would be invested in
such illiquid securities. Each Fund currently intends to invest in accordance
with the SEC staff view that repurchase agreements maturing in more than seven
days are illiquid securities. The SEC staff has stated informally that it is of
the view that over-the-counter options and securities serving as cover for
over-the-counter options are illiquid securities. While the Trust does not agree
with this view, it will operate in accordance with any relevant formal
guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps,
floors and collars to be illiquid securities. Consequently, while the staff
maintains this position, the Fund will not enter into an equity swap contract or
a reverse equity swap contract or purchase a cap, floor or collar if, as a
result of the investment, the total value (i.e., marked-to-market value) of such
investments (without regard to their notional amount) together with that of all
other illiquid securities which the Fund owns would exceed 15% (or, in the case
of the Foreign Fund only, 10%) of the Fund's total assets.
SPECIAL ASSET ALLOCATION FUND CONSIDERATIONS
The Manager does not charge an investment management fee for asset
allocation advice provided to the Asset Allocation Funds, but certain other
expenses such as custody, transfer agency and audit fees will be borne by the
Asset Allocation Funds. Investors in Asset Allocation Funds will also indirectly
bear a proportionate share of the Total Operating Expenses (including investment
management, custody, transfer agency, audit and other Fund expenses) of the
underlying Funds in which the Asset Allocation Funds invest, as well as any
purchase premiums or redemption fees charged by such underlying Funds. Since the
Manager will receive fees from the underlying Funds, the Manager has a financial
incentive to invest the assets of the Asset Allocation Funds in underlying Funds
with higher fees, despite the investment interests of the Asset Allocation
Funds. The Manager is legally obligated to disregard that incentive in selecting
shares of the underlying Funds.
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ADDITIONAL INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS:
Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to any Fund as indicated:
(1) Borrow money except under the following circumstances: (i) Each
Fund may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt obligations; (ii) Each
Fund may also borrow amounts equal to an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes, such as for
the clearance and settlement of portfolio transactions and to meet shareholder
redemption requests; (iii) Each Fund may enter into transactions that are
technically borrowings under the 1940 Act because they involve the sale of a
security coupled with an agreement to repurchase that security (e.g., reverse
repurchase agreements, dollar rolls and other similar investment techniques)
without regard to the asset coverage restriction described in (i) above, so long
as and to the extent that a Fund establishes a segregated account with its
custodian in which it maintains cash and/or high grade debt securities equal in
value to its obligations in respect of these transactions. Under current
pronouncements of the SEC staff, such transactions are not treated as senior
securities so long as and to the extent that the Fund establishes a segregated
account with its custodian in which it maintains liquid assets, such as cash,
U.S. Government securities or other appropriate high grade debt securities equal
in value to its obligations in respect of these transactions; notwithstanding
the foregoing, the Japan Fund may not borrow money in excess of 10% of the value
(taken at the lower of cost or current value) of the Fund's total assets (not
including the amount borrowed) at the time the borrowing is made, and then only
from banks as a temporary measure to facilitate the meeting of redemption
requests (not for leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or emergency purposes,
and which borrowings will be repaid before any additional investments are
purchased.
(2) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities. (For
this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of a Fund's total assets in the case of each Fund (except the International Core
and Currency Hedged International Core Funds), and with respect to not more than
25% of total assets in the case of each of the International Core and Currency
Hedged International Core Funds.
(7) Invest in securities of any issuer if, to the knowledge of the
Trust, officers and Trustees of the Trust and officers and members of Grantham,
Mayo, Van Otterloo & Co. LLC (the "Manager") who beneficially own more than 1/2
of 1% of the securities of that issuer together beneficially own more than 5%.
(8) Concentrate more than 25% of the value of its total assets in any
one industry (except that, as described in the Prospectus, the Short-Term Income
Fund may invest up to 100% of its assets in obligations issued by banks, and the
REIT and Global Properties Funds may invest more than 25% of their assets in
real estate-related securities).
(9) Purchase or sell commodities or commodity contracts, except that
the Funds (other than the Short-Term Income Fund) may purchase and sell
financial futures contracts and options thereon.
(10) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the functional meaning
of the term "evidence of indebtedness", the issue of compliance with Section 18
of the 1940 Act will not be raised with the SEC by the Division of Investment
Management if a Fund covers such securities by maintaining certain "segregated
accounts." Similarly, so long as such segregated accounts are maintained, the
issue of compliance with Section 18 will not be raised with respect to any of
the following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (5) below; any
borrowing permitted by restriction 1 above; any collateral arrangements with
respect to initial and variational margin permitted by non- fundamental policy
(5) below; and the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts.
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(11) With respect to the Tobacco-Free Core Fund only, invest in (a)
securities which at the time of such investment are not readily marketable, (b)
securities the disposition of which is restricted under federal securities laws,
and (c) repurchase agreements maturing in more than seven days if, as a result,
more than 10% of the Fund's total assets (taken at current value) would then be
invested in securities described in (a), (b) and (c) above.
(12) With respect to the Japan Fund only, (i) own greater than 10% of
the outstanding voting securities of any single issuer; or (ii) pledge,
hypothecate, mortgage or otherwise encumber its assets in excess of 10% of the
Fund's total assets (taken at cost) and then only to secure permitted borrowings
(for purposes of this restriction, collateral arrangements with respect to the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets).
Notwithstanding the latitude permitted by Restrictions 1, 3, and 5
above and non-fundamental policy (e) below, no Fund has any 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) with
the exception of the REIT Fund, the Global Properties Fund, the Core Fund, the
Tobacco-Free Core Fund, the Value Fund, the Growth Fund, the U.S. Sector Fund,
the Small Cap Value Fund and the Small Cap Growth Fund, investing in real estate
investment trusts.
NON-FUNDAMENTAL RESTRICTIONS:
It is contrary to the present policy of all the Funds, which may be
changed by the Trustees without shareholder approval, to:
(1) Invest in warrants or rights excluding options (other than warrants
or rights acquired by the Fund as a part of a unit or attached to securities at
the time of purchase), except that (i) the International Equity Funds may invest
in such warrants or rights so long as the aggregate value thereof (taken at the
lower of cost or market) does not exceed 5% of the value of the Fund's total net
assets; provided that within this 5%, not more than 2% of its net assets may be
invested in warrants that are not listed on the New York or American Stock
Exchange or a recognized foreign exchange, and (ii) the Foreign Fund may invest
without limitation in such warrants or rights.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) Make investments for the purpose of gaining control of a company's
management.
(4) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
(5) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 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 equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)
(6) With respect to the Foreign Fund only, to (i) invest in interests
of any general partnership, (ii) utilize margin or other borrowings to increase
market exposure (such prohibition shall extend to the use of cash collateral
obtained in exchange for loaned securities but does not prohibit the use of
margin accounts for permissible futures trading; further, the Fund may borrow an
amount equal to cash receivable from sales of stocks or securities the
settlement of which is deferred under standard practice in the country of sale),
(iii) pledge or otherwise encumber its assets, and (iv) invest more than 5% of
its assets in any one issuer (except Government securities and bank certificates
of deposit).
Except as indicated above in Fundamental Restriction No. 1, all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of that Fund, or (2) 67% or more of the
shares of that Fund present at a meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy.
MULTIPLE CLASSES
Each Fund (except the Short-Term Income Fund) offers three classes of
shares: Class I, Class II and Class III. The Short-Term Income Fund offers only
Class III Shares. Eligibility generally depends on the size of a client's total
investment with GMO, as described more fully in this section. See "Eligibility
for Classes" below.
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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
Fund Class I Class II Class III
All Funds (except Asset 0.28% 0.22% 0.15%
Allocation Funds)
Asset Allocation Funds* 0.13% 0.07% 0.00%
* The Asset Allocation Funds will invest in Class III Shares of underlying Funds
and will therefore also indirectly bear an additional Shareholder Service Fee of
0.15%. Thus, the total Shareholder Service Fee borne by Class I, Class II and
Class III Shares of the Asset Allocation Funds is the same as that borne by
Class I, Class II and Class III Shares, respectively, of the other Funds.
CLIENT SERVICE - GMO AND GMO FUNDS DIVISION
A significant distinction among classes is that clients eligible for
Class I or Class II Shares are serviced by the Manager's GMO FUNDS DIVISION, a
division of GMO established in April of 1996 to deliver institutional quality
service and reporting to clients generally committing between $1 million and $35
million to GMO's management.
Clients eligible to purchase Class III Shares will be serviced directly
by the Manager.
ELIGIBILITY FOR CLASSES
With certain exceptions described below, eligibility for Class I, Class
II, and Class III Shares depends on a client's "TOTAL INVESTMENT" with GMO.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment is equal at any time to the aggregate of all
amounts contributed by the client to any GMO Fund, less the "INVESTMENT COST" of
all redemptions by the client from such Funds. Where applicable, the market
value of assets managed by GMO for the client other than in a mutual fund, as of
the prior month end, will be added to the client's Total Investment. For
purposes of class eligibility, market appreciation or depreciation of a client's
mutual fund account is not considered; the Total Investment of a client is
affected only by the amount of purchases and redemptions made by the client.
Further, it is assumed that any redemptions made by a client are satisfied first
by market appreciation so that a redemption does not have Investment Cost except
to the extent that the redemption or withdrawal exceeds the market appreciation
of the client's account in a Fund.
Subject to the exceptions set forth following this table, the minimum
Total Investment for a new client (establishing a GMO Account after June 1,
1996) to be eligible for Class I, II or III Shares is set forth in the following
table:
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 Funds will be automatically
converted to the class with the lowest Shareholder Service Fee for which the
client is eligible based on the amount of their Total Investment on the
Determination Date. The conversion will occur within 15
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business days following the Determination Date. Also, if a client makes an
investment in a GMO Fund or puts additional assets under GMO's management so as
to cause the client to be eligible for a new class of shares, such determination
will be made as of the close of business on the last day of the month in which
the investment was made, and the conversion will be effected within 15 business
days of that month-end.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in the new class of shares immediately after the
conversion should equal the client's basis in the converted shares immediately
before conversion, and the holding period of the new class of shares should
include the holding period of the converted shares.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (despite the normal $35 million minimum), provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Clients whose Total Investment as of May
31, 1996 is less than $7 million will be converted to Class II Shares, (rather
than Class I Shares), and such conversion will not occur until July 31, 1997 or
slightly thereafter. Of course, if such a client makes an additional investment
prior to July 31, 1997 such that their Total Investment on July 31, 1997 is $35
million or more, the client will remain eligible for Class III Shares.
Investors should be aware that not all classes of all Funds are
available in all jurisdictions.
PURCHASE OF SHARES
Shares of each Fund are available only from the Trust and may be
purchased on any day when the New York Stock Exchange is open for business (a
"business day"). Class I and Class II Shares may be purchased by calling (617)
790-5000. Class III Shares may be purchased by calling (617) 330-7500.
See "Purchase Procedures" below.
The purchase price of a share of each Fund is (i) the net asset value
next determined after a purchase order is received in good order plus (ii) a
premium, if any, established from time to time by the Trust for the particular
Fund and class to be purchased. All purchase premiums are paid to and retained
by the Fund and are intended to cover the brokerage and other costs associated
with putting the investment to work in the relevant markets. Each class of
shares of a Fund has the same rate of purchase premium.
The purchase premiums currently in effect for each
Fund are as follows:
Fund Purchase Premium
- ---- ----------------
Short-Term Income Fund,
Domestic Bond Fund
and Foreign Fund None
Inflation Indexed Bond Fund 0.10%
Core Fund, Tobacco-Free
Core Fund, U.S. Sector
Fund, Value Fund and Growth Fund 0.14%
Fundamental Value Fund,
International Bond Fund, Currency
Hedged International Bond Fund, Global
Bond Fund and U.S. Bond/Global
Alpha A Fund 0.15%
Global Balanced Allocation Fund 0.31%
Japan Fund 0.40%
Global (U.S.+) Equity Allocation Fund 0.42%
Small Cap Value Fund,
Small Cap Growth Fund, REIT Fund,
Emerging Country Debt Fund and
Global Hedged Equity Fund 0.50%
International Core Fund,
Currency Hedged International
Core Fund and Global Properties Fund 0.60%
World Equity Allocation Fund 0.69%
International Equity Allocation Fund 0.80%
International Small Companies Fund 1.00%
Emerging Markets Fund 1.60%
Purchase premiums apply only to cash transactions. These fees are paid
to and retained by the Fund itself and are designed to allocate transaction
costs caused by shareholder activity to the shareholder generating the activity,
rather than to the Fund as a whole. Purchase premiums are not sales loads.
In certain limited circumstances, the purchase premiums and/or
redemption fees for certain Funds may be waived in part or in full. The
circumstances are described in the footnotes to the Schedule of Fees and
Expenses beginning on page 13 of this Prospectus.
Normally, no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases involving
transfers of large positions in markets where the costs of re-registration
and/or other transfer expenses are high, the International Core Fund, Currency
Hedged International Core Fund, International Small Companies Fund, Japan Fund
and Global Hedged Equity Fund may each charge a premium of 0.10% and the
Emerging Markets Fund may charge a premium of 0.20%.
Shares may be purchased (i) in cash, (ii) in exchange for securities on
deposit at The Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be
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exchanged are acceptable, or (iii) by a combination of such securities and cash.
In all cases, the Manager reserves the right to reject any particular
investment. Securities acceptable to the Manager as consideration for Fund
shares will be valued as set forth under "Determination of Net Asset Value"
(generally the last quoted sale price) as of the time of the next determination
of net asset value after such acceptance. All dividends, subscription or other
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the relevant Fund and must be delivered
to the Trust upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes may be realized by investors subject to federal
income taxation upon the exchange, depending upon the investor's basis in the
securities tendered.
The Manager will not approve securities as acceptable consideration for
Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; and (3) the securities may be acquired under the investment
restrictions applicable to the relevant Fund. Investors interested in making
in-kind purchases should telephone the Manager at (617) 330-7500.
For purposes of calculating the purchase price of Trust shares, a
purchase order is received by the Trust on the day that it is in "good order"
and is accepted by the Trust. For a purchase order to be in "good order" on a
particular day, the investor's consideration must be received before the
relevant deadline on that day. If the investor makes a cash investment, the
deadline for wiring Federal funds to the Trust is 2:00 p.m.; if the investor
makes an investment in-kind, the investor's securities must be placed on deposit
at DTC (or such other depository as is acceptable to the Manager) and 2:00 p.m.
is the deadline for transferring those securities to the account designated by
the transfer agent, Investors Bank & Trust Company, One Lincoln Plaza, Boston,
Massachusetts 02205. Investors should be aware that approval of the securities
to be used for purchase must be obtained from the Manager prior to this time.
When the consideration is received by the Trust after the relevant deadline, the
purchase order is not considered to be in good order and is required to be
resubmitted on the following business day. With the prior consent of the
Manager, in certain circumstances the Manager may, in its discretion, permit
purchases based on receiving adequate written assurances that Federal Funds or
securities, as the case may be, will be delivered to the Trust by 2:00 p.m. on
or prior to the fourth business day after such assurances are received.
The International Core Fund may be available through a broker or dealer
who may charge a transaction fee for purchases and redemptions of that Fund's
shares. If shares of the International Core Fund are purchased directly from the
Trust without the intervention of a broker or dealer, no such charge will be
imposed.
PURCHASE PROCEDURES:
(a) General: Investors should call the Trust at (617) 790-5000 before
attempting to place an order for Class I or Class II Shares. Investors should
call the Trust at (617) 330-7500 before attempting to place an order for Class
III Shares. The Trust reserves the right to reject any order for Trust shares.
DO NOT SEND CASH, CHECKS OR SECURITIES DIRECTLY TO THE TRUST. Wire transfer and
mailing instructions are contained on the PURCHASE ORDER FORM which can be
obtained from the Trust at the telephone numbers set forth above.
Purchases will be made in full and fractional shares of each Fund
calculated to three decimal places. The Trust will send a written confirmation
(including a statement of shares owned) to shareholders at the time of each
transaction.
(b) Purchase Order Form: Investors must submit an application to the
Trust and it must be accepted by the Trust before it will be considered in "good
order."
Class I and Class II Shares: A Purchase Order Form for Class I and
Class II Shares may be obtained by calling the Trust at (617) 790-5000. This
Order Form may be submitted to the Trust (i) By Mail to GMO Trust c/o GMO Funds
Division, 40 Rowes Wharf, Boston, MA 02110; or (ii) By Facsimile to (617)
439-4290.
Class III Shares: A Purchase Order Form for Class III Shares may be
obtained by calling the Trust at (617) 330-7500. This Order Form may be
submitted to the Trust (i) By Mail to GMO Trust c/o Grantham, Mayo, Van Otterloo
& Co. LLC, 40 Rowes Wharf, Boston, MA 02110; Attention: Shareholder Services, or
(ii) By Facsimile to (617) 439-4192; Attention:
Shareholder Services.
(c) Acceptance of Order: No purchase order is in "good order" until it
has been accepted by the Trust. As noted above, investors should call the Trust
at the telephone numbers indicated before attempting to place an order. If a
Purchase Order Form is faxed to the Trust without first contacting the Trust,
investors should not consider their order acknowledged until they have received
notification from the Trust or have confirmed receipt of the order by contacting
the Trust. A shareholder may confirm acceptance of a mailed or faxed purchase
order by calling the Trust at (617) 330-7500 in the case of Class III Shares, or
at (617) 790-5000 in the case of Class I or II Shares. If a Purchase Order is
mailed to the Trust, it will be acted upon when received.
(d) Payment: All Federal funds must be transmitted to Investors Bank &
Trust Company for the account of the specific Fund of GMO Trust. "Federal funds"
are monies credited to Investors Bank & Trust Company's account with the Federal
Reserve Bank of Boston.
Note: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above but, in such cases, the investor
should carefully review confirmations
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sent by the Trust to verify that the order was properly executed. The Trust
cannot be held responsible for failure to execute orders or improperly executing
orders that are not submitted in accordance with these procedures.
REDEMPTION OF SHARES
Shares of each Fund may be redeemed on any business day in cash or in
kind. The redemption price is the net asset value per share next determined
after receipt of the redemption request in "good order" less any applicable
redemption fee. All redemption fees are paid to and retained by the Fund and are
intended to cover the brokerage and other Fund costs associated with
redemptions. All classes of a particular Fund bear the same redemption fee rate,
if any.
The redemption fees currently in effect for each Fund are as follows:
Fund Redemption Fee
- ---- --------------
Global Balanced Allocation Fund 0.03%
Global (U.S.+) Equity Allocation Fund 0.05%
World Equity Allocation Fund 0.09%
International Equity Allocation Fund 0.10%
Inflation Indexed Bond Fund 0.10%
Emerging Country Debt Fund 0.25%1
Global Properties Fund 0.30%
Emerging Markets Fund 0.40%2
Small Cap Value Fund 0.50%
Small Cap Growth Fund 0.50%
REIT Fund 0.50%
International Small Companies Fund 0.60%
Japan Fund 0.61%
Global Hedged Equity Fund 1.40%3
1 Applies only to shares acquired on or after July 1, 1995 (including shares
acquired through the reinvestment of dividends and other distributions after
such date).
2 Applies only to shares acquired on or after June 1, 1995 (including shares
acquired through the reinvestment of dividends and other distributions after
such date).
3 This redemption fee will be 0% unless the size of a redemption forces the
Manager to an early termination of a hedging transaction to meet the redemption
request.
No redemption fees apply to redemptions of shares of any Funds other
than the Funds listed above.
Redemption fees apply only to cash transactions. These fees are paid to
and retained by the Fund itself and are employed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity,
rather than to the Fund as a whole. Redemption fees are not sales loads or
contingent deferred sales charges.
In certain limited circumstances, the purchase premiums and/or
redemption fees for certain Funds may be waived in part or in full. The
circumstances are described in the footnotes to the Schedule of Fees and
Expenses beginning on page 13 of this Prospectus.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Securities used to redeem Fund shares in-kind will be valued in
accordance with the relevant Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a Fund in-kind
will be selected by the Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Any in-kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
Payment on redemption will be made as promptly as possible and
in any event within seven days after the request for redemption is received by
the Trust in "good order." A redemption request is in "good order" if it
includes the exact name in which shares are registered, the investor's account
number and the number of shares or the dollar amount of shares to be redeemed
and if it is signed exactly in accordance with the form of registration. In
addition, for a redemption request to be in "good order" on a particular day,
the investor's request must be received by the Trust by 4:15 p.m. on a business
day. When a redemption request is received after 4:15 p.m., the redemption
request will not be considered to be in "good order" and is required to be
resubmitted on the following business day. Persons acting in a fiduciary
capacity, or on behalf of a corporation, partnership or trust must specify, in
full, the capacity in which they are acting. The redemption request will be
considered "received" by the Trust only after (i) it is mailed to, and received
by, the Trust at the appropriate address set forth above for purchase orders, or
(ii) it is faxed to the Trust at the appropriate facsimile number set forth
above for purchase orders, and the investor has confirmed receipt of the faxed
request by calling the Trust at (617) 330-7500 in the case of Class III Shares,
or at (617) 790-5000 in the case of Class I or Class II Shares. In-kind
distributions will be transferred and delivered as directed by the investor.
Cash payments will be made by transfer of Federal funds for payment into the
investor's account.
When opening an account with the Trust, shareholders will be
required to designate the account(s) to which funds or securities may be
transferred upon redemption. Designation of additional accounts and any change
in the accounts originally designated must be made in writing.
Each Fund may suspend the right of redemption and may postpone
payment for more than seven days when the New York Stock Exchange is closed for
other than weekends or holidays, or if permitted by the rules of the Securities
and Exchange Commission during periods when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Fund to
dispose of its securities or to fairly determine the value of the net assets of
the Fund, or during any other period permitted by the Securities and Exchange
Commission for the
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protection of investors. Because the International Funds each hold portfolio
securities listed on foreign exchanges which may trade on days on which the New
York Stock Exchange is closed, the net asset value of such Funds' shares may be
significantly affected on days when shareholders have no access to such Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for each Fund once on each
day on which the New York Stock Exchange is open as of 4:15 p.m., New York City
Time, except that a Fund may not determine its net asset value on days during
which no security is tendered for redemption and no order to purchase or sell
such security is received by the relevant Fund. A Fund's net asset value is
determined by dividing the total market value of the Fund's portfolio
investments and other assets, less any liabilities, by the total outstanding
shares of the Fund. Portfolio securities listed on a securities exchange for
which market quotations are available are valued at the last quoted sale price
on each business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken from
the closing price on the exchange where the security is primarily traded.
Unlisted securities for which market quotations are readily available are valued
at the most recent quoted bid price, except that debt obligations with sixty
days or less remaining until maturity may be valued at their amortized cost,
unless circumstances dictate otherwise. Circumstances may dictate otherwise,
among other times, when the issuer's creditworthiness has become impaired.
All other fixed income securities (which includes bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another source)
because of such price activity or because the Manager has other reasons to
suspect that a price supplied may not be reliable.
Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Trustees
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Trustees may determine in computing net asset value.
Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the New York
Stock Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may occasionally
occur between the earlier closings of such exchanges and securities markets and
the closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the International Funds. If an event
materially affecting the value of such foreign securities occurs during such
period, then such securities will be valued at fair value as determined in good
faith by the Trustees or persons acting at their direction.
Because foreign securities, options on foreign securities and foreign
futures are quoted in foreign currencies, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
shares of the International Funds even though there has not been any change in
the values of such securities and options, measured in terms of the foreign
currencies in which they are denominated.
DISTRIBUTIONS
Each Fund intends to pay out as dividends, at least annually,
substantially all of its net investment income (which is derived from dividends
and interest it receives from its portfolio investments and net short-term
capital gains). For these purposes and for federal income tax purposes, a
portion of the premiums from certain expired call or put options written by a
Fund, net gains from certain closing purchase and sale transactions with respect
to such options and a portion of net gains from other options and futures
transactions are treated as short-term capital gain. Each Fund also intends to
distribute substantially all of its net long-term capital gains, if any, after
giving effect to any available capital loss carryovers. It is the policy of each
Fund to make distributions, at least annually, sufficient to avoid the
imposition of a non-deductible 4% excise tax on certain undistributed amounts of
taxable investment income and capital gains. The policy of each Domestic Equity
Fund (except for the REIT Fund), the Short-Term Income Fund and the Domestic
Bond Fund is to declare and pay distributions of its dividends and interest
quarterly. The policy of each other Fund is to declare and pay distributions of
its dividends, interest and foreign currency gains semi-annually. Each Fund also
intends to distribute net short-term capital gains and net long-term capital
gains at least annually. Investors should be aware that by purchasing shares
shortly before the record date of a dividend or capital gains distribution, they
will pay the full price of the shares and shortly thereafter will receive some
portion of the price paid back as a taxable dividend or taxable capital gains
distribution.
All dividends and/or distributions will be paid in shares of the
relevant Fund, at net asset value, unless the shareholder elects to receive
cash. There is no purchase premium on reinvested dividends or distributions.
Shareholders may make this election by marking the appropriate box on the
Application or by writing to the Trust.
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Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "indexed securities," will create taxable
income in excess of the cash they generate. In such cases, the Fund may be
required to sell assets (including when it is not advantageous to do so) to
generate the cash necessary to distribute as dividends to its shareholders all
of its income and gains and therefore to eliminate any tax liability at the Fund
level.
TAXES
Each Fund is treated as a separate taxable entity for federal income
tax purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended, and
to meet all other requirements necessary for it to be relieved of federal taxes
on income and gains it distributes to shareholders. So long as a Fund so
qualifies, the Fund itself will not pay federal income taxes on the amounts
distributed.
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Designated distributions of any long-term capital
gains whether received in cash or reinvested shares are taxable as such to
shareholders subject to federal income tax, regardless of how long a shareholder
may have owned shares in the Fund. Any loss realized upon a taxable disposition
of shares held for six months or less will be treated as long-term capital loss
to the extent of any long-term capital gain distributions received by a
shareholder with respect to those shares. The recognition of certain losses upon
the sale of shares of a Fund may be limited to the extent shareholders dispose
of shares of one Fund and invest in shares of the same or another Fund. A
distribution paid to shareholders by a Fund in January of a year generally is
deemed to have been received by shareholders on December 31 of the preceding
year, if the distribution was declared and payable to shareholders of record on
a date in October, November or December of that preceding year. The Trust will
provide federal tax information annually, including information about dividends
and distributions paid during the preceding year to taxable investors and others
requesting such information.
For corporate shareholders, the dividends-received deduction will
generally apply to a Fund's dividends paid from investment income to the extent
derived from dividends received from U.S. corporations. However, any
distributions received by a Fund from REITs will not qualify for the corporate
dividends-received deduction. A Fund's investments in REIT equity securities may
require such Fund to accrue and distribute income not yet received. In order to
generate sufficient cash to make the requisite distributions, the Fund may be
required to sell securities in its portfolio that it otherwise would have
continued to hold (including when it is not advantageous to do so). A Fund's
investments in REIT equity securities may at other times result in the Fund's
receipt of cash in excess of the REIT's earnings; if the Fund distributes such
amounts, such distribution could constitute a return of capital to Fund
shareholders for federal income tax purposes.
The back-up withholding rules do not apply to tax exempt entities so
long as each such entity furnishes the Trust with an appropriate certification.
However, other shareholders are subject to back-up withholding at a rate of 31%
on all distributions of net investment income and capital gain, whether received
in cash or reinvested in shares of the relevant Fund, and on the amount of the
proceeds of any redemption of Fund shares paid or credited to any shareholder
account for which an incorrect or no taxpayer identification number has been
provided, where appropriate certification has not been provided for a foreign
shareholder, or where the Trust is notified that the shareholder has
underreported income in the past (or the shareholder fails to certify that he is
not subject to such withholding).
The foregoing is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in a Fund in light
of each shareholder's particular tax situation. Shareholders should also consult
their own tax advisors about consequences under foreign, state, local or other
applicable tax laws (including possible liability for federal alternative
minimum tax).
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder will ordinarily not be subject to U.S.
taxation, unless the recipient or seller is a nonresident alien individual who
is present in the United States for more than 182 days during the taxable year.
However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Federal regulations generally require the Funds to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and gains realized upon a sale of securities
paid to a shareholder if such shareholder fails to certify either that the TIN
furnished in connection with opening an account is correct or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Also, the IRS may notify a Fund
to institute
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backup withholding if the IRS determines a shareholder's TIN is incorrect or if
a shareholder has failed to properly report taxable dividend and interest income
on a Federal income tax return. A TIN is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return. Also, foreign shareholders with
respect to whom income from a Fund is "effectively connected" with a U.S. trade
or business carried on by such shareholder will in general be subject to U.S.
federal income tax on the income derived from the Fund at the graduated rates
applicable to U.S. citizens, residents or domestic corporations, whether
received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the total assets of
any Fund is represented by stock of foreign corporations, the Fund intends to
make an election with respect to the relevant Fund which allows shareholders
whose income from the Fund is subject to U.S. taxation at the graduated rates
applicable to U.S. citizens, residents or domestic corporations to claim a
foreign tax credit or deduction (but not both) on their U.S. income tax return.
In such case, the amounts of foreign income taxes paid by the Fund would be
treated as additional income to Fund shareholders from non-U.S. sources and as
foreign taxes paid by Fund shareholders. Investors should consult their tax
advisors for further information relating to the foreign tax credit and
deduction, which are subject to certain restrictions and limitations.
Shareholders of any of the International Funds whose income from the Fund is not
subject to U.S. taxation at the graduated rates applicable to U.S. citizens,
residents or domestic corporations may receive substantially different tax
treatment of distributions by the relevant Fund, and may be disadvantaged as a
result of the election described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
As described above under the heading "Distributions", certain of the
Funds' investments, including assets "marked to the market" for federal income
tax purposes, debt obligations issued or purchased at a discount and potentially
so-called "index securities," will create taxable income in excess of the cash
they generate. In such cases, a Fund may be required to sell assets (including
when it is not advantageous to do so) to generate the cash necessary to
distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level.
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert short-term capital gains or losses into long-term capital
gains or losses. Qualification requirements noted above may restrict a Fund's
ability to engage in these transactions, and these transactions may affect the
amount, timing and character of distributions to shareholders.
Investment by the International Funds in certain "passive foreign
investment companies" could subject a Fund to a U.S. federal income tax or other
charge on distribution received from the sale of its investment in such a
company, which tax cannot be eliminated by making distributions to Fund
shareholders. However, a Fund may elect to treat a passive foreign investment
company as a "qualified electing fund," 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 a Fund to liquidate other investments
(including when it is not advantageous to do so) to meet its distribution
requirement, which may also accelerate the recognition of gain and affect a
Fund's total return.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
MANAGEMENT OF THE TRUST
Each Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co.
LLC, 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO") which
provides investment advisory services to a substantial number of institutional
and other investors, including one other registered investment company.
Grantham, Mayo, Van Otterloo & Co. LLC converted from a general partnership to a
limited liability company on December 16, 1996. Each of the following four
members holds a greater than 5% interest in the Manager: R. Jeremy Grantham,
Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley Durant.
Under separate Management Contracts with the Trust, the Manager selects
and reviews each Fund's investments and
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provides executive and other personnel for the management of the Trust. Pursuant
to the Trust's Agreement and Declaration of Trust, the Board of Trustees
supervises the affairs of the Trust as conducted by the Manager. In the event
that the Manager ceases to be the manager of any Fund, the right of the Trust to
use the identifying name "GMO" may be withdrawn.
The Manager has entered into a Consulting Agreement (the "Consulting
Agreement") with Dancing Elephant, Ltd., 1936 University Avenue, Berkeley,
California 94704 (the "Consultant"), with respect to the management of the
portfolio of the Emerging Markets Fund. The Consultant is wholly-owned by Mr.
Arjun Divecha. Under the Consulting Agreement, the Manager pays the Consultant a
monthly fee at an annual rate equal to the greater of 0.50% of the Fund's
average daily net assets or $500,000. The Consultant may from time to time waive
all or a portion of its fee. Payments made by the Manager to the Consultant will
not affect the amounts payable by the Fund to the Manager or the Fund's expense
ratio.
Each Management Contract provides for payment to the Manager of a
management fee at the stated annual rates set forth under Schedule of Fees and
Expenses. The management fee is computed and accrued daily, and paid monthly.
While the fee paid to the Manager by each of the Fundamental Value Fund, the
REIT Fund, the International Core Fund, the Currency Hedged International Core
Fund, the Foreign Fund, the International Small Companies Fund, the Japan Fund
and the Emerging Markets Fund is higher than that paid by most funds, each is
comparable to the fees paid by many funds with similar investment objectives. In
addition, with respect to each Fund, the Manager has voluntarily agreed to waive
its fee and to bear certain expenses until further notice in order to limit each
Fund's annual expenses to specified limits (with certain exclusions). These
limits and the terms applicable to them are described under Schedule of Fees and
Expenses.
During the fiscal year ended February 29, 1996, the Manager received,
as compensation for management services rendered in such year (after waiver),
the percentages of each Fund's average daily net assets as set forth below:
Fund % of Average Net Assets
- ---- -----------------------
Core Fund 0.45%
Tobacco-Free Core Fund 0.30%
Value Fund 0.56%
Growth Fund 0.43%
U.S. Sector Fund 0.42%
Small Cap Value Fund 0.37%
Fundamental Value Fund 0.70%
International Core Fund 0.61%
International Small Companies Fund 0.56%
Japan Fund 0.60%
Emerging Markets Fund 0.98%
Global Hedged Equity Fund 0.59%
Domestic Bond Fund 0.19%
Short-Term Income Fund 0.00%
International Bond Fund 0.27%
Currency Hedged International Bond Fund 0.26%
Emerging Country Debt Fund 0.34%
Currency Hedged International Core Fund 0.32%
Global Bond Fund 0.00%
Mr. R. Jeremy Grantham and Christopher Darnell are primarily
responsible for the day-to-day management of the Core Fund, the Tobacco-Free
Core Fund, the Growth Fund, the U.S. Sector Fund, the Small Cap Value Fund and
the Small Cap Growth Fund. Each has served in this capacity for more than five
years. Mr. Richard A. Mayo has been primarily responsible for the day-to-day
management of the Fundamental Value Fund since the Fund's inception. Mr. Mayo
and Mr. Christopher Darnell have been primarily responsible for the day-to-day
management of the Value Fund since the Fund's inception. Mr. Darnell, Mr. Robert
Brokaw and Mr. Richard McQuaid are primarily responsible for the day-to-day
Management of the REIT Fund. Mr. Grantham, Mr. Darnell and Mr. Forrest Berkley
have been primarily responsible for the day-to-day management of each of the
Currency Hedged International Core Fund, the International Small Companies Fund,
the Japan Fund and the Global Hedged Equity Fund since inception of the Funds
and have served as managers of the International Core Fund for the last six
years. Mr. Arjun Bhagwan Divecha has been primarily responsible for the
day-to-day management of the Emerging Markets Fund since the inception of the
Fund. Mr. Jui L. Lai and Ms. Ann M. Spruill are primarily responsible for the
day-to- day management of the Foreign Fund. Mr. Eyk H.A. Van Otterloo and Mr.
Wilson Magee have been primarily responsible for the day-to-day management of
the Global Properties Fund since its inception. Mr. William L. Nemerever, Mr.
Thomas F. Cooper and Mr. Steven Edelstein are primarily responsible for the
day-to-day management of the Fixed Income Funds other than the Global Hedged
Equity Fund. Each of Messrs. Nemerever and Cooper has served in this capacity
since the inception of all of these Funds except the Short-Term Income Fund.
Messrs. Nemerever and Cooper have served as the managers of the Short- Term
Income Fund since 1993. Mr. Edelstein has served in this capacity since 1995.
Prior to 1993, the Short-Term Income Fund was managed by Mr. Brokaw. Day-to-day
management of each of the Asset Allocation Funds is the responsibility of a
committee and no person or persons is primarily responsible for making
recommendations to that committee.
Mr. Grantham, Mr. Mayo and Mr. Van Otterloo are all founding partners
of the Manager, are currently members of the Manager, and have been engaged by
the Manager in equity and fixed-income portfolio management since its inception
in 1977. Mr. Grantham serves as President - Quantitative, Mr. Mayo serves as
President - Domestic Active and Mr. Van Otterloo serves as
President-International of the Trust. Mr. Darnell is a member of the Manager and
has been with the Manager since 1979 and has been involved in equity portfolio
management for more than ten years. Mr. Berkley is a member of the Manager, has
been employed by the Manager for more than eight years, and has been involved in
equity portfolio management
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(principally of international equities) for more than six years. Mr. Nemerever
and Mr. Cooper are each members of the Manager and have been employed by the
Manager in fixed-income portfolio management since October, 1993. For the five
years prior to October, 1993, Mr. Nemerever was employed by Boston International
Advisors and Fidelity Management Trust Company in fixed-income portfolio
management. For the five years prior to October, 1993, Mr. Cooper was employed
by Boston International Advisors, Goldman Sachs Asset Management and Western
Asset Management in fixed-income portfolio management. Mr. Edelstein joined the
Manager in June 1995. For the five years prior to that, Mr. Edelstein was Vice
President in the Fixed Income Futures and Options Group at Morgan Stanley &
Company. Mr. Divecha is the sole shareholder and President of the Consultant
which he organized in September 1993. From 1981 until September 1993, Mr.
Divecha was employed by BARRA and during this period he was involved in equity
portfolio management for more than five years. Mr. Lai is a member of the
Manager and has been employed by the Manager in international equity portfolio
management since 1988. Ms. Spruill is a member of the Manager and has been
employed by the Manager in international equity portfolio management since 1990.
Mr. Magee joined the Manager in 1997. From September 1994 to November 1996, Mr.
Magee was a principal for the Penobscot Group, a real estate securities research
firm, where he was responsible for securities analysis, marketing/client
relations and new business development. From January 1987 to December 1994, Mr.
Magee was the principal for his own firm, advising institutional investors and
private clients in real estate investments and conducting fundamental research
for portfolio strategies.
Pursuant to an Administrative Services Agreement with GMO, Investors
Bank & Trust Company provides administrative services to each of the Funds. GMO
pays Investors Bank & Trust Company an annual fee for its services to each Fund.
Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of each Fund, Grantham, Mayo, Van Otterloo & Co. LLC, in its
capacity as the Trust's shareholder servicer (the "Shareholder Servicer")
provides direct client service, maintenance and reporting to shareholders of
each class of shares. Such servicing and reporting services include, without
limitation, professional and informative reporting, client account information,
personal and electronic access to Fund information, access to analysis and
explanations of Fund reports, and assistance in the correction and maintenance
of client-related information.
ORGANIZATION AND CAPITALIZATION
OF THE TRUST
The Trust was established on June 24, 1985 as a business trust under
Massachusetts law. The Trust has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series of such shares, and which are presently divided into
thirty series of shares: one for each Fund and one for the Pelican Fund. All
shares of all series are entitled to vote at any meetings of shareholders. The
Trust does not generally hold annual meetings of shareholders and will do so
only when required by law. All shares entitle their holders to one vote per
share. Matters submitted to shareholder vote must be approved by each Fund
separately except (i) when required by the 1940 Act shares shall be voted
together as a single class and (ii) when the Trustees have determined that the
matter does not affect a Fund, then only shareholders of the Fund(s) affected
shall be entitled to vote on the matter. Shareholders of a particular class of
shares do not have separate class voting rights except with respect to matters
that affect only that class of shares or as otherwise required by law. Shares
are freely transferable, are entitled to dividends as declared by the Trustees,
and, in liquidation of the Trust, are entitled to receive the net assets of
their Fund, but not of any other Fund. Shareholders holding a majority of the
outstanding shares of all series may remove Trustees from office by votes cast
in person or by proxy at a meeting of shareholders or by written consent.
On January 2, 1997, the following shareholders held greater than 25% of
the outstanding shares of a series of the Trust:
Fund Shareholders
- ---- ------------
Tobacco-Free Core Fund Dewitt Wallace - Reader's Digest Fund,
Inc.; Lila Wallace Reader's Digest Fund, Inc.
U.S. Sector Fund John D. MacArthur &
Catherine T. MacArthur Foundation;
Yale University; Bost & Co.
/BAMF8721002
Fundamental Value Fund Yale University; Leland Stanford Junior
University II
Small Cap Growth Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Domestic Bond Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Short-Term Income Fund The Directors Fund Limited Partnership
Currency Hedged Bankers Trust Company as Trustee,
International Bond Fund GTE Service Corp. Pension Trust
Global Hedged Equity Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Global Bond Fund Essex & Company
REIT Fund Bankers Trust Company as Trustee,
GTE Service Corp. Pension Trust
Global Properties Fund Eyk Van Otterloo
Global Balanced Providence Washington Insurance Co.
Allocation Fund Employees' Pension Plan
Global (U.S.+) Equity Milbank Foundation for Rehabilitation
Allocation Fund
International Equity M.D. Co. FBO Memorial Drive Trust
Allocation Fund
World Equity Allocation RJR Nabisco Canada Master Trust
Fund
As a result, such shareholders may be deemed to "control" their respective
series as such term is defined in the 1940 Act.
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Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote since
it may arise only in very limited circumstances.
CERTAIN FINANCIAL INFORMATION
RELATING TO THE GMO FOREIGN FUND
As discussed in "Financial Highlights -- Foreign Fund" above, the
Foreign Fund commenced operations on June 28, 1996 subsequent to a transaction
involving, in essence, the reorganization of the GMO International Equities Pool
of The Common Fund for Nonprofit Organizations (the "GMO Pool") as the Foreign
Fund, pursuant to an Agreement and Plan of Reorganization which provided that
(i) the GMO Pool be discontinued and its assets and liabilities distributed pro
rata to the unitholders of the GMO Pool as a liquidating distribution, and (ii)
such assets and liabilities immediately thereafter be transferred by the
unitholders to the Foreign Fund in exchange for shares of the Foreign Fund. The
Foreign Fund's portfolio of investments on June 28, 1996 was the same as the
portfolio of the GMO Pool immediately prior to the transfer, and the Foreign
Fund will operate under investment policies, objectives, guidelines and
restrictions that are in all material respects equivalent to those of the GMO
Pool.
The GMO Pool was not a registered investment company as it was exempt
from registration under the 1940 Act. Since, in a practical sense, the GMO Pool
constitutes a predecessor of the Foreign Fund, the Trust calculates the
performance for the Foreign Fund for periods prior to June 28, 1996 by including
the total return of the GMO Pool.
AVERAGE ANNUAL TOTAL RETURN. The Foreign Fund from time to time may advertise
certain investment performance figures. These figures are based on historical
earnings but past performance data is not necessarily indicative of future
performance of the Fund. All performance information will be provided net of
Fund and GMO Pool expenses. The Fund may, in conformance with SEC guidelines,
advertise its total return for various periods of time by determining, over a
period of time stated in the advertisement, the average annual compounded rate
of return that an investment in the Fund earned over that period, assuming
reinvestment of all distributions.
The performance data quoted below includes the performance of the GMO
Pool for periods before the commencement of operations of the Foreign Fund.
Performance data relating to Class II and Class III Shares of the Foreign Fund
has not been restated because the historical level of expenses for the GMO Pool
(0.83% per annum) was higher than the expenses anticipated for Class II and
Class III Shares of the Foreign Fund (0.75% and 0.82% per annum). Performance
data relating to Class I Shares of the Foreign Fund has been restated because
the historical level of expenses for the GMO Pool (0.83% per annum) was lower
than the expenses anticipated for the Class I Shares of the Foreign Fund (0.88%
per annum). The GMO Pool was not registered under the 1940 Act and therefore was
not subject to certain investment restrictions imposed by the 1940 Act. If the
GMO Pool had been registered under the 1940 Act, its performance may have been
adversely affected.
Average Annual Total Return for the periods ended December 31, 1995:
Class II and III Shares Class I Shares
----------------------- --------------
1-year return 13.85% 13.80%
3-year return 19.63% 19.57%
5-year return 12.87% 12.81%
10-year return 15.94% 15.88%
Since inception (9/1/84) 19.73% 19.67%
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APPENDIX A
RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS
Limitations on the Use of Options and Futures Portfolio Strategies. As
noted in "Descriptions and Risks of Fund Investment Practices--Futures and
Options" above, the Funds may use futures contracts and related options for
hedging and, in some circumstances, for risk management or investment but not
for speculation. Thus, except when used for risk management or investment, each
such Fund's long futures contract positions (less its short positions) together
with the Fund's cash (i.e., equity or fixed income) positions will not exceed
the Fund's total net assets.
The Funds' ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that a Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, each
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
Risk Factors in Options Transactions. The option writer has no control
over when the underlying securities or futures contract must be sold, in the
case of a call option, or purchased, in the case of a put option, since the
writer may be assigned an exercise notice at any time prior to the termination
of the obligation. If an option expires unexercised, the writer realizes a gain
in the amount of the premium. Such a gain, of course, may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security or futures contract during the option period. If a call
option is exercised, the writer realizes a gain or loss from the sale of the
underlying security or futures contract. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security or
futures contract at the exercise price, which will usually exceed the then
market value of the underlying security or futures contract.
An exchange-traded option may be closed out only on a national
securities exchange ("Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular option
with the result that the Fund holding the option would have to exercise the
option in order to realize any profit. For example, in the case of a written
call option, if the Fund is unable to effect a closing purchase transaction in a
secondary market (in the case of a listed option) or with the purchaser of the
option (in the case of an over-the-counter-option), the Fund will not be able to
sell the underlying security (or futures contract) until the option expires or
it delivers the underlying security (or futures contract) upon exercise. Reasons
for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
Risk Factors in Futures Transactions. Investment in futures contracts
involves risk. If the futures are used for hedging, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or currency being hedged. The correlation
is higher between price movements of futures contracts and the instrument
underlying that futures contract. The correlation is lower when futures are used
to hedge securities
-80-
other than such underlying instrument, such as when a futures contract on an
index of securities is used to hedge a single security, a futures contract on
one security (e.g., U.S. Treasury bonds) is used to hedge a different security
(e.g., a mortgage-backed security) or when a futures contract in one currency
(e.g., the German Mark) is used to hedge a security denominated in another
currency (e.g., the Spanish Peseta). In the event of an imperfect correlation
between a futures position and a portfolio position (or anticipated position)
which is intended to be protected, the desired protection may not be obtained
and a Fund may be exposed to risk of loss. In addition, it is not always
possible to hedge fully or perfectly against currency fluctuations affecting the
value of the securities denominated in foreign currencies because the value of
such securities also is likely to fluctuate as a result of independent factors
not related to currency fluctuations. The risk of imperfect correlation
generally tends to diminish as the maturity date of the futures contract
approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.
As noted in the Prospectus, a Fund may also purchase futures contracts
(or options thereon) as an anticipatory hedge against a possible increase in the
price of currency in which is denominated the securities the Fund anticipates
purchasing. In such instances, it is possible that the currency may instead
decline. If the Fund does not then invest in such securities because of concern
as to possible further market and/or currency decline or for other reasons, the
Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
a Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realized in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
Risk Factors in Swap Contracts, OTC Options and other Two-Party
Contracts. A Fund may only close out a swap, contract for differences, cap floor
or collar or OTC option, with the particular counterparty. Also, if the
counterparty defaults, a Fund will have contractual remedies pursuant to the
agreement related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, a Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor subject to the oversight of the Trustees, the creditworthiness
of contract counterparties and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard and Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the counterparty may be adversely affected by larger-than-average
volatility in the markets, even if the counterparty's net market exposure is
small relative to its capital. The management of caps, floors, collars and swaps
may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.
Additional Regulatory Limitations on the Use of Futures and Related
Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency
Swap Contracts. In accordance with CFTC regulations, investments by any Fund as
provided in the Prospectus in futures contracts and related options for purposes
other than bona fide hedging are limited such that the aggregate amount that a
Fund may commit to initial margin on such contracts or time premiums on such
options may not exceed 5% of that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective
obligations under equity swap contracts, reverse equity swap contracts or Index
Futures are senior securities and, accordingly, the Fund will not treat them as
being
-81-
subject to its borrowing restrictions. However, the net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each equity
swap contract will be accrued on a daily basis and an amount of cash, U.S.
Government Securities or other high grade debt obligations having an aggregate
market value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian. Likewise, when a Fund takes a short
position with respect to an Index Futures contract the position must be covered
or the Fund must maintain at all times while that position is held by the Fund,
cash, U.S. government securities or other high grade debt obligations in a
segregated account with its custodian, in an amount which, together with the
initial margin deposit on the futures contract, is equal to the current delivery
or cash settlement value.
The use of unsegregated futures contracts, related written options,
interest rate floors, caps and collars and interest rate and currency swap
contracts for risk management by a Fund permitted to engage in any or all of
such practices is limited to no more than 10% of a Fund's total net assets when
aggregated with such Fund's traditional borrowings in accordance with SEC
pronouncements. This 10% limitation applies to the face amount of unsegregated
futures contracts and related options and to the amount of a Fund's net payment
obligation that is not segregated against in the case of interest rate floors,
caps and collars and interest rate and currency swap contracts.
-82-
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.
-83-
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make the long-term
risks appear somewhat larger than in Aaa securities.1
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.1
Baa - Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or
accepted.
2. The issue or issuer belongs to a group of
securities that are not rated as a matter of policy.
3. There is lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols 1Aa1,
A1, Baa1, and B1.
-84-
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
-85-
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
April 7, 1997
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the GMO Trust Prospectus dated April 7, 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>
<CAPTION>
Table of Contents
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Caption Page
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................1
MISCELLANEOUS INVESTMENT PRACTICES................................................................................1
INVESTMENT RESTRICTIONS...........................................................................................2
INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS...................................................................3
MANAGEMENT OF THE TRUST...........................................................................................4
INVESTMENT ADVISORY AND OTHER SERVICES............................................................................5
PORTFOLIO TRANSACTIONS............................................................................................9
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.................................................................11
FINANCIAL STATEMENTS .............................................................................26
SPECIMEN PRICE-MAKE-UP SHEET.....................................................................................27
-i-
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are described in the
Prospectus. Unless otherwise indicated in the Prospectus or this Statement of
Additional Information, the investment objective and policies of the Funds may
be changed without shareholder approval.
MISCELLANEOUS INVESTMENT PRACTICES
Index Futures. As stated in the Prospectus under the heading
"Description and Risks of Fund Investments -- Futures and Options," many of the
Funds may purchase futures contracts on various securities indexes ("Index
Futures"). As indicated in the Prospectus, an Index Future is a contract to buy
or sell an integral number of units of the particular stock index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. Entering into a contract to buy
units is commonly referred to as buying or purchasing a contract or holding a
long position in the relevant index.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if a Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
Index Futures in which a Fund may invest typically can be traded
through all major commodity brokers, and trades are currently effected on the
exchanges described in the Prospectus. A Fund may close open positions on the
futures exchange on which Index Futures are then traded at any time up to and
including the expiration day. All positions which remain open at the close of
the last business day of the contract's life are required to settle on the next
business day (based upon the value of the relevant index on the expiration day)
with settlement made, in the case of S&P 500 Index Futures, with the Commodities
Clearing House. Because the specific procedures for trading foreign stock Index
Futures on futures exchanges are still under development, additional or
different margin requirements as well as settlement procedures may be applicable
to foreign stock Index Futures at the time a Fund purchases foreign stock Index
Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the S&P 500 Index and futures markets. Secondly, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
-1-
INVESTMENT RESTRICTIONS
A complete list of the fundamental investment policies relating to the
Funds, which policies may not be changed without a vote of the majority of the
outstanding voting securities of the relevant Fund, is set forth in the
Prospectus. See "Investment Restrictions--Fundamental Restrictions." In
addition, it is contrary to the present policy of all the Funds, which may be
changed by the Trustees without shareholder approval, to:
(a) Invest in warrants or rights excluding options (other than
warrants or rights acquired by the Fund as a part of a unit or attached
to securities at the time of purchase), except that (i) the
International Funds (other than the International Bond Fund) may invest
in such warrants or rights so long as the aggregate value thereof
(taken at the lower of cost or market) does not exceed 5% of the value
of the Fund's total net assets; provided that within this 5%, not more
than 2% of its net assets may be invested in warrants that are not
listed on the New York or American Stock Exchange or a recognized
foreign exchange, and (ii) the Foreign Fund may invest without
limitation in such warrants or rights.
(b) Invest in securities of an issuer, which, together with
any predecessors or controlling persons, has been in operation for less
than three consecutive years if, as a result, the aggregate of such
investments would exceed 5% of the value of the Fund's net assets;
except that this restriction shall not apply to any obligation of the
U.S. Government or its instrumentalities or agencies; and except that
this restriction shall not apply to the investments of the Japan Fund.
(c) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(d) Make investments for the purpose of gaining control of a
company's management.
(e) Invest more than 15% of net assets (or such lower
percentage permitted by the states in which shares are eligible for
sale) in illiquid securities. The securities currently thought to be
included as "illiquid securities" are restricted securities under the
Federal securities laws (including illiquid securities traded under
Rule 144A), repurchase agreements and securities that are not readily
marketable. To the extent the Trustees determine that restricted
securities traded under Rule 144A are in fact liquid, they will not be
included in the 15% limit on investment in illiquid securities.
(f) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 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 equivalents in escrow in
connection with the writing of covered call or put options,
respectively is not deemed to be a pledge or encumbrance.)
(g) With respect to the Foreign Fund only, to (i) invest in
interests of any general partnership, (ii) utilize margin or other
borrowings to increase market exposure (such prohibition shall extend
to the use of cash collateral obtained in exchange for loaned
securities but does not prohibit the use of margin accounts for
permissible futures trading; further, the Fund may borrow an amount
equal to cash receivable from sales of stocks or securities the
settlement of which is deferred under standard practice in the country
of sale), (iii) pledge or otherwise encumber its assets, and (iv)
invest more than 5% of its assets in any one issuer (except Government
securities and bank certificates of deposit).
Except as indicated above in Restriction No. 1, all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
-2-
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of that Fund, or (2) 67% or more of the
shares of that Fund present at a meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy.
INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). So long as a Fund qualifies for treatment as a regulated investment
company, the Fund will not be subject to federal income tax on income paid to
its shareholders in the form of dividends or capital gain distributions.
The tax status of each Fund and the distributions which it may make are
summarized in the Prospectus under the heading "Taxes." Each Fund intends to pay
out substantially all of its ordinary income and net short-term capital gains,
and to distribute substantially all of its net capital gain, if any, after
giving effect to any available capital loss carryover. Net capital gain is the
excess of net long-term capital gain over net short-term capital loss. It is the
policy of each Fund to make distributions sufficient to avoid the imposition of
a 4% excise tax on certain undistributed amounts. The recognition of certain
losses upon the sale of shares of a Fund may be limited to the extent
shareholders dispose of shares of one Fund and invest in shares of the same or
another Fund.
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert short-term capital gains or losses into long-term capital
gains or losses. Qualification requirements noted above may restrict the Fund's
ability to engage in these transactions, and these transactions may affect the
amount, timing and character of distributions to shareholders.
Investment by the International Funds in certain "passive foreign
investment companies" could subject a Fund to a U.S. federal income tax or other
charge on distributions received from or the sale of its investment in such a
company, which tax cannot be eliminated by making distributions to Fund
shareholders. However, a Fund may elect to treat a passive foreign investment
company as a "qualified electing fund," or elect the mark-to-market election
under proposed regulation 1.1291-8, which may have the effect of accelerating
the recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the Fund to avoid taxation. Making either of
these elections may therefore require the Fund to liquidate other investments to
meet its distribution requirement, which may also accelerate the recognition of
gain and affect the Fund's total return.
In general, all dividends derived from ordinary income and short-term
capital gain are taxable to investors as ordinary income (subject to special
rules concerning the extent of the dividends received deduction for
corporations) and long-term capital gain distributions are taxable to investors
as long-term capital gains, whether such dividends or distributions are received
in shares or cash. Tax exempt organizations or entities will generally not be
subject to federal income tax on dividends or distributions from a Fund, except
certain organizations or entities, including private foundations, social clubs,
and others, which may be subject to tax on dividends or capital gains. Each
organization or entity should review its own circumstances and the federal tax
treatment of its income.
The dividends-received deduction for corporations will generally apply
to a Fund's dividends paid from investment income to the extent derived from
dividends received by the Fund from domestic corporations.
Certain of the Funds which invest in foreign securities may be subject
to foreign withholding taxes on income and gains derived from foreign
investments. Such taxes would reduce the yield on the Trust's
-3-
investments, but, as discussed in the Prospectus, may be taken as either a
deduction or a credit by U.S. citizens and corporations if the Fund makes the
election described in the Prospectus.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. Jeremy Grantham*. President-Quantitative and Trustee of the
Trust. Partner, Grantham, Mayo, Van Otterloo & Co. LLC
Harvey R. Margolis. Trustee of the Trust. Mathematics Professor,
Boston College.
Jay O. Light. Trustee of the Trust. Professor of Business
Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
Eyk del Mol Van Otterloo. President-International of the Trust.
Partner, Grantham, Mayo, Van Otterloo & Co. LLC
Richard Mayo. President-Domestic Active of the Trust. Partner,
Grantham, Mayo, Van Otterloo & Co. LLC
Kingsley Durant. Vice President, Treasurer and Secretary of the
Trust. Partner, Grantham, Mayo, Van Otterloo & Co. LLC
Susan Randall Harbert. Secretary and Assistant Treasurer of the
Trust. Partner, Grantham, Mayo, Van Otterloo & Co. LLC
William R. Royer, Esq.. Clerk, Vice President and Assistant
Treasurer of the Trust. General Counsel, Grantham, Mayo, Van
Otterloo & Co. LLC (January, 1995 - Present). Associate, Ropes &
Gray, Boston, Massachusetts (September, 1992 - January, 1995).
Jui Lai. Secretary of the Trust. Partner, Grantham, Mayo, Van
Otterloo & Co. LLC
Ann Spruill. Secretary of the Trust. Partner, 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.
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.
-4-
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
NAME OF PERSON, TOTAL ANNUAL COMPENSATION FROM
POSITION THE TRUST
-------- ---------
Harvey R. Margolis, Trustee $70,000
Jay O. Light, Trustee $70,000
Messrs. Grantham, Mayo, Van Otterloo, Durant and Lai, and Mses. Harbert
and Spruill, as partners of the Manager, will benefit from the management fees
paid by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACTS
As disclosed in the Prospectus under the heading "Management of the
Fund," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio Transactions
- --Brokerage and Research Services," the Trust's portfolio transactions may be
placed with broker-dealers which furnish the Manager, at no cost, certain
research, statistical and quotation services of value to the Manager in advising
the Trust or its other clients.
As is disclosed in the Prospectus, the Manager's compensation will be
reduced to the extent that any Fund's annual expenses incurred in the operation
of the Fund (including the management fee but excluding Shareholder Service
Fees, brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and transfer
taxes; and, in the case of the Emerging Markets Fund, Emerging Country Debt Fund
and Global Hedged Equity Fund, excluding custodial fees; and, in the case of the
Asset Allocation Funds, excluding expenses indirectly incurred by investment in
other Funds of the Trust) would exceed the percentage of the Fund's average
daily net assets described therein. Because the Manager's compensation is fixed
at an annual rate equal to this expense limitation, it is expected that the
Manager will pay such expenses (with the exceptions noted) as they arise. In
addition, the Manager's compensation under the Management Contract is subject to
reduction to the extent that in any year the expenses of the relevant Fund
exceed the limits on investment company expenses imposed by any statute or
regulatory authority of any jurisdiction in which shares of such Fund are
qualified for offer and sale. The term "expenses" is defined in the statutes or
regulations of such jurisdictions, and, generally speaking, excludes brokerage
commissions, taxes, interest and extraordinary expenses. No Fund is currently
subject to any state imposed limit on expenses.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Funds. Each Management
Contract will
-5-
continue in effect for a period more than two years from the date of its
execution only so long as its continuance is approved at least annually by (i)
vote, cast in person at a meeting called for that purpose, of a majority of
those Trustees who are not "interested persons" of the Manager or the Trust, and
by (ii) the majority vote of either the full Board of Trustees or the vote of a
majority of the outstanding shares of the relevant Fund. Each Management
Contract automatically terminates on assignment, and is terminable on not more
than 60 days' notice by the Trust to the Manager. In addition, each Management
Contract may be terminated on not more than 60 days' written notice by the
Manager to the Trust.
In the last three fiscal years the Funds have paid the following
amounts as Management Fees to the Manager pursuant to the relevant Management
Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
CORE FUND
Year ended 2/29/96 $14,964,100 $2,052,651 $12,911,449
Year ended 2/28/95 $10,703,745 $1,492,476 $ 9,211,269
Year ended 2/28/94 $ 9,872,383 $1,323,098 $ 8,549,285
INTERNATIONAL CORE FUND
Year ended 2/29/96 $25,419,063 $4,915,283 $20,503,780
Year ended 2/28/95 $19,964,039 $3,849,845 $16,114,194
Year ended 2/28/94 $12,131,276 $2,974,235 $ 9,157,041
GROWTH FUND
Year ended 2/29/96 $1,685,025 $ 241,245 $ 1,443,780
Year ended 2/28/95 $1,063,102 $ 162,479 $ 900,623
Year ended 2/28/94 $ 732,330 $ 136,305 $ 596,025
SHORT-TERM INCOME FUND
Year ended 2/29/96 $ 21,431 $ 21,431 $ 0
Year ended 2/28/95 $ 32,631 $ 24,693 $ 7,938
Year ended 2/28/94 $ 25,648 $ 25,012 $ 636
JAPAN FUND
Year ended 2/29/96 $ 647,675 $ 125,662 $ 522,013
Year ended 2/28/95 $ 3,394,922 $ 113,442 $ 3,281,480
Year ended 2/28/94 $ 2,985,621 $ 116,523 $ 2,869,098
VALUE FUND
Year ended 2/29/96 $2,296,190 $ 463,260 $ 1,832,930
Year ended 2/28/95 $3,144,806 $ 612,779 $ 2,532,027
Year ended 2/28/94 $7,860,120 $ 1,319,736 $ 6,540,384
-6-
TOBACCO-FREE CORE FUND
Year ended 2/29/96 $ 284,306 $ 113,925 $ 170,381
Year ended 2/28/95 $ 260,209 $ 140,422 $ 119,787
Year ended 2/28/94 $ 285,625 $ 123,056 $ 162,569
FUNDAMENTAL VALUE FUND
Year ended 2/29/96 $ 1,496,155 $ 108,537 $ 1,387,618
Year ended 2/28/95 $ 1,297,348 $ 118,250 $ 1,179,098
Year ended 2/28/94 $ 847,075 $ 131,219 $ 715,856
SMALL CAP VALUE FUND
Year ended 2/29/96 $ 873,239 $ 226,684 $ 646,555
Year ended 2/28/95 $ 865,852 $ 187,546 $ 678,306
Year ended 2/28/94 $ 626,163 $ 154,249 $ 471,914
INTERNATIONAL SMALL COMPANIES FUND
Year ended 2/29/96 $ 2,467,267 $1,358,838 $ 1,108,429
Year ended 2/28/95 $ 2,184,055 $1,368,080 $ 815,975
Year ended 2/28/94 $ 833,440 $ 625,615 $ 207,825
U.S. SECTOR FUND
Year ended 2/29/96 $ 1,134,431 $ 169,840 $ 964,591
Year ended 2/28/95 $ 934,108 $ 179,986 $ 754,122
Year ended 2/28/94 $ 848,089 $ 141,400 $ 706,689
INTERNATIONAL BOND FUND
Year ended 2/29/96 $ 779,352 $ 257,658 $ 521,694
Year ended 2/28/95 $ 345,558 $ 181,243 $ 164,315
Commencement of
Operations $ 23,776 $ 23,776 $ 0
(12/22/93) - 2/28/94
EMERGING MARKETS FUND
Year ended 2/29/96 $ 5,944,710 $ 90,073 $ 5,854,637
Year ended 2/28/95 $ 3,004,553 $ 0 $ 3,004,553
Commencement of
Operations $ 158,043 $ 18,574 $ 139,469
(12/8/93) - 2/28/94
-7-
EMERGING COUNTRY DEBT FUND
Year ended 2/29/96 $ 2,504,503 $ 810,112 $1,694,391
Commencement of
Operations $ 417,918 $ 174,820 $ 243,098
(4/19/94) - 2/28/95
GLOBAL HEDGED EQUITY FUND
Year ended 2/29/96 $ 2,071,406 $ 199,269 $1,872,137
Commencement of
Operations $ 324,126 $ 80,409 $ 243,717
(7/29/94) - 2/28/95
DOMESTIC BOND FUND
Year ended 2/29/96 $ 707,127 $ 158,391 $ 548,736
Commencement of
Operations $ 95,643 $ 68,732 $ 26,911
(8/18/94) - 2/28/95
CURRENCY HEDGED INTERNATIONAL BOND FUND
Year ended 2/29/96 $ 1,163,131 $ 522,806 $ 610,325
Commencement of
Operations $ 306,031 $ 173,302 $ 132,729
(9/30/94) - 2/28/95
GLOBAL BOND FUND
Commencement of
Operations $ 17,307 $ 17,307 $ 0
(12/28/95) - 2/29/96
CURRENCY HEDGED INTERNATIONAL CORE FUND
Commencement of
Operations $1, 097,558 $ 663,365 $ 464,193
(6/30/95) - 2/29/96
</TABLE>
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), One
Lincoln Plaza, Boston, Massachusetts 02205, and Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109 serve as the Trust's
custodians on behalf of the Funds. As such, IBT or BBH holds in safekeeping
certificated securities and cash belonging to a Fund and, in such capacity, is
the registered owner of securities in book-entry form belonging to a Fund. Upon
instruction, IBT or BBH receives and delivers cash and securities of a Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. Each of IBT and
BBH also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of each
Fund on a daily basis. The Manager has voluntarily agreed with the Trust to
reduce its management fees and to bear certain expenses with respect to each
Fund until further notice to the extent that a Fund's total annual operating
expenses
-8-
(excluding Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes; and, in the case of the Emerging County Debt
Fund, Emerging Markets Fund and Global Hedged Equity Fund, excluding custodial
fees; and, in the case of the Asset Allocation Funds, excluding expenses
indirectly incurred by investment in other Funds of the Trust) would otherwise
exceed the percentage of that Fund's daily net assets specified in the
Prospectus ("Schedule of Fees and Expenses"). Therefore so long as the Manager
agrees so to reduce its fee and bear certain expenses, total annual operating
expenses (subject to such exclusions) of the Fund will not exceed this stated
limitation. Absent such agreement by the Manager to waive its fees, management
fees for each Fund and the annual operating expenses for each Fund would be as
stated in the Prospectus.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of the
Trust, Grantham, Mayo, Van Otterloo & Co. LLC, either directly or through its
GMO Funds Division, provides direct client service, maintenance and reporting to
shareholders of the Funds. The Servicing Agreement was approved by the Trustees
of the Trust (including a majority of the Trustees who are not "interested
persons" of the Manager or the Trust). The Servicing Agreement will continue in
effect for a period more than one year from the date of its execution only so
long as its continuance is approved at least annually by (i) vote, cast in
person at a meeting called for the purpose, of a majority of those Trustees who
are not "interested persons" of the Manager or the Trust, and by (ii) the
majority vote of the full Board of Trustees. The Servicing Agreement
automatically terminates on assignment (except as specifically provided in the
Servicing Agreement) and is terminable by either party upon not more than 60
days written notice to the other party.
Independent Accountants. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts annual audits of the Trust's financial statements,
assists in the preparation of each Fund's federal and state income tax returns,
consults with the Trust as to matters of accounting and federal and state income
taxation and provides assistance in connection with the preparation of various
Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may
-9-
constitute best price and execution by a broker-dealer in effecting a securities
transaction involves a number of considerations, including, without limitation,
the overall net economic result to the Fund (involving price paid or received
and any commissions and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the transaction at all where a
large block is involved, availability of the broker to stand ready to execute
possibly difficult transactions in the future and the financial strength and
stability of the broker. Because of such factors, a broker-dealer effecting a
transaction may be paid a commission higher than that charged by another
broker-dealer. Most of the foregoing are judgmental considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the Domestic Funds with primary market makers unless better prices or
executions are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
During the three most recent fiscal years, the Trust paid, on behalf of
the Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
1994 1995 1996 Total
<S> <C> <C> <C> <C>
Core Fund $1,176,157 $4,641,334 $3,353,136 $9,170,627
Growth Fund 159,018 211,476 295,985 $666,479
SAF Core Fund 158,642 --- --- $158,642
Value Fund 1,911,868 1,523,065 784,675 $4,219,608
Short-Term Income Fund --- --- --- ---
International Core Fund 2,911,201 4,518,970 1,888,442 $9,318,613
Japan Fund 138,019 1,038,223 41,022 $1,217,264
Tobacco-Free Core Fund 70,113 126,491 71,940 $268,544
Fundamental Value Fund 508,267 444,239 270,800 $1,223,306
International Small Companies Fund 279,639 470,900 77,221 $827,760
Bond Allocation Fund 34,238 29,533 --- $63,771
Small Cap Value Fund 127,191 514,168 678,406 $1,319,765
-10-
U.S. Sector Fund 166,982 434,291 324,992 $926,265
International Bond Fund 1,340 3,251 13,750 $18,341
Emerging Markets Fund 423,879 2,668,508 3,199,810 $6,292,197
Emerging Country Debt Fund --- --- 31,200 $31,200
Global Hedged Equity Fund --- 146,893 415,040 $561,933
Domestic Bond Fund --- --- 62,799 $62,799
Currency Hedged International Bond --- --- 1,800 $1,800
Fund
Currency Hedged International Core --- --- 264,754 $264,754
Fund
Global Bond Fund --- --- 2,321 $2,321
Total $8,251,453 $16,975,056 $11,943,052 $37,169,561
</TABLE>
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-one series: the Core Fund; the Value Fund; the Growth Fund; the Pelican
Fund; the Short-Term Income Fund; the Small Cap Value Fund; the Fundamental
Value Fund, the Tobacco-Free Core Fund; the U.S. Sector Fund; the Small Cap
Growth Fund; the International Core Fund; the Japan Fund; the International Bond
Fund; the Emerging Markets Fund; the Global Properties Fund; the Emerging
Country Debt Fund; the Domestic Bond Fund; the Currency Hedged International
Bond Fund; the Global Hedged Equity Fund; the Currency Hedged International Core
Fund; the International Small Companies Fund; the REIT Fund; the Global Bond
Fund; the Inflation Indexed Bond Fund; the Foreign Fund; the U.S. Bond/Global
Alpha A Fund; the U.S. Bond/Global Alpha B 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
-11-
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
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 the Trust
or the Trustees. The Declaration of Trust provides for
-12-
indemnification out of all the property of the relevant Fund for all loss and
expense of any shareholder of that Fund held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered remote since it is
limited to circumstances in which the disclaimer is inoperative and the Fund of
which he is or was a shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Beneficial Owners of 5% or More of the Fund's Shares
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Core Fund as of October 31, 1996:
<TABLE>
<CAPTION>
Name Address % Ownership
- ---- ------- -----------
<S> <C> <C>
Huntington Trust Co. FBO the Attn: Ms. Michelle McCallister 100.00
Jewish Community Federation P.O. Box 1558
of Cleveland Employees Ret. Plan Columbus, OH 43260
and Trust
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Core Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
The Washington and Lee Attn: John E. Cuny 100.00
University Treasurer's Office
Washington and Lee Univ.
Washington Hall 33
Lexington, VA 24450
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Core Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Employee Retirement Plan of 5918 Stoneridge Mall Road 5.60
Safeway IN Pleasanton, CA 94588
3M Company Building 224-5N-21 5.47
MMM Center
St. Paul, MN 55144
-13-
NRECA Attn: Peter Morris 8.32
4301 Wilson Boulevard
RSI8-305
Arlington, VA 22203
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Growth Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
The Northern Trust Company, Attn: Mutual Funds 14.77
Trustee of the P.O. Box 92950
Aerospace Corporation Chicago, IL 60675
Retirement Plan
Northern Trust Co.
by Northern Trust Co.
as Trustee
John D. MacArthur & Attn: Lawrence L. Landry 10.40
Catherine T. MacArthur 140 South Dearborn
Foundation - Growth Suite 1100
Chicago, IL 60603
Yale University 230 Prospect Street 6.70
Attn: Theodore D. Seides
New Haven, CT 06511
Surdna Foundation Inc. Attn: Mark De Venoge 17.75
330 Madison Avenue
30th Floor
New York, NY 10017
Duke University 2200 West Main St. 8.97
Long Term Endowment PO Suite 1000
Attn: Deborah Lane
Durham, NC 27705
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Japan Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Collins EAFE Group Trust Attn: Y. Hong 11.95
840 Newport Center Drive
Newport Beach, CA 92691
International Monetary Fund Staff 700 19th St., NW 17.03
Retirement Plan Attn: Hillary Boardman
Washington, DC 20431
Public Service Electric & Gas Attention: Doug Hoerr 5.49
-14-
3201468.02
<PAGE>
Company Master Retirement Trust 80 Park Plaza
P.O. Box 570
Newark, NJ 07102
Gordon Family Trust c/o Strategic Investment Management 9.35
1001 19th Street North, 16th Floor
Arlington, VA 22209-1722
Brown University Investment Office - Box C 8.06
Attn: Robert J. Kolyer, Jr.
164 Angell Street
Providence, RI 02912
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Short-Term Income Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
MJH Foundation Attn: J. Michael Burris 12.10
Martha Jefferson Hospital 459 Locust Avenue
Charlottesville, VA 22902
Cormorant Fund c/o Jeremy Grantham 24.74
40 Rowes Wharf
Boston, MA 02110
Directors Fund Limited Attn: Michael J. Leahy 37.97
Partnership c/o Commodities Corporation Ltd
CN 850
Princeton, NJ 08542
Gerald Grinstein & c/o Molly Pengra 7.54
Carolyn H. Grinstein JT TEN Pengra Capital Mgt 2 Union Square
601 Union St. #4100
Seattle, WA 98101-2380
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Value Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Duke University Long Term Attn: Deborah Lane 8.36
Endowment PO 2200 West Main Street
Suite 1000
Durham, NC 27705
International Monetary Fund 700 19th St., NW 14.27
Staff Retirement Plan Attn: Hillary Boardman
Washington, DC 20431
-15-
3201468.02
<PAGE>
Leland Stanford Junior Stanford Management Company 27.48
University II 2770 Sand Hill Road
Menlo Park, CA 94025
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Fundamental Value Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
Yale University 230 Prospect Street 32.12
Attn: Theodore D. Seides
New Haven, CT 06511
Berea College Box 2306 10.51
Attn: Jeff Amburgey
Associate Controller
CPO2306
Berea, KY 40404
Leland Stanford Junior Stanford Management Company 35.08
University II 2770 Sand Hill Road
Menlo Park, CA 94025
Wachovia Bank of NSNA Attn: Ms. Ruth Hawley 17.17
Trustee for Vice President NC 31013
RJR Nabisco Inc. Main Street
Defined Benefit/Master Winston-Salem, NC 27150-3099
Trust - Fundamental Value
Account
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Core II Secondaries Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
The Andrew W. Mellon Foundation 140 E. 62nd Street 7.84
Attn: Kenneth J. Herr, Treasurer
New York, NY 10021
Cheyne Walk Trust Pearce Investments Ltd. 6.68
Attn: Howard Reynolds
1325 Air Motive Way, Suite 262
Reno, NV 89502
-16-
3201468.02
<PAGE>
John D. MacArthur & Catherine T. Attn: Lawrence L. Landry 8.17
MacArthur Foundation 140 South Dearborn
Suite 1100
Chicago, IL 60603
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 7.38
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Yale University 230 Prospect St. 9.55
Attn: Theodore D. Seides
New Haven, CT 06511
Bankers Trust Company TR Attn: Marshall Jones 16.89
GTE Service Corp Pension GTE Investment Management
Trust One Stanford Forum
Stanford, CT 06902
Bost & Co. a/c WFHF6202002 Attn: Mutual Funds Operations 7.01
FBO the Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Small Companies Fund as of
October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Yale University 230 Prospect Street 6.96
Attn: Theodore D. Seides
New Haven, CT 06511
Bankers Trust Company TR Attn: Marshall Jones 6.24
GTE Service Corp Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tobacco-Free Core Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 36.16
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
-17-
3201468.02
<PAGE>
Lila Wallace-Reader's Digest Attn: Rob D. Nagel 31.12
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
Tufts Associated Health 353 Wyman Street 15.03
Maintenance Organization Inc. Waltham, MA 02254
Beverly Hospital Corporation Attn: Pela J. Kilcommons 11.56
Finance Department
85 Herrick Street
Beverly, MA 01915-1777
Olsen & Co. Attn: Mutual Funds 6.10
FBO Beverly Hospital A/C #640 790070
Pension Plan P.O. Box 92800
Boston, MA 02211
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the U.S. Sector Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
The Herb Society of America, Inc. Attn: David Pauer 100.00
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Sector Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
John D. MacArthur & Catherine T. Attn: Lawrence L. Landry 39.75
MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
Trustees of Columbia University Columbia University 14.80
in the City of New York-Global 475 Riverside Drive, Suite 401
New York, NY 10115
Yale University 230 Prospect St. 29.09
Attn: Theodore D. Seides
New Haven, CT 06511
-18-
3201468.02
<PAGE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Bond Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
The Trustees of Princeton Attn: John D. Sweeney 18.73
University Int'l PO Box 35
Princeton, NY 08544
Saturn & Co. A/C 4600712 P.O. Box 1537 Top 57 20.00
c/o Investors Bank & Trust Co. Boston, MA 02205-1537
FBO The John Hancock Mutual
Life Insurance Company Pension
Plan
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Markets Fund as of October 31,
1996.
Name Address % Ownership
- ---- ------- -----------
Trustees of Princeton University Attn: John D. Sweeney 6.37
Intl PO Box 35
Princeton, NJ 08544
Princeton University TR Attn: John D. Sweeney 5.16
PO Box 35
Princeton, NJ 08544
Bankers Trust Company TR Attn: Marshall Jones 9.10
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Domestic Bond Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
The Herb Society of America, Inc. Attn: David Pauer 100.00
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
-19-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Domestic Bond Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 20.33
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company TR Attn: Marshall Jones 33.97
GTE Service Pension Trust GTE Investment Management
One Stamford Forum
Stamford, CT 06902
John D. MacArthur & Attn: Lawrence L. Landry 8.46
Catherine T. MacArthur Foundation 140 South Dearborn, Suite 1100
Chicago, IL 60603
Corning Retirement Master Trust II Attn: Mr. Lindsay W. Brown 9.65
One Riverfront Plaza
HQ-E2-34
Corning, NY 14831-0001
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Bond Fund as
of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Marshstorm & Co. State Street Bank and Trust 6.95
Attn: Cara Allen - W6C
1 Enterprise Dr. W6C
North Quincy, MA 02171
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 7.34
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Bankers Trust Company TR Attn: Marshall Jones 42.06
GTE Service Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
Park Foundation, Inc. Attn: Sharon Linderberry 5.19
Fixed Income Terrace Hill
P.O. Box 550
Ithaca, NY 14851
-20-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
The Trustees of Princeton Attn: John D. Sweeney 9.13
University Int'l PO Box 35
Princeton, NJ 08544
Bankers Trust Company TR Attn: Marshall Jones 8.83
GTE Service Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
Regents of the University 5032 Fleming Admin. Bldg. 6.02
of Michigan Ann Arbor, MI 48109-1340
Treasurer's Office
Duke University Long Term 2200 W. Main Street 7.66
Endowment PO Suite 1000
Attn: Deborah Lane
Durham, NC 27705
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Hedged Equity Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
Bankers Trust Company TR Attn: Marshall Jones 30.94
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
John D. MacArthur & Attn: Lawrence L. Landry 7.78
Catherine T. MacArthur Foundation 140 S. Dearborn, Suite 1100
Chicago, IL 60603
Partners Healthcare System Partners Healthcare System, Inc. 8.28
Pooled Investment Accounts 101 Merrimac Street, 4th Floor
Boston, MA 02114
-21-
3201468.02
<PAGE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Core Fund as
of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Bost & Co./BAMF8721002 1 Cabot Road 028-003B 8.54
Bell Atlantic Mutual Fund Operations
Medford, MA 02155
Trustees of Columbia University Columbia University 9.93
in the City of New York - Global 475 Riverside Drive Suite 401
New York, NY 10115
Duke University Long Term 2200 West Main Street 5.20
Endowment PO Suite 1000
Attn: Deborah Lane
Durham, NC 27705
Howard Hughes Medical 4000 Jones Bridge Road 23.48
Institute Chevy Chase, MD 20815-6789
Arthur Andersen & Co. Attn: John H. Greenwell 6.43
SC U S Profit Sharing 69 W. Washington Street
and Retirement Trust A21A
Chicago, IL 60602
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Bond Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Catholic Bishop of Chicago 155 East Superior Street 12.23
Attn: John F. Benware
Chicago, IL 60611
Board of Trustees of the University 302 South Building 005A 7.15
of North Carolina at Chapel Hill Campus Box 1000
Endowment Fund Bonds Chapel Hill, NC 27599-1000
The University of North Carolina 302 South Building 005A 5.67
at Chapel Hill Foundation Inc. Campus Box 1000
Bonds Chapel Hill, NC
Nazareth College of Rochester 4245 East Avenue 13.78
Fixed Income Rochester, NY 14618
Essex & Company Attn: Linda Wills, Trust Dept. 45.40
c/o First National in Palm Springs
255 South County Road
Palm Springs, FL 33480
-22-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Foreign Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
Wentworth Institute of Technology Attn: David Gilmore 78.01
550 Huntington Avenue
Boston, MA 02115
Dana Hall School Attn: Lucille R. Kooyoomjian 21.95
45 Dena Road
Wellesley, MA 02181
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Foreign Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
President and Fellows c/o Harvard Management Company 18.64
of Harvard College 600 Atlantic Avenue
Boston, MA 02210
Trustees of the University Attn: Jon Scheinman 13.79
of Pennsylvania Office of Investments
3451 Walnut St
714 Franklin Building
Philadelphia, PA 19104-6205
Wellesley College Attn: Catherine Feddersen 10.27
Associate Treasurer
106 Central St
Wellesley, MA 02181
University of Minnesota Attn: Gracie A. Davenport 9.39
Foundation 1300 S. 2nd St. Suite 200
Minneapolis, MN 55454-1029
Swarthmore College - Foreign 500 College Ave. 8.21
Swarthmore, VA 19081-1397
The Rector and Visitors of the Office of the Treasurer 7.55
University of Virginia P.O. Box 9012
Attn: Mr. Rob Walker Freer
Charlottesville, VA 22906
Princeton University TR Attn: John D. Sweeney 7.41
P.O. Box 35
Princeton, NJ 08544
-23-
3201468.02
<PAGE>
Trustees of Amherst College Attn: Sharon G. Siegel 5.30
Consolidat Treasurer's Office
Box 2203 P.O. Box 5000
Corner of Rts 9 & 116
Amherst, MA 01002-5000
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the REIT Fund as of October 31, 1996:
Name Address % Ownership
- ---- ------- -----------
The Andrew W. Mellon Foundation 140 E. 62nd Street 11.02
Attn: Kenneth J. Herr, Treasurer
New York, NY 10021
The Duke Endowment - AA Attn: Henry Vassoll Jr. 7.61
100 North Tryon Street Suite 3500
Charlotte, NC 28202-4012
Princeton University TR Attn: John D. Sweeney 5.97
P.O. Box 35
Princeton, NJ 08544
Berea College Attn: Jeff Amburger 5.47
Associate Controlle
COP 2306
Box 2306
Berea, KY 40404
Bankers Trust Company TR Attn: Marshall Jones 47.43
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stanford, CT 06902
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the World Equity Allocation Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
Melvin B. and Joan F. Lane 3000 Sand Hill Rd. 84.14
TR U/A DTD 09/14/93 Building 2 Suite 215
Melvin and Joan Lane Revocable Menlo Park, CA 94025
Trust I
Melvin B. and Joan F. Lane 3000 Sand Hill Rd. 15.83
TR U/A DTD 09/14/93 Building 2 Suite 215
Melvin and Joan Lane Revocable Menlo Park, CA 94025
Trust I
-24-
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the Global Balanced Allocation Fund as of October
31, 1996:
Name Address % Ownership
- ---- ------- -----------
Redington-Fairview General Attn: Dana C. Kempton 6.66
Hospital - Operating Fund Associate Director
28 Fairview Avenue
Skowhegan, ME 04976
Redington-Fairview General Attn: Dana C. Kempton 33.33
Hospital Associate Director
Funded Depreciation 28 Fairview Avenue
Skowhegan, ME 04976
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class I Shares of the International Core Fund as of October 31,
1996:
Name Address % Ownership
- ---- ------- -----------
The Herb Society of America, Inc. Attn: David Pauer 100.00
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the World Equity Fund as of October 31, 1996:
Sidney J. Weinberg Jr. Foundation The Goldman Sachs Group L.P. 20.00
85 Broad Street
New York, NY 10004
Sidney J. Weinberg Jr. The Goldman Sachs Group L.P. 80.00
85 Broad Street
New York, NY 10004
</TABLE>
-25-
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
February 29, 1996 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on May 7, 1996 pursuant to Section 30(d) of
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are hereby incorporated in this Statement of Additional Information
by reference.
The Trust's unaudited financial statements for the six month period
ended August 31, 1996 included in the Trust's Semi-Annual Reports filed with the
Securities and Exchange Commission on November 8, 1996 pursuant to Section 30(d)
of the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are also hereby incorporated in this Statement of Additional
Information by reference.
The Trustees of the Trust have approved, effective December 1, 1996, a
change in the name of the Core II Secondaries Fund to the GMO Small Cap Value
Fund.
-26-
GMO Trust
Specimen Price-Make-Up Sheet
Following are computations of the total offering price per share for
the Core Fund, the International Core Fund, the Growth Fund, the Short-Term
Income Fund, the Japan Fund, the Value Fund, the Tobacco-Free Core Fund, the
Core II Secondaries Fund, the International Small Companies Fund, the U.S.
Sector Fund, the International Bond Fund, the Emerging Markets Fund, the
Emerging Country Debt Fund, the Global Hedged Equity Fund, the Domestic Bond
Fund, the Currency Hedged International Bond Fund, the Fundamental Value Fund,
the Currency Hedged International Core Fund, the Global Bond Fund, the REIT
Fund, the Foreign Fund, the Global Balanced Allocation Fund, the World Equity
Allocation Fund, and the Pelican Fund based upon their respective net asset
values and shares of beneficial interest outstanding at the close of business on
August 31, 1996.
<TABLE>
<CAPTION>
<S> <C>
Core Fund-Class I
Net Assets at Value (Equivalent to
$18.34 per share based on
326,936 shares of beneficial $5,995,766
interest outstanding)
Offering Price ($18.34 x 100/99.86)* $18.37
Core Fund-Class II
Net Assets at Value (Equivalent to
$18.33 per share based on
1,384,183 shares of beneficial
interest outstanding) $25,376,930
Offering Price ($18.33 x 100/99.86)* $18.36
Core Fund-Class III
Net Assets at Value (Equivalent to
$18.33 per share based on
164,491,589 shares of beneficial
interest outstanding) $3,015,902,108
Offering Price ($18.33 x 100/99.86)* $18.36
- ------------
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-27-
International Core Fund-Class III
Net Assets at Value (Equivalent to $24.18
per share based on 175,896,874 shares of
beneficial interest outstanding) $4,253,261,975
Offering Price ($24.18 x 100/99.40)* $24.33
Growth Fund-Class III
Net Assets at Value (Equivalent to $5.33
per share based on 60,348,814 shares of
beneficial interest outstanding) $321,551,389
Offering Price ($5.33 x 100/99.86)* $5.34
Short-Term Income Fund-Class III
Net Assets at Value (Equivalent to $9.72
per share based on 2,612,653 shares of
beneficial interest outstanding) $25,385,056
Offering Price $9.72
Japan Fund-Class III
Net Assets at Value (Equivalent to $8.21
per share based on 32,080,230 shares of
beneficial interest outstanding) $263,437,757
Offering Price ($8.21 x 100/99.60)* $8.24
Value Fund-Class III
Net Assets at Value (Equivalent to
$13.25 per share based on
23,721,468 shares of beneficial
interest outstanding) $314,417,775
Offering Price ($13.25 x 100/99.86)* $13.27
- ------------
* Represents maximum offering price charged on certain cash purchases. See "Purchase of Shares" in the
Prospectus.
-28-
Tobacco-Free Core Fund-Class III
Net Assets at Value (Equivalent to
$11.96 per share based on
4,514,874 shares of beneficial $54,010,694
interest outstanding)
Offering Price ($11.96 x 100/99.86)* $11.98
Core II Secondaries-Class III
Net Assets at Value (Equivalent to $14.17
per share based on 23,309,621 shares
of beneficial interest outstanding) $330,377,344
Offering Price ($14.17 x 100/99.50)* $14.24
International Small Companies Fund-Class III
Net Assets at Value (Equivalent to $12.98
per share based on 17,439,466 shares of
beneficial interest outstanding) $226,425,855
Offering Price ($12.98 x 100/99.00)* $13.11
Fundamental Value Fund-Class III
Net Assets at Value (Equivalent to $14.47
per share based on 14,047,972 shares
of beneficial interest outstanding) $203,243,206
Offering Price ($14.47 x 100/99.85)* $14.49
U.S. Sector Fund-Class III
Net Assets at Value (Equivalent to $11.74
per share based on 19,210,683 shares
of beneficial interest outstanding) $225,507,971
Offering Price ($11.74 x 100/99.86)* $11.76
- ------------
* Represents maximum offering price charged on certain cash purchases. See "Purchase of Shares" in the
Prospectus.
-29-
Emerging Markets Fund-Class III
Net Assets at Value (Equivalent to $10.93
per share based on 111,608,650 shares
of beneficial interest outstanding) $1,220,397,245
Offering Price ($10.93 x 100/98.4)* $11.11
International Bond Fund-Class III
Net Assets at Value (Equivalent to $11.55
per share based on 17,563,164 shares) $202,804,753
Offering Price ($11.55 x 100/99.85)* $11.57
Emerging Country Debt Fund-Class III
Net Assets at Value (Equivalent to $14.36
per share based on 45,031,574 shares) $646,826,854
Offering Price ($14.36 x 100/99.50)* $14.43
Global Hedged Equity Fund-Class III
Net Assets at Value (Equivalent to $10.65
per share based on 29,771,691 shares) $317,129,079
Offering Price ($10.65 x 100/99.50)* $10.70
Domestic Bond Fund-Class III
Net Assets at Value (Equivalent to $9.98
per share based on 45,181,741 shares) $451,130,993
Offering Price $9.98
Currency Hedged International Bond Fund-Class III
Net Assets at Value (Equivalent to $12.00
per share based on 29,089,838 shares) $349,130,518
Offering Price ($12.00 x 100/99.85)* $12.02
- ------------
* Represents maximum offering price charged on certain cash purchases. See "Purchase of Shares" in the
Prospectus.
-30-
Currency Hedged International Core Fund-Class III
Net Assets at Value (Equivalent to $11.53 $508,171,149
per share based on 44,087,812 shares)
Offering Price ($11.53 x 100/99.40)* $11.60
Pelican Fund
Net Assets at Value (Equivalent to $14.22
per share based on 12,797,474 shares) $182,007,642
Offering Price $14.22
Global Bond Fund-Class III
Net Assets at Value (Equivalent to $10.48
per share based on 6,042,003 shares) $63,320,513
Offering Price ($10.48 x 100/99.85)* $10.50
Global Balanced Allocation Fund-Class I
Net Assets at Value (Equivalent to $10.24
per share based on 300,000 shares of beneficial
interest outstanding) $3,073,030
Offering Price ($10.24 x 100/99.69)* $10.27
World Equity Allocation Fund-Class I
Net Assets at Value (Equivalent to $9.69
per share based on 582,229 shares of beneficial
interest outstanding) $5,639,148
Offering Price ($9.69 x 100/99.31)* $9.76
World Equity Allocation Fund-Class II
Net Assets at Value (Equivalent to $9.69
per share based on 412,344 shares of beneficial
interest outstanding) $3,994,141
Offering Price ($9.69 x 100/99.31)* $9.76
- ------------
* Represents maximum offering price charged on certain cash purchases. See "Purchase of Shares" in the
Prospectus.
-31-
REIT Fund-Class III
Net Assets at Value (Equivalent to $10.60
per share based on 7,464,598 shares of beneficial
interest outstanding) $79,110,833
Offering Price ($10.60 x 100/99.25)* $10.68
Foreign Fund-Class I
Net Assets at Value (Equivalent to $9.81
per share based on 354,251 shares of beneficial
interest outstanding) $3,476,181
Offering Price $9.81
Foreign Fund-Class III
Net Assets at Value (Equivalent to $9.81
per share based on 57,710,422 shares of beneficial
interest outstanding) $566,258,587
Offering Price $9.81
- ------------
* Represents maximum offering price charged on certain cash purchases. See "Purchase of Shares" in the
Prospectus.
</TABLE>
-32-
