<PAGE> 1
File Nos. 2-98772
811-4347
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON DECEMBER 5, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 40 [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 42 [ ]
GMO TRUST
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
40 ROWES WHARF, BOSTON, MASSACHUSETTS 02110
-------------------------------------------
(Address of principal executive offices)
617-330-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
with a copy to:
R. Jeremy Grantham J.B. Kittredge, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
(Name and address of agents for service)
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1), or
[ ] On ________________, pursuant to paragraph (b), or
[ X ] 75 days after filing pursuant to paragraph (a)(2), of Rule 485.
================================================================================
<PAGE> 2
GMO TRUST
(For GMO Fundamental Value Fund and GMO International Core Plus
Allocation Fund only)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
<S> <C> <C>
PART A
Item 1. Cover Page................................ Cover Page
Item 2. Synopsis.................................. Schedule of Fees and Expenses
Item 3. Condensed Financial Information........... Financial Highlights
Item 4. General Description of Registrant......... Organization and Capitalization of the
Trust; Investment Objectives and
Policies; Description and Risks of Fund
Investments; Cover Page
Item 5. Management of the Fund.................... Management of the Trust
Item 5A. Management's Discussion of Fund
Performance.......................... Financial Highlights (referencing the
Trust's Annual Reports)
Item 6. Capital Stock and Other Securities........ Organization and Capitalization of the
Trust; Distributions; Taxes; Back Cover
(Shareholder Inquiries)
Item 7. Purchase of Securities Being Offered...... Purchase of Shares; Determination of Net
Asset Value
Item 8. Redemption or Repurchase.................. Redemption of Shares; Determination of Net
Asset Value
Item 9. Pending Legal Proceedings................. None
PART B
Item 10. Cover Page................................ Cover Page
Item 11. Table of Contents......................... Table of Contents
Item 12. General Information and History........... Not Applicable
Item 13. Investment Objectives and Policies........ Investment Objectives and Policies;
Investment Restrictions
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Item 14. Management of the Fund.................... Management of the Trust
Item 15. Control Persons and Principal Holders
of Securities........................ Description of the Trust and Ownership of
Shares
Item 16. Investment Advisory and Other Services.... Investment Advisory and Other Services
Item 17. Brokerage Allocation and Other Practices.. Portfolio Transactions
Item 18. Capital Stock and Other Securities........ Description of the Trust and Ownership of
Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............. See in Part A Purchase of Shares; Redemption
of Shares; Determination of Net Asset Value;
Specimen Price Make-Up Sheet
Item 20. Tax Status................................ Income, Dividends, Distributions and Tax Status
Item 21. Underwriters.............................. Not Applicable
Item 22. Calculation of Performance Data........... Not Applicable
Item 23. Financial Statements...................... Financial Statements
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
This Post-Effective Amendment relates solely to the GMO Fundamental
Value Fund and the GMO International Core Plus Allocation Fund. No information
relating to any other series of the registrant is amended or superseded hereby.
<PAGE> 4
GMO INTERNATIONAL CORE PLUS ALLOCATION FUND
GMO FUNDAMENTAL VALUE FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO INTERNATIONAL CORE PLUS ALLOCATION FUND ("ICPA FUND") AND THE GMO
FUNDAMENTAL VALUE FUND ("FV FUND") (the "Funds") are two of thirty-three
separate investment portfolios of GMO Trust (the "Trust"), an open-end
management investment company. The other portfolios are offered pursuant to two
separate prospectuses. The Fund's investment manager is GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO").
The ICPA Fund seeks a total return greater than the return of the
EAFE-Lite Index. The ICPA Fund will pursue its objective by investing primarily
in Class III shares of the GMO International Core Fund ("International Core
Fund") the GMO Evolving Countries Fund ("Evolving Countries Fund") and other GMO
Funds.
The FV Fund seeks long-term capital growth through investment primarily in
equity securities. Consideration of current income is secondary to this
principal objective.
The ICPA Fund and the FV Fund are "diversified" portfolios, as defined in
the Investment Company Act of 1940 (the "1940 Act"). See "Description and Risks
of Fund Investments--Diversified Portfolio." A TABLE OF CONTENTS APPEARS ON PAGE
3 OF THIS PROSPECTUS.
The ICPA Fund offers three classes of shares (Class I, Class II and Class
III) and the FV Fund offers four classes of shares (Class I, Class II, Class III
and Class IV). 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 IV the most), as described more fully herein. See
"Multiple Classes--Eligibility for Classes."
The classes differ solely with regard to the level of SHAREHOLDER SERVICE
FEE borne by the class. This difference is 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 The level of Shareholder Service Fee for each
Tel: (617) 330-7500 class is set forth on the following page and
Fax: (617) 439-4192 described more fully under "Multiple Classes
--Shareholder Service Fee."
- ---------------------------
This Prospectus concisely describes the information which investors ought
to know about the Funds before investing. Please read this memorandum carefully
and keep it for further reference. A Statement of Additional Information dated
February 18, 1998, as revised from time to time, is available free of charge by
writing to GMO, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling
(617) 330-7500. The Statement, which contains more detailed information about
the Funds, has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS FEBRUARY 18, 1998
<PAGE> 5
CLASSES AND FEES
<TABLE>
<CAPTION>
ELIGIBILITY
REQUIREMENT* SHAREHOLDER SERVICE FEE**
<S> <C> <C>
ICPA FUND
Class I N/A 0.13%***
Class II N/A 0.07%***
Class III $1 million 0.00%***
FV FUND
Class I N/A 0.28%
Class II N/A 0.22%
Class III $1 million 0.15%
Class IV $125 million/$250 million 0.13%
</TABLE>
_________________
* More detailed explanation of eligibility criteria is provided below and
under "Multiple Classes -- Eligibility for Classes."
** As noted above, all classes of shares of the Fund pay the same investment
management fee.
*** The ICPA Fund, by virtue of its investment in Class III Shares of other
GMO 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 ICPA Fund is the same as that borne by Class
I, Class II and Class III Shares, respectively, of the other GMO Funds.
CLASS ELIGIBILITY
For full details of the class eligibility criteria summarized below and an
explanation of how conversions between classes will occur, see "Multiple Classes
- - Eligibility for Classes" and "Multiple Classes - Conversions Between Classes."
CLASS I SHARES. Class I Shares are not currently being offered by the Trust, but
may be offered by the Trust in the future. Class I Shares bear a Shareholder
Service Fee of 0.28%.
CLASS II SHARES. Class II Shares are not currently being offered by the Trust,
but may be offered by the Trust in the future. Class II Shares bear a
Shareholder Service Fee of 0.22%.
CLASS III SHARES. Class III Shares are available to any investor who commits
assets to GMO management to establish a "Total Investment" (as defined) with GMO
of at least $1 million. Class III Shares bear a Shareholder Service Fee of 0.15%
of average net assets.
CLASS IV SHARES. Class IV shares are available to accommodate clients who have
very large amounts under GMO's management. Class IV Shares bear lower
Shareholder Service Fees than Class III Shares to reflect the lower cost of
servicing such large accounts as a percentage of assets. See "Multiple
Classes--Eligibility for Class" and "Multiple Classes--Conversions Between
Classes" for full details of the eligibility criteria for the Class IV Shares
(which work differently than that for Class I, II and III Shares) and an
explanation of how conversions between classes will occur.
Purchasers of Class I, Class II, Class III and Class IV Shares should
follow purchase instructions described under "Purchase of Shares" and direct
questions to the Trust at (617) 330-7500.
-2-
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
SCHEDULE OF FEES AND EXPENSES...............................................-4-
DESCRIPTION AND RISKS OF FUND
INVESTMENTS..........................................................-10-
Portfolio Turnover...................................................-10-
Diversified Portfolios...............................................-10-
Certain Risks of Foreign Investments.................................-10-
General .....................................................-10-
Emerging Markets.............................................-10-
Securities Lending...................................................-11-
Depository Receipts..................................................-11-
Convertible Securities...............................................-11-
Futures and Options..................................................-12-
Options .....................................................-12-
Writing Covered Options......................................-12-
Futures .....................................................-13-
Index Futures................................................-14-
Interest Rate Futures........................................-14-
Options on Futures Contracts.................................-15-
Uses of Options, Futures and Options on Futures......................-15-
Risk Management..............................................-15-
Hedging .....................................................-15-
Investment Purposes..........................................-15-
Synthetic Sales and Purchases................................-16-
Swap Contracts and Other Two-Party Contracts.........................-16-
Swap Contracts...............................................-16-
Interest Rate and Currency Swap Contracts....................-16-
Equity Swap Contracts and Contracts for Differences..........-17-
Interest Rate Caps, Floors and Collars.......................-17-
Foreign Currency Transactions .......................................-18-
Repurchase Agreements................................................-19-
Debt and Other Fixed Income Securities Generally.....................-19-
Temporary High Quality Cash Items....................................-19-
U.S. Government Securities and Foreign Government Securities.........-19-
Lower Rated Securities...............................................-20-
Indexed Securities...................................................-20-
Firm Commitments.....................................................-21-
Reverse Repurchase Agreements and Dollar Roll Agreements.............-21-
Special Asset Allocation Fund Considerations.........................-22-
ADDITIONAL INVESTMENT RESTRICTIONS.........................................-22-
MULTIPLE CLASSES...........................................................-23-
Purchase Procedures..................................................-26-
DETERMINATION OF NET ASSET VALUE...........................................-28-
DISTRIBUTIONS..............................................................-28-
TAXES .....................................................................-29-
Withholding on Distributions to Foreign Investors....................-30-
Foreign Tax Credits..................................................-30-
Tax Implications of Certain Investments..............................-30-
Loss of Regulated Investment Company Status..........................-31-
MANAGEMENT OF THE TRUST....................................................-31-
ORGANIZATION AND CAPITALIZATION OF THE TRUST...............................-32-
Appendix A.................................................................-33-
RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS........................-33-
Limitations on the Use of Options and Futures Portfolio Strategies...-33-
Risk Factors in Options Transactions.................................-33-
Risk Factors in Futures Transactions.................................-33-
Risk Factors in Swap Contracts, OTC Options and other
Two-Party Contracts..........................................-34-
Additional Regulatory Limitations on the Use of Futures and
Related Options, Interest Rate Floors, Caps and Collars
and Interest Rate and Currency Swap Contracts................-34-
Appendix B.................................................................-35-
COMMERCIAL PAPER AND CORPORATE DEBT
RATINGS..............................................................-35-
Commercial Paper Ratings ............................................-35-
Corporate Debt Ratings...............................................-35-
Standard & Poor's Corporation........................................-35-
Moody's Investors Service, Inc.......................................-35-
</TABLE>
-3-
<PAGE> 7
SCHEDULE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
GMO Shareholder
Fund Name Transaction Expenses Annual Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Inv. Share- Other Total You would pay the following You would pay the
Premium (as Fees (as a Mgmt. holder Expenses Operating expenses on a $1,000 following expenses on
a percentage percentage Fees after Service (3) Expenses(3) investment assuming 5% annual the same investment
of amount of amount Fee Fee(2) return with redemption at the assuming no
invested(1) redeemed(1) Waiver(3) end of each time period: redemption:
- ------------------------------------------------------------------------------------------------------------------------------------
ICPA FUND(8) 1 3 5 10 1 3 5 10
YR. YR. YR. YR. YR. YR. YR. YR.
- ------------------------------------------------------------------------------------------------------------------------------------
Class I .65%(7) .11%(7) .00%(8) .13%(8) .00%(4,8) .13%(8) $9 $12 -- -- $8 $11 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Class II .65%(7) .11%(7) .00%(8) .07%(8) .00%(4,8) .07%(8) $8 $10 -- -- $7 $9 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Class III .65%(7) .11%(7) .00%(8) .00%(8) .00%(4,8) .00%(8) $8 $8 -- -- $7 $7 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
FV FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Class I .15%(5) None .55%(6) .28% .05% .88% $10 $30 $50 $100 $10 $30 $50 $110
- ------------------------------------------------------------------------------------------------------------------------------------
Class II .15%(5) None .55%(6) .22% .05% .82% $10 $28 $47 $103 $10 $28 $47 $103
- ------------------------------------------------------------------------------------------------------------------------------------
Class III .15%(5) None .55%(6) .15% .05% .75% $9 $25 $43 $94 $9 $25 $43 $94
- ------------------------------------------------------------------------------------------------------------------------------------
Class IV .15%(5) None .55%(6) .13% .05% .73% $9 $25 $42 $92 $9 $25 $42 $92
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes begin on the following page and are important to understanding this
table.
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").
-4-
<PAGE> 8
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.
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.
The level of SSF is the sole economic distinction between the various
classes of Fund shares. A lower SSF for larger investments reflects that
the cost of servicing client accounts is lower for larger accounts when
expressed as a percentage of the account. See "Multiple Classes -
Shareholder Service Fees" for more information.
3. The Manager has voluntarily undertaken to reduce its management fees and
to bear certain expenses with respect to 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, transfer taxes; and, in the case of
the ICPA Fund also excluding expenses indirectly incurred by investment in
other Funds of the Trust) would otherwise exceed the percentage of that
Fund's daily net assets specified below. Therefore, so long as the Manager
agrees to reduce its fees and bear certain expenses, total annual
operating expenses (subject to such exclusions) of the Fund will not
exceed these stated limitations. Absent such undertakings, management fees
for each Fund and the annual operating expenses for each class would be as
shown below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
MANAGEMENT
VOLUNTARY FEE
FUND EXPENSE (ABSENT TOTAL CLASS
LIMIT WAIVER) OPERATING EXPENSES (ABSENT WAIVER)
-----------------------------------------------------------------------------------------------
CLASS I CLASS II CLASS III Class IV
-----------------------------------------------------------------------------------------------
ICPA .00% .00% .17% .11% .04% N/A
-----------------------------------------------------------------------------------------------
FV .60% .75% 1.08% 1.02% .95% .93%
-----------------------------------------------------------------------------------------------
</TABLE>
4. Based on estimated amounts for the Fund's first fiscal year.
5. The Manager may waive or reduce purchase premiums for this Fund if there
are minimal brokerage and transaction costs incurred in connection with a
transaction due to offsetting transactions or otherwise.
6. Figure based on actual expenses for the fiscal year ended February 28,
1997 but restated to give effect to a reduction in the expense limitation
and the imposition of a Shareholder Service Fee for each Fund, which
changes were effective as of June 1, 1996.
7. The ICPA Fund 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 the ICPA Fund has been computed as the weighted average of the
premiums and fees, respectively, of the underlying Funds in which the ICPA
Fund is expected to invest. The amount of purchase premium and redemption
fee for the ICPA Fund is adjusted approximately annually based on
underlying Funds owned by the ICPA Fund during the prior year. The Manager
may, but is not obligated to, adjust the purchase premium and/or
redemption fee for the ICPA Fund more frequently if
-5-
<PAGE> 9
the Manager believes in its discretion that circumstances warrant. For
more information concerning which underlying Funds in which the ICPA may
invest, see "Investment Objectives and Policies."
8. The ICPA Fund invests 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 ICPA Fund (which are shown in the
Schedule of Fees and Expenses), the ICPA Fund will also incur fees and
expenses indirectly as a shareholder of the underlying Funds. Because the
underlying Funds have varied expense and fee levels and the ICPA Fund may
own different proportions of underlying Funds at different times, the
amount of fees and expenses indirectly incurred by the ICPA Fund will
vary. The Manager believes that, under normal market conditions, the total
amount of fees and expenses that will be indirectly incurred by the ICPA
Fund because of investment in underlying Funds will fall within the ranges
set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
---------------------------------------------------------------------
Fund Low Typical High
---------------------------------------------------------------------
ICPA Fund .71% .74% .77%
---------------------------------------------------------------------
</TABLE>
-6-
<PAGE> 10
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each period)
FUNDAMENTAL VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------
SIX MONTHS ENDED
AUGUST 31, 1997
(UNAUDITED) 1997 1996 1995 1994 1993 1992(1)
---------------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 16.33 $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82 $ 10.00
-------- -------- -------- -------- -------- ------- -------
Income from investment operations:
Net investment income ................. 0.18 0.33 0.37 0.34 0.27 0.30 0.11
Net realized and unrealized gain on
investments ......................... 2.26 2.53 3.26 0.55 1.64 1.32 0.77
-------- -------- -------- -------- -------- ------- -------
Total from investment operations ... 2.44 2.86 3.63 0.89 1.91 1.62 0.88
-------- -------- -------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income ............ (0.17) (0.32) (0.37) (0.32) (0.28) (0.30) (0.06)
From net realized gains ............... (0.74) (1.25) (0.76) (0.52) (0.85) (0.43) --
-------- -------- -------- -------- -------- ------- -------
Total distributions ................ (0.91) (1.57) (1.13) (0.84) (1.13) (0.73) (0.06)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period .......... $ 17.86 $ 16.33 $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82
======== ======== ======== ======== ======== ======= =======
Total Return(2) ......................... 15.31% 20.03% 29.95% 7.75% 16.78% 15.66% 8.87%
Ratios/Supplemental Data:
Net assets, end of period (000's) ..... $207,730 $232,583 $212,428 $182,871 $147,767 $62,339 $32,252
Net expenses to average daily
net assets .......................... 0.75%(4) 0.75% 0.75% 0.75% 0.75% 0.73% 0.62%(4)
Net investment income to average
daily net assets .................... 1.99%(4) 2.15% 2.61% 2.84% 2.32% 2.77% 3.43%(4)
Portfolio turnover rate ............... 10% 25% 34% 49% 65% 83% 33%
Average commission rate paid(3) ....... $ 0.0674 $ 0.0590 N/A N/A N/A N/A N/A
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts ......... $ 0.02 $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.03 $ 0.03
</TABLE>
(1) For the period from the commencement of operations, October 31, 1991 to
February 29, 1992
(2) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(3) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
(4) Annualized.
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 FV Fund's other audited financial statements and related
notes which are included in the Trust's Annual Reports and with the FV Fund's
other unaudited financial statements and related notes, which are included in
the Trust's Semi-Annual Reports, which are incorporated by reference in the
Statement of Additional Information. Information is presented for the FV Fund,
and each class of shares thereof, which had investment operations during the
reporting periods. Information regarding Class III Shares of the FV Fund
reflects the operational history for the FV Fund's sole outstanding class prior
to the creation of multiple classes of the FV Fund on May 31, 1996.
The Manager's discussion of the performance of the FV Fund in fiscal 1997 and
the six months ended August 31, 1997, as well as a comparison of the FV Fund's
performance over the life of the FV Fund with that of a benchmark securities
index selected by the Manager, is included in the FV Fund's Annual Report for
the fiscal year ended February 28, 1997 and Semi-Annual Report for the six
months ended August 31, 1997, respectively. Copies of the Annual Report and
Semi-Annual Report are available upon request without charge.
-7-
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
ICPA Fund
Current Benchmark: EAFE-Lite
The ICPA Fund seeks a total return greater than the return of the
EAFE-Lite Index. The ICPA Fund will pursue its objective by investing primarily
in Class III shares of the International Core Fund and the Evolving Countries
Fund. The Manager expects that approximately 85% of the Fund's net assets will
be invested in the International Core Fund, and that approximately 15% of the
Fund's net assets will be invested in the Evolving Countries Fund.
While the Fund's assets will be primarily invested in the Funds listed
above, the Fund may also invest in other GMO Funds, 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.
The ICPA is one of the Trust's five 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 Section 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
in the case of the ICPA Fund. 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. Thus, investors in Class I, Class II and Class
III Shares of the ICPA Fund 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, respectively, of the other (non-Asset Allocation)
Funds (i.e., in the case of Class III Shares, an aggregate of 0.15% per annum).
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 (as set forth in
the GMO Trust Prospectus dated August 29, 1997) 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. See "Description and Risks of Fund Investments" in this Prospectus.
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.
FV 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.
-8-
<PAGE> 12
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, managed strength, and level of
industry dominance as measured by market share. At the same time, the Manager
analyzes the financial condition of each company. The Manager examines current
and historical measures of relative value to find corporations that are selling
at discounts relative to both underlying asset values and market pricing. The
Manager then selects those companies with financial and business characteristics
that it believes will produce above-average growth in earnings. Sell decisions
are triggered when, in the opinion of the Manager, the stock price and other
fundamental considerations make further appreciation less likely.
The Manager generally selects equities that normally trade in sufficient
volume to provide liquidity. Domestic equities are usually traded on the New
York Stock Exchange or the American Stock Exchange or in the over-the-counter
markets.
The Fund's investments in foreign securities will generally consist of
equity securities traded in principal European and Pacific Basin markets. The
Manager evaluates the economic strength of a country, which includes its
resources, markets, and growth rate. In addition, it examines the political
climate of a country as to its stability and business policies. The Manager then
assess 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 under perform other types
of investments. The Fund expects that, not including the margin deposits or the
segregated accounts created in connection with index futures and other
derivatives, less than 5% of its total assets will be exposed to high quality
money market instruments such as securities issued by the U.S. government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. The Fund will at all times invest at least 65% of its total assets
in domestic common stocks and domestic equity derivatives. The Fund does not
expect that it will invest in long or short-term fixed income securities for
temporary defensive purposes.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
-9-
<PAGE> 13
DESCRIPTION AND RISKS OF FUND
INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage (either directly or, in the case of the
ICPA Fund, indirectly through investment in underlying Funds) and the risks
associated with their use. Please refer to the "Investment Objectives and
Policies" section above (or, in the case of the underlying Funds in which the
ICPA Fund may invest, in the GMO Trust Prospectus dated August 29, 1997) for
determination of which practices the Funds may engage in.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment
decisions for the Funds. The portfolio turnover rate of the FV Fund is shown
under the heading "Financial Highlights." Portfolio turnover for the ICPA Fund
is not expected to exceed 150%.
In any particular year, market conditions may well result in greater rates
than are presently anticipated. High portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by the relevant Funds, and may well involve realization of capital
gains that would be taxable when distributed to shareholders of the relevant
Funds unless such shareholders are themselves exempt. See "Taxes" below.
DIVERSIFIED PORTFOLIOS
It is a fundamental policy of the ICPA Fund and the FV 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.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit a Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the securities markets of the U.S. and developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent than in
the U.S. and developed foreign markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce a
Fund's income from such securities. Finally, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation in the
world debt markets, there is little historical data or related market experience
concerning the attributes of such instruments under all economic, market and
political conditions.
-10-
<PAGE> 14
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. 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 maintained 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
The Funds may make secured loans of portfolio securities amounting to not
more than one-third of the relevant Fund's 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
The Funds may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with a Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature, an
opportunity to participate in capital appreciation resulting from a market price
advance in a convertible security's underlying common stock. The price of a
convertible security is influenced by the market value of the underlying common
stock and tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. The Manager regards convertible securities as a form of equity
security.
-11-
<PAGE> 15
FUTURES AND OPTIONS
As described under "Investment Objectives and Policies" above, 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 Fund's investments in futures contracts and
related options.
OPTIONS. As has been noted above, the Funds may use options and (1) may
enter into contracts giving third parties the right to buy the Fund's portfolio
securities for a fixed price at a future date (writing "covered call options");
(2) may enter into contracts giving third parties the right to sell securities
to the Fund for a fixed price at a future date (writing "covered put options");
and (3) may buy the right to purchase securities from third parties ("call
options") or the right to sell securities to third parties ("put options") for a
fixed price at a future date.
WRITING COVERED OPTIONS. The 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.
The Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if 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 the 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.
-12-
<PAGE> 16
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, the Fund may purchase a security and then write a call option against
that security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which the Fund will be able to write and purchase call and
put options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
FUTURES. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm which is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted. See
Appendix A, "Risks and Limitations of Options, Futures and Swaps" for more
information concerning these practices and their accompanying risks.
The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known
-13-
<PAGE> 17
as variation margin, are made on a daily basis as the price of the underlying
futures contract fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as "marking to market." Prior to
the settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker, and the
purchaser realizes a loss or gain. In addition, a commission is paid on each
completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the same delivery date.
If the price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. The Funds may purchase futures contracts on various
securities indexes ("Index Futures"). 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 con tract to buy an integral
number of units of the particular securities index at a specified future date at
a price agreed upon when the contract is made. A unit is the value from time to
time of the 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 Funds
may engage in a variety of transactions involving the use of futures with
respect to U.S. Government Securities and other fixed income securities. The use
of interest rate futures involves risk.
-14-
<PAGE> 18
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
"Description 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. 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. The Fund may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that a Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, the Fund may purchase call options or write put
options as a substitute for the purchase of futures contracts. See "Description
and Risks of Fund Investment Practices -- Foreign Currency Transactions" for
more information regarding the currency hedging practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also
enter into futures contracts and buy and sell options thereon for investment.
For example, a Fund may invest in futures when its Manager believes that there
are not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
-15-
<PAGE> 19
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, the Funds may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
The use of swap contracts and other two-party contracts involves risk. See
Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more
detailed discussion of the limits, conditions and risks of the Funds'
investments in swaps and other two-party contracts.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. A Fund
will usually enter into swaps on a net basis, i.e., the two returns are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g., an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
-16-
<PAGE> 20
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. 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 the 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 contracts, when
aggregated with the Index Futures and equity swap 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, 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 at least equal to its obligations, if
any, under interest rate cap, floor and collar arrangements. As with futures
contracts, when a Fund uses notional amount contracts for risk management it is
only required to segregate assets equal to its net payment obligation, not the
notional amount of the contract. In those cases, the notional amount contract
will have the effect of providing a degree of investment leverage similar to the
leverage associated with non-segregated futures contracts. The Fund's use of
interest rate caps, floors and collars for the same or similar purposes as those
for which they use futures contracts and related options present the same risks
and similar opportunities to those associated with futures and related options.
For a description of certain limitations on the 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
-17-
<PAGE> 21
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.
The 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 Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the 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.
The 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, the 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.
Except to the extent that a Fund may use such contracts for risk
management, whenever a Fund enters into a foreign currency forward contract,
other than a forward contract entered into for hedging, it will maintain cash,
U.S. Government securities or other high grade debt obligations in a segregated
account with its custodian with a value, marked to market daily, equal to the
amount of the currency required to be delivered. A Fund's ability to engage in
forward contracts may be limited by tax considerations.
-18-
<PAGE> 22
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
The Funds may enter into repurchase agreements with banks and
broker-dealers by which a Fund acquires a security (usually an obligation of the
Government where the transaction is initiated or in whose currency the agreement
is denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the Fund
to expenses, delays and risks of loss including: (a) possible declines in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of income and lack of
access to income during this period and (c) inability to enforce rights and the
expenses involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities of
any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future income
of 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, the Funds
may temporarily invest a portion of its assets in cash or cash items pending
other investments or in connection with the maintenance of a segregated account.
These cash items must be of high quality and may include a number of money
market instruments such as securities issued by the United States government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. By investing only in high quality money market securities a Fund
will seek to minimize credit risk with respect to such investments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by the
U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S.
-19-
<PAGE> 23
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, the Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or both, in U.S. Government Securities and
Foreign Government Securities. These certificates of accrual and similar
instruments may be more volatile than other government securities.
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.
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.
-20-
<PAGE> 24
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which the Funds 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. A
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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
The 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
The 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% of net assets would be invested in such illiquid securities.
The Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
-21-
<PAGE> 25
In addition, the SEC staff considers equity swap contracts, caps, floors
and collars to be illiquid securities. Consequently, while the staff maintains
this position, the Fund will not enter into an equity swap contract or a reverse
equity swap contract or purchase a cap, floor or collar if, as a result of the
investment, the total value (i.e., marked-to-market value) of such investments
(without regard to their notional amount) together with that of all other
illiquid securities which the Fund owns would exceed 15% of the Fund's total
assets.
SPECIAL ASSET ALLOCATION FUND CONSIDERATIONS
The Manager does not charge an investment management fee for asset
allocation advice provided to the Asset Allocation Funds (including the ICPA
Fund), but certain other expenses such as custody, transfer agency and audit
fees will be borne by the Asset Allocation Funds. Investors in Asset Allocation
Funds will also indirectly bear a proportionate share of the Total Operating
Expenses (including investment management, custody, transfer agency, audit and
other Fund expenses) of the underlying Funds in which the Asset Allocation Funds
invest, as well as any purchase premiums or redemption fees charged by such
underlying Funds. Since the Manager will receive fees from the underlying Funds,
the Manager has a financial incentive to invest the assets of the Asset
Allocation Funds in underlying Funds with higher fees, despite the investment
interests of the Asset Allocation Funds. The Manager is legally obligated to
disregard that incentive in selecting shares of the underlying Funds.
ADDITIONAL INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS:
Without a vote of the majority of the outstanding voting securities of the
Funds, the Trust will not take any of the following actions with respect to the
Funds as indicated:
(1) Borrow money except under the following circumstances: (i) The Fund
may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt obligations; (ii) The
Fund may also borrow amounts equal to an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes, such as for
the clearance and settlement of portfolio transactions and to meet shareholder
redemption requests; (iii) The Fund may enter into transactions that are
technically borrowings under the 1940 Act because they involve the sale of a
security coupled with an agreement to repurchase that security (e.g., reverse
repurchase agreements, dollar rolls and other similar investment techniques)
without regard to the asset coverage restriction described in (i) above, so long
as and to the extent that the Fund establishes a segregated account with its
custodian in which it maintains cash and/or high grade debt securities equal in
value to its obligations in respect of these transactions. Under current
pronouncements of the 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.
(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 each
Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any one
industry.
-22-
<PAGE> 26
(8) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell financial futures contracts and options thereon.
(9) 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.
NON-FUNDAMENTAL RESTRICTIONS:
It is contrary to the present policy of 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).
(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.)
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
The ICPA Fund has three classes of shares, Class I, Class II and Class III
Shares, but is currently offering only Class III Shares. The FV Fund has four
classes of shares, Class I, Class II, Class III and Class IV Shares, but is
currently offering only Class III and Class IV Shares. Class IV Shares of the FV
Fund are for clients making very large investments in the FV Fund or making
investments in the FV Fund in conjunction with a very large commitment of assets
to GMO. See "Eligibility for Classes" below.
SHAREHOLDER SERVICE FEES
The principal economic difference among the various classes of shares is
the level of Shareholder Service Fee which the classes bear for client and
shareholder service, reporting and other support. The existence of multiple
classes reflects the fact that, as the size of
-23-
<PAGE> 27
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------
Fund Class I Class II Class III Class IV
-------------------------------------------------------------------------
ICPA Fund(1) 0.13% 0.07% 0.00% N/A
-------------------------------------------------------------------------
FV Fund 0.28% 0.22% 0.15% 0.13%
-------------------------------------------------------------------------
</TABLE>
ELIGIBILITY FOR CLASSES
CLASS I, CLASS II AND CLASS III SHARES: With certain exceptions described
below, eligibility for Class I, Class II, and Class III Shares depends on a
client's "TOTAL INVESTMENT" with GMO. For clients 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 May 31, 1996 and will subsequently be adjusted as
described below.
For clients establishing a relationship with GMO on or after June 1, 1996,
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 of the Funds is set forth in
the following table:
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------
CLASS OF SHARES MINIMUM TOTAL INVESTMENT
--------------------------------------------------------
Class I N/A
--------------------------------------------------------
Class II N/A
--------------------------------------------------------
Class III $1 Million
--------------------------------------------------------
</TABLE>
Investments by defined contribution pension plans (such as 401(k) plans)
will be accepted only in the Class of Shares with the highest Shareholder
Service Fee then available, regardless of the size of the investment, and will
not be eligible to convert to other classes with lower Shareholder Service Fees.
CLASS IV SHARES: Class IV Shares bear significantly lower Shareholder
Service Fees than other classes and are designed to accommodate clients making
very large investments in a particular Fund or that are making investments into
one or more Funds in conjunction with a very large commitment of assets to
investment management by GMO.
- -----------
(1) The ICPA Fund 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 ICPA Fund is the same as that borne by the Class I,
Class II and Class III shares, respectively, of the other GMO Funds.
-24-
<PAGE> 28
In order to purchase Class IV Shares, a client must meet EITHER (i) a
minimum "Total Fund Investment" requirement, which includes only a client's
total investment in the particular Fund for which this additional class of
shares is available; OR (ii) a minimum "Total Investment" requirement, each as
set forth in the table below:
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------
CLASS OF SHARES MINIMUM TOTAL FUND INVESTMENT MINIMUM TOTAL INVESTMENT
- --------------------------------------------------------------------------------
Class IV $125 million $250 million
- --------------------------------------------------------------------------------
</TABLE>
For clients with GMO accounts as of November 30, 1997, for purposes of
determining a client's eligibility for Class IV Shares only, a client's initial
Total Fund Investment and initial Total Investment will equal the market value
of such client's investments in the particular Fund or in all investments
advised by the Manager and its affiliates, as the case may be, as of
November 30, 1997.
For clients establishing a relationship with GMO on or after December 1,
1997, their Total Fund Investment and Total Investment for purposes of
determining eligibility for Class IV Shares will be determined similarly to the
determination of Total Investment for purposes of eligibility for Class I, Class
II and Class III Shares described above ( i.e., appreciation and depreciation of
Fund shares is not considered in either calculation; a client's Total Investment
is affected only by the amount of contributions to and withdrawals from Fund
accounts made by the client and changes in the market value of any non-mutual
fund investment with GMO or its affiliates as of the month-end prior to the date
that Total Investment is being computed; a client's Total Fund Investment is
affected only by the amount of contributions to and withdrawals from the
relevant Fund made by the client). Similar to Class I, Class II and Class III
Shares, it is assumed that any Fund redemptions or withdrawals made by a client
are satisfied first from market appreciation in their shares, so that a
redemption or withdrawal does not lower a client's Total Investment or Total
Fund Investment unless the redemption or withdrawal exceeds the value of market
appreciation. However, with respect to Class IV Shares only, a withdrawal from a
non-mutual fund account, or a withdrawal of Fund shares in excess of market
appreciation, will only affect a client's Total Investment or Total Fund
Investment if, on the date of computation, the aggregate value of such
withdrawals since the previous computation of Total Investment or Total Fund
Investment, as the case may be (the "prior computation date"), equals or exceeds
10% of the value of such client's Total Investment or Total Fund Investment as
of the prior computation date.
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 and on such other dates as may be determined by
the Manager (each a "DETERMINATION DATE") the amount of each client's Total
Investment and Total Fund Investment, 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 to purchase based on their Total Investment or
Total Fund Investment, as the case may be, on the Determination Date, and which
is then being offered by the Fund. The conversion will occur within 15 business
days following the Determination Date. Also, if a client makes an investment in
a GMO Fund or puts additional assets under GMO's management so as to cause the
client to be eligible for a new class of shares, such determination will be made
as of the close of business on the last day of the month in which the investment
was made, and the conversion will be effected within 15 business days of that
month-end.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the 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.
Investors should be aware that not all classes of all Funds are available
in all jurisdictions.
PURCHASE OF SHARES
Shares of a 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"). Shares may be purchased by calling (617) 330-7500. See "Purchase
Procedures" below.
-25-
<PAGE> 29
The purchase price of a share of the Fund is (i) the net asset value next
determined after a purchase order is received in good order plus (ii) a premium,
if any, established from time to time by the Trust for the 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 purchase premium.
The purchase premium currently in effect for the FV Fund is 0.15%. The
purchase premium currently in effect for the ICPA Fund is 0.65%.
Purchase premiums generally 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 the Fund may be waived in part or in full. The circumstances are
described in the footnotes to the Schedule of Fees and Expenses in this
Prospectus.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares.
Shares may be purchased (i) in cash, (ii) in exchange for securities on
deposit at The Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be exchanged are acceptable, or (iii) by a combination of such
securities and cash. In all cases, the Manager reserves the right to reject any
particular investment. Securities acceptable to the Manager as consideration for
Fund shares will be valued as set forth under "Determination of Net Asset Value"
(generally the last quoted sale price) as of the time of the next determination
of net asset value after such acceptance. All dividends, subscription or other
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the relevant Fund and must be delivered
to the Trust upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes may be realized by investors subject to federal
income taxation upon the exchange, depending upon the investor's basis in the
securities tendered.
The Manager will not approve securities as acceptable consideration for
Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; and (3) the securities may be acquired under the investment
restrictions applicable to the 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, 200 Clarendon Street,
Boston, Massachusetts 02116. Investors should be aware that approval of the
securities to be used for purchase must be obtained from the Manager prior to
this time. When the consideration is received by the Trust after the relevant
deadline, the purchase order is not considered to be in good order and is
required to be resubmitted on the following business day. With the prior consent
of the Manager, in certain circumstances the Manager may, in its discretion,
permit purchases based on receiving adequate written assurances that Federal
Funds or securities, as the case may be, will be delivered to the Trust by 2:00
p.m. on or prior to the fourth business day after such assurances are received.
PURCHASE PROCEDURES:
(a) GENERAL: Investors should call the Trust at (617) 330-7500 before
attempting to place an order for 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."
-26-
<PAGE> 30
A Purchase Order Form for 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 number 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. If a Purchase Order is mailed to
the Trust, it will be acted upon when received.
(d) PAYMENT: All Federal funds must be transmitted to Investors Bank &
Trust Company for the account of the specific Fund of GMO Trust. "Federal funds"
are monies credited to Investors Bank & Trust Company's account with the Federal
Reserve Bank of Boston.
Note: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above, but, in such cases, the
investor should carefully review confirmations sent by the Trust to verify that
the order was properly executed. The Trust cannot be held responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed on any business day in cash or in kind.
The redemption price is the net asset value per share next determined after
receipt of the redemption request in "good order" 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 fee currently in effect for the ICPA Fund is 0.11%. No
redemption fee is currently charged in connection with redemptions of shares of
the FV Fund.
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 the Fund may be waived in part or in full. The circumstances are
described in the footnotes to the Schedule of Fees and Expenses in 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 the Fund in-kind
will be selected by the Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Any in-kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
Payment on redemption will be made as promptly as possible and in any
event within seven days after the request for redemption is received by the
Trust in "good order." A redemption request is in "good order" if it includes
the exact name in which shares are registered, the investor's account number and
the number of shares or the dollar amount of shares to be redeemed and if it is
signed exactly in accordance with the form of registration. In addition, for a
redemption request to be in "good order" on a particular day, the investor's
request must be received by the Trust by 4:15 p.m. on a business day. When a
redemption request is received after 4:15 p.m., the redemption request will not
be considered to be in "good order" and is required to be resubmitted on the
following business day. Persons acting in a fiduciary capacity, or on behalf of
a corporation, partnership or trust must specify, in full, the capacity in which
they are acting. The redemption request will be considered "received" by the
Trust only after (i) it is mailed to, and received by, the Trust at the address
set forth above for purchase orders, OR (ii) it is faxed to the Trust at the
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-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.
-27-
<PAGE> 31
When opening an account with the Trust, shareholders will be required to
designate the account(s) to which funds or securities may be transferred upon
redemption. Designation of additional accounts and any change in the accounts
originally designated must be made in writing.
The Funds may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because the International Funds each hold portfolio
securities listed on foreign exchanges which may trade on days on which the New
York Stock Exchange is closed, the net asset value of such Funds' shares may be
significantly affected on days when shareholders have no access to such Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for the Fund once on each day
on which the New York Stock Exchange is open as of 4:15 p.m., New York City
Time, except that 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
The Funds intend 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. The Funds also intend to distribute
substantially all of its net long-term capital gains, if any, after giving
effect to any available
-28-
<PAGE> 32
capital loss carryovers. It is the policy of the Funds 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 the Funds is to declare and pay distributions of its
dividends, interest and foreign currency gains semi-annually. The Funds also
intend to distribute net short-term capital gains and net long-term capital
gains at least annually. Investors should be aware that by purchasing shares
shortly before the record date of a dividend or capital gains distribution, they
will pay the full price of the shares and shortly thereafter will receive some
portion of the price paid back as a taxable dividend or taxable capital gains
distribution.
All dividends and/or distributions will be paid in shares of the relevant
Fund, at net asset value, unless the shareholder elects to receive cash. There
is no purchase premium on reinvested dividends or distributions. Shareholders
may make this election by marking the appropriate box on the Application or by
writing to the Trust.
Certain of the Fund's investments, including assets "marked to the market"
for federal income tax purposes, debt obligations issued or purchased at a
discount and potentially so-called "indexed securities," will create taxable
income in excess of the cash they generate. In such cases, the Fund may be
required to sell assets (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. Distributions from a Fund will be taxable to
shareholders as ordinary income to the extent derived from the Fund's investment
income and net short-term gains. Pursuant to the Taxpayer Relief Act of 1997
(the "1997 Act"), two different tax rates apply to net capital gains (that is,
the excess of net gains from capital assets held for more than one year
("long-term capital assets") over net losses from capital assets held for not
more than one year ("short-term capital assets")). One rate (generally 28%)
applies to net gains on capital assets held for more than one year but not more
than 18 months ("mid-term gains") and a second, preferred rate (generally 20%)
applies to the balance of such net capital gains ("adjusted net capital gains").
Distributions of net capital gains will be treated in the hands of shareholders
as mid-term gains to the extent designated by the Fund as deriving from net
gains from assets held for more than one year but not more than 18 months, and
the balance will be treated as adjusted net capital gains. Distributions of
mid-term gains and adjusted net capital gains will be taxable to shareholders as
such, regardless of how long a shareholder has held the 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 (subject to a holding period requirement imposed by the 1997
Act) 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 the Fund from REITs will not qualify for the corporate
dividends-received deduction. The Fund's investments in REIT equity securities
may require the 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). The 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 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
-29-
<PAGE> 33
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 the 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 the Fund in
light of each shareholder's particular tax situation. Shareholders should also
consult their own tax advisors about consequences under foreign, state, local or
other applicable tax laws (including possible liability for federal alternative
minimum tax).
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder will ordinarily not be subject to U.S.
taxation, unless the recipient or seller is a nonresident alien individual who
is present in the United States for more than 182 days during the taxable year.
However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Federal regulations generally require the Funds to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and gains realized upon a sale of securities
paid to a shareholder if such shareholder fails to certify either that the TIN
furnished in connection with opening an account is correct or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Also, the IRS may notify a Fund
to institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a Federal income tax return. A TIN is either the Social
Security number or employer identification number of the record owner of the
account. Any tax withheld as a result of backup withholding does not constitute
an additional tax imposed on the record owner of the account, and may be claimed
as a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the total assets of a
Fund is represented by stock of foreign corporations, the Fund intends to make
an election 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 (including a holding period requirement
applied at both the Fund and shareholder level imposed by the 1997 Act).
Shareholders whose income from the Fund is not subject to U.S. taxation at the
graduated rates applicable to U.S. citizens, residents or domestic corporations
may receive substantially different tax treatment of distributions by the Fund,
and may be disadvantaged as a result of the election described in this
paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
As described above under the heading "Distributions," certain of the
Fund's investments, including assets "marked to the market" for federal income
tax purposes, debt obligations issued or purchased at a discount and potentially
so-called "index 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.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Fund's
securities and convert short-term capital gains or losses into long-term capital
gains or losses. Qualification requirements noted above may restrict the Fund's
ability to engage in these transactions,
-30-
<PAGE> 34
and these transactions may affect the amount, timing and character of
distributions to shareholders. The tax consequences of certain hedging
transactions have been modified by the 1997 Act.
Investment by the Fund in certain "passive foreign investment companies"
could subject the Fund to a U.S. federal income tax or other charge on
distributions received from the sale of its investment in such a company, which
tax cannot be eliminated by making distributions to Fund shareholders. However,
the Fund may elect to treat a passive foreign investment company as a "qualified
electing fund," or elect the mark-to-market election under proposed regulation
1.1291-8, which may have the effect of accelerating the recognition of income
(without the receipt of cash) and increase the amount required to be distributed
for the Fund to avoid taxation. Making either of these elections may therefore
require the Fund to liquidate other investments (including when it is not
advantageous to do so) to meet its distribution requirement, which may also
accelerate the recognition of gain and affect the Fund's total return.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
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
The Funds are 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 each Fund of the Trust, the
Manager selects and reviews the Fund's investments and provides executive and
other personnel for the management of the Trust. Pursuant to the Trust's
Agreement and Declaration of Trust, the Board of Trustees supervises the affairs
of the Trust as conducted by the Manager. In the event that the Manager ceases
to be the manager of any Fund, the right of the Trust to use the identifying
name "GMO" may be withdrawn.
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 the Funds 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 the Fund's annual expenses to specified limits (with certain
exclusions). These limits and the terms applicable to them are described under
the Schedule of Fees and Expenses.
During the fiscal year ended February 28, 1997, the Manager received, as
compensation for management services rendered in such year (after waiver), an
amount equal to 0.59% of the FV Fund's average daily net assets.
Mr. Richard A. Mayo has been primarily responsible for the day-to-day
management of the FV Fund since the inception of the Fund. Mr. R. Jeremy
Grantham and Mr. Christopher Darnell will be primarily responsible for the
day-to-day management of the ICPA Fund.
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.
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.
-31-
<PAGE> 35
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 and classes of such shares. The Trusts's shares are
presently divided into thirty-three series of shares, one for each of the ICPA
Fund and FV Fund, and one for each of the Pelican Fund, Core Fund, Tobacco-Free
Core Fund, Value Fund, Growth Fund, U.S. Sector 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, Evolving Countries Fund, Global Properties Fund,
Domestic Bond Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B
Fund, International Bond Fund, Currency Hedged International Bond Fund, Global
Bond Fund, Emerging Country Debt Fund, Short-Term Income Fund, Global Hedged
Equity Fund, Inflation Indexed Bond Fund, International Equity Allocation Fund,
World Equity Allocation Fund, Global (U.S.+) Equity Allocation Fund, and Global
Balanced Allocation Fund, and up to eight classes of shares. 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 November 25, 1997, Leland Stanford Junior University II held greater
than 25% of the outstanding shares of the FV Fund. As a result, such shareholder
may be deemed to "control" the FV Fund as such term is defined in the 1940 Act.
Shareholders could, under certain circumstances, be held personally liable
for the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of that liability is considered remote since it may
arise only in very limited circumstances.
-32-
<PAGE> 36
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, the
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that the Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, the
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control
over when the underlying securities or futures contract must be sold, in the
case of a call option, or purchased, in the case of a put option, since the
writer may be assigned an exercise notice at any time prior to the termination
of the obligation. If an option expires unexercised, the writer realizes a gain
in the amount of the premium. Such a gain, of course, may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security or futures contract during the option period. If a call
option is exercised, the writer realizes a gain or loss from the sale of the
underlying security or futures contract. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security or
futures contract at the exercise price, which will usually exceed the then
market value of the underlying security or futures contract.
An exchange-traded option may be closed out only on a national securities
exchange ("Exchange") which generally provides a liquid secondary market for an
option of the same series. An over-the-counter option may be closed out only
with the other party to the option transaction. If a liquid secondary market for
an exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund holding the option would have to exercise the option in order to realize
any profit. For example, in the case of a written call option, if the Fund is
unable to effect a closing purchase transaction in a secondary market (in the
case of a listed option) or with the purchaser of the option (in the case of an
over-the-counter-option), the Fund will not be able to sell the underlying
security (or futures contract) until the option expires or it delivers the
underlying security (or futures contract) upon exercise. Reasons for the absence
of a liquid secondary market on an Exchange include the following: (i) there may
be insufficient trading interest in certain options; (ii) restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that Exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange should continue to be
exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number of
options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts
involves risk. If the futures are used for hedging, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or currency being hedged. The correlation
is higher between price movements of futures contracts and the instrument
underlying that futures contract. The correlation is lower when futures are used
to hedge securities other than such underlying instrument, such as when a
futures contract on an index of securities is used to hedge a single security, a
futures contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency (e.g., the German Mark) is used to hedge a security denominated
in another currency (e.g., the Spanish Peseta). In the event of an imperfect
correlation between a futures position and a portfolio position (or anticipated
position) which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
always possible to hedge fully or perfectly against currency fluctuations
affecting the value of the securities denominated in foreign currencies because
the value of such securities also is likely to fluctuate as a result of
independent factors not related to currency fluctuations. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
contracts if the
-33-
<PAGE> 37
volatility of the price of the hedged securities is historically less than that
of the futures contract.
As noted in the Prospectus, the Fund may also purchase futures contracts
(or options thereon) as an anticipatory hedge against a possible increase in the
price of currency in which is denominated the securities the Fund anticipates
purchasing. In such instances, it is possible that the currency may instead
decline. If the Fund does not then invest in such securities because of concern
as to possible further market and/or currency decline or for other reasons, the
Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. Short positions in index
futures may be closed out only by entering into a futures contract purchase on
the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
a Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realized in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
RISK FACTORS IN SWAP CONTRACTS, OTC OPTIONS AND OTHER TWO-PARTY CONTRACTS.
A Fund may only close out a swap, contract for differences, cap floor or collar
or OTC option, with the particular counterparty. Also, if the counterparty
defaults, a Fund will have contractual remedies pursuant to the agreement
related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, a Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor subject to the oversight of the Trustees, the creditworthiness
of contract counterparties and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard and Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the counterparty may be adversely affected by larger-than-average
volatility in the markets, even if the counterparty's net market exposure is
small relative to its capital. The management of caps, floors, collars and swaps
may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.
ADDITIONAL REGULATORY LIMITATIONS ON THE USE OF FUTURES AND RELATED
OPTIONS, INTEREST RATE FLOORS, CAPS AND COLLARS AND INTEREST RATE AND CURRENCY
SWAP CONTRACTS. In accordance with CFTC regulations, investments by any Fund as
provided in the Prospectus in futures contracts and related options for purposes
other than bona fide hedging are limited such that the aggregate amount that a
Fund may commit to initial margin on such contracts or time premiums on such
options may not exceed 5% of that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective
obligations under equity swap contracts, reverse equity swap contracts or Index
Futures are senior securities and, accordingly, the Fund will not treat them as
being subject to its borrowing restrictions. However, the net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each equity swap contract will be accrued on a daily basis and an amount of
cash, U.S. Government Securities or other high grade debt obligations having an
aggregate market value at least equal to the accrued excess will be 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.
-34-
<PAGE> 38
APPENDIX B
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's Corporation ("Standard &
Poor's") are current assessments of the likelihood of timely payment of debts
having original maturities of no more than 365 days. Commercial paper rated A-1
by Standard & Poor's indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Commercial paper
rated A-2 by Standard and Poor's indicates that capacity for timely payment on
issues is strong. However, the relative degree of safety is not as high as for
issues designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternate liquidity is maintained.
CORPORATE DEBT RATINGS
STANDARD & POOR'S CORPORATION. A Standard & Poor's corporate debt rating
is a current assessment of the creditworthiness of an obligor with respect to a
specific obligation. The following is a summary of the ratings used by Standard
& Poor's for corporate debt:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. The following is a summary of the ratings
used by Moody's Investor Services, Inc. for corporate debt:
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.(1)
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
-35-
<PAGE> 39
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.
-36-
<PAGE> 40
- --------------------------------------------------------------------------------
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries regarding Shares
to Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
(1-617-330-7500)
- --------------------------------------------------------------------------------
-37-
<PAGE> 41
GMO INTERNATIONAL CORE PLUS ALLOCATION FUND
GMO FUNDAMENTAL VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 18, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the GMO International Core Plus Allocation
Fund and GMO Fundamental Value Fund Prospectus dated February 18, 1998, 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.
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Caption Page
------- ----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES............................................1
MISCELLANEOUS INVESTMENT PRACTICES............................................1
MANAGEMENT OF THE TRUST.......................................................1
INVESTMENT ADVISORY AND OTHER SERVICES........................................3
PORTFOLIO TRANSACTIONS........................................................5
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES..............................7
FINANCIAL STATEMENTS.........................................................10
SPECIMEN PRICE MAKE-UP SHEET.................................................11
</TABLE>
-i-
<PAGE> 43
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of the GMO International Core
Plus Allocation Fund (the "ICPA Fund") and the GMO Fundamental Value Fund (the
"FV Fund," and together with the ICPA Fund, the "Funds") are described in the
Prospectus. Unless otherwise indicated in the Prospectus or this Statement of
Additional Information, the investment objective and policies of the Funds may
be changed without shareholder approval.
MISCELLANEOUS INVESTMENT PRACTICES
INDEX FUTURES. As stated in the Prospectus under the heading
"Description and Risks of Fund Investments -- Futures and Options," the Funds
may (either directly or, in the case of the ICPA Fund, indirectly through
underlying Funds) purchase futures contracts on various securities indexes
("Index Futures"). As indicated in the Prospectus, an Index Future is a contract
to buy or sell an integral number of units of the particular stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the value from time to time of the relevant index. Entering into a contract
to buy units is commonly referred to as buying or purchasing a contract or
holding a long position in the relevant index.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if the Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM*. President-Quantitative and Trustee of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
HARVEY R. MARGOLIS. Trustee of the Trust. Mathematics Professor,
Boston College.
JAY O. LIGHT. Trustee of the Trust. Professor of Business
Administration, Harvard University; Senior Associate Dean, Harvard
University (1988-1992).
<PAGE> 44
EYK DEL MOL VAN OTTERLOO. President-International of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC
RICHARD MAYO. President-Domestic Active of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC
KINGSLEY DURANT. Vice President, Treasurer and Secretary of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
SUSAN RANDALL HARBERT. Secretary and Assistant Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
WILLIAM R. ROYER, ESQ. Vice President and Assistant Treasurer of
the Trust. General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC
(January, 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September, 1992 - January, 1995).
JUI LAI. Secretary of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC
ANN SPRUILL. Secretary of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC
ALISON E. BAUR, ESQ. Clerk of the Trust. Associate General
Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (February 1997 -
Present). Attorney, Securities and Exchange Commission (April 1991
- January 1997).
ROBERT V. BROKAW, JR. Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC
*Trustee is deemed to be an "interested person" of the Trust and the Manager, as
defined by the 1940 Act.
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
Funds.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
-2-
<PAGE> 45
<TABLE>
<CAPTION>
------------------------------------------------------------------------
NAME OF PERSON, TOTAL ANNUAL COMPENSATION FROM
POSITION THE TRUST
------------------------------------------------------------------------
<S> <C>
Harvey R. Margolis, Trustee $70,000
------------------------------------------------------------------------
Jay O. Light, Trustee $70,000
------------------------------------------------------------------------
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai and Brokaw, and Mses.
Harbert and Spruill, as members of the Manager, will benefit from the management
fees paid by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACTS
As disclosed in the Prospectus under the heading "Management of the
Fund," under separate Management Contracts (each a "Management Contract")
between the Trust and Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager"),
subject to such policies as the Trustees of the Trust may determine, the Manager
will furnish continuously an investment program for each Fund and will make
investment decisions on behalf of the Funds 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 ICPA Fund, also 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 each Management
Contract is subject to reduction to the extent that in any year the expenses of
the Fund exceed the limits on investment company expenses imposed by any statute
or regulatory authority of any jurisdiction in which shares of the Fund are
qualified for offer and sale. The
-3-
<PAGE> 46
term "expenses" is defined in the statutes or regulations of such jurisdictions,
and, generally speaking, excludes brokerage commissions, taxes, interest and
extraordinary expenses. The Fund is not currently subject to any state imposed
limit on expenses.
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 each Fund's initial sole shareholder in connection with the
organization of the Trust and the establishment of the Fund. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) vote, cast in person at a meeting called for that purpose, of a majority
of those Trustees who are not "interested persons" of the Manager or the Trust,
and by (ii) the majority vote of either the full Board of Trustees or the vote
of a majority of the outstanding shares of the relevant Fund. Each Management
Contract automatically terminates on assignment, and is terminable on not more
than 60 days' notice by the Trust to the Manager. In addition, each Management
Contract may be terminated on not more than 60 days' written notice by the
Manager to the Trust.
In the last three fiscal years, the FV Fund has paid the following
amounts as Management Fees to the Manager pursuant to its Management Contract:
FUNDAMENTAL VALUE FUND
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
Year ended 2/28/97 $1,627,950 $ 347,372 $ 1,280,578
Year ended 2/29/96 $1,496,155 $ 108,537 $ 1,387,618
Year ended 2/28/95 $1,297,348 $ 118,250 $ 1,179,098
</TABLE>
CUSTODIAL ARRANGEMENTS. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, and Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109 serve as the Trust's
custodians on behalf of the Funds. As such, IBT and BBH hold in safekeeping
certificated securities and cash belonging to each Fund and, in such capacity,
are the registered owners of securities in book-entry form belonging to the
Funds. Upon instruction, IBT and BBH receive and deliver cash and securities of
the Funds in connection with Funds' transactions and collect all dividends and
other distributions made with respect to the Funds' portfolio securities. IBT
and BBH also maintain certain accounts and records of the Trust and calculate
the total net asset value, total net income and net asset value per share of the
Funds on a daily basis.
-4-
<PAGE> 47
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 ("GMO") 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.
The Trust entered into the Servicing Agreement with GMO on May 30,
1996. For the fiscal year ended February 28, 1997, pursuant to the Servicing
Agreement, the FV Fund paid GMO $244,167.
INDEPENDENT ACCOUNTANTS. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts annual audits of the Trust's financial statements,
assists in the preparation of each Fund's federal and state income tax returns,
consults with the Trust as to matters of accounting and federal and state income
taxation and provides assistance in connection with the preparation of various
Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Funds and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account's being
preferred over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to
-5-
<PAGE> 48
transfer either by law or liquidity of market; and (d) such securities have a
value which is readily ascertainable as evidenced by a listing on the American
Stock Exchange, the New York Stock Exchange, NASDAQ or a recognized foreign
exchange.
BROKERAGE AND RESEARCH SERVICES. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
Over-the-counter transactions often involve dealers acting for their
own account.
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 FV Fund, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
1995 1996 1997 TOTAL
<S> <C> <C> <C> <C>
Fundamental Value Fund $444,239 $270,800 $295,379 $1,010,418
</TABLE>
-6-
<PAGE> 49
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-three series: the ICPA Fund; the FV Fund; the Evolving Countries Fund;
the Core Fund; the Value Fund; the Growth Fund; the Pelican Fund; the Short-Term
Income Fund; the Small Cap 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 B Fund; the U.S. Bond/Global Alpha A
Fund; the International Equity Allocation Fund; the World Equity Allocation
Fund; the Global (U.S.+) Equity Allocation Fund; and the Global Balanced
Allocation Fund. Interests in each portfolio (Fund) are represented by shares of
the corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
-7-
<PAGE> 50
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
-8-
<PAGE> 51
new and existing series or sub-series of Trust shares or other provisions
relating to Trust shares in response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OF MORE OF THE FV 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 III Shares of the FV Fund as of November 25, 1997:
<TABLE>
<CAPTION>
Percentage
Name Address Interest
- ---- ------- ----------
<S> <C> <C>
Leland Stanford Junior Stanford Management Company 52.75%
University II 2770 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
-9-
<PAGE> 52
<TABLE>
<S> <C> <C>
Berea College Box 2306 21.23%
Attn: Parry Poynter, Assoc. Controller
CPO 2306
Berea, KY 40404
Wachovia Bank NA c/o Wachovia Bank NA 15.71%
Trustees for RJR Nabisco 301 North Main Street MC - NC 31057
Defined Benefits Master Winston-Salem, NC 27150-3099
Trust -- Fundamental Value
Account
Princeton University TR Attn: John D. Sweeney 10.09%
P.O. Box 35
Princeton, NJ 08544
</TABLE>
FINANCIAL STATEMENTS
The FV Fund's audited financial statements for the fiscal year ended
February 28, 1997 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on May 7, 1997 pursuant to Section 30(d) of
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are hereby incorporated in this Statement of Additional Information
by reference. In addition, the FV Fund's unaudited financial statements for the
six months ended August 31, 1997 included in the Trust's Semi-Annual Reports
filed with the Securities and Exchange Commission on November 7, 1997 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.
-10-
<PAGE> 53
SPECIMEN PRICE MAKE-UP SHEET
Following are computations of the total offering price per share for
the FV Fund based upon its net asset value and shares of beneficial interest
outstanding at the close of business on August 31, 1997:
FV FUND - CLASS III
<TABLE>
<S> <C>
Net Assets at Value (Equivalent to $17.86
per share based on 11,632,360 shares of
beneficial interest outstanding) $207,729,507
Offering Price ($17.86 x 100/99.85)* $ 17.89
</TABLE>
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Prospectus.
-11-
<PAGE> 54
GMO TRUST
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: See "Financial Highlights" in the Prospectus and
"Financial Statements" in the Statement of Additional Information. The
Financial Statements relating to the GMO Fundamental Value Fund (the "FV
Fund") required by Item 23 of Form N-1A are hereby incorporated by
reference to the Annual Reports to shareholders previously filed with the
Commission by means of EDGAR pursuant to the requirements of Section
30(d) of the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules promulgated thereunder. This Post-Effective Amendment
relates solely to the FV Fund and the GMO International Core Plus
Allocation Fund (the "ICPA Fund"). No information relating to any other
series of the registrant is amended or superseded hereby.
(b) Exhibits
1. Amended and Restated Agreement and Declaration of Trust -- Exhibit 1.
2. Amended and Restated By-laws of the Trust(2).
3. None.
4. Not Applicable.
5. (a) Form of Management Contract between the Trust, on behalf of its
FV Fund, and Grantham, Mayo, Van Otterloo & Co. LLC ("GMO")(1);
(b) Form of Management Contract between the Trust, on behalf of its
ICPA Fund, and GMO -- Exhibit 5.
6. None.
7. None.
<PAGE> 55
8. (a) Custodian Agreement (the "IBT Custodian Agreement") among the
Trust, on behalf of its GMO Core Fund, GMO Currency Hedged
International Bond Fund (formerly "GMO SAF Core Fund"), GMO
Value Fund (formerly "GMO Value Allocation Fund"), GMO Growth
Fund (formerly "GMO Growth Allocation Fund"), and GMO Short-Term
Income Fund, GMO and Investors Bank & Trust Company ("IBT")(1);
(b) Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its FV Fund, GMO and
IBT(1);
(c) Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its ICPA Fund, GMO and
IBT -- Exhibit 8.
9. (a) Transfer Agency Agreement among the Trust, on behalf of its GMO
Core Fund, GMO Currency Hedged International Bond Fund, GMO
Growth Fund (formerly "GMO Growth Allocation Fund"), GMO Value
Fund (formerly "GMO Growth Allocation Fund"), GMO Short-Term
Income Fund, GMO International Core Fund and GMO Japan Fund, GMO
and IBT(1);
(b) Form of Letter Agreement to the Transfer Agency Agreement among
the Trust, on behalf of its FV Fund, GMO and IBT(1);
(c) Form of Letter Agreement to the Transfer Agency Agreement among
the Trust, on behalf of its ICPA Fund, GMO and IBT --
Exhibit 9.1;
(d) Form of Notification of Fee Waiver and Expense Limitation by GMO
to the Trust relating to all Funds of the Trust -- Exhibit 9.2;
(e) Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of the Funds, and GMO -- Exhibit 9.3.
10. Opinion and Consent of Ropes & Gray (2).
11. Consent of Price Waterhouse LLP -- Exhibit 11.
-2-
<PAGE> 56
12. None.
13. None.
14. Prototype Retirement Plans(1).
15. None.
16. Not Applicable.
17. Financial Data Schedule -- Exhibit 17.
18. Form of Rule 18f-3 Multiclass Plan -- Exhibit 18.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the number of record holders of each
class of securities of the Funds included in this Post-Effective
Amendment as of November 25, 1997:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Shares of Beneficial Interest
FV Fund (Class III) 12
</TABLE>
Item 27. INDEMNIFICATION
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 29. PRINCIPAL UNDERWRITERS
Not Applicable.
-3-
<PAGE> 57
Item 30. LOCATION OF ACCOUNTS AND RECORDS
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 31. MANAGEMENT SERVICES
Not Applicable.
Item 32. UNDERTAKINGS
(a) See Item 33 of Post-Effective Amendment No. 1 which is hereby
incorporated by reference.
(b) Registrant hereby undertakes to file a post-effective amendment using
financial statements of the ICPA Fund, which need not be certified,
within four to six months from the latter of the effective date of
this Post-Effective Amendment No. 40 to Registrant's Registration
Statement under the Securities Act of 1933, as amended (the "1933
Act"), and Post-Effective Amendment No. 42 to Registrant's
Registration Statement under the 1940 Act, and the date on which
shares of the ICPA Fund are first sold (other than shares sold for
seed money).
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders containing the information required by Item 5A
of Form N-1A omitted from the Prospectus, upon request and without
charge.
- ----------------
(1) = Previously manually filed with the Securities and Exchange Commission and
incorporated herein by reference.
(2) = Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference.
-4-
<PAGE> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the
"Securities Act") and the Investment Company Act of 1940 (the "1940 Act"), the
Registrant has duly caused this Post- Effective Amendment No. 40 to the Trust's
Registration Statement under the Securities Act and Post-Effective Amendment No.
42 under the 1940 Act, to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston and The Commonwealth of Massachusetts, on
the 4th day of December, 1997.
GMO Trust
By: R. JEREMY GRANTHAM*
----------------------------
R. Jeremy Grantham
President - Quantitative;
Principal Executive Officer;
Title: Trustee
Pursuant to the Securities Act, this Post-Effective Amendment No. 40 to
the Trust's Registration Statement under the Securities Act has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
R. JEREMY GRANTHAM* President - Quantitative; Principal December 4, 1997
- ------------------- Executive Officer; Trustee
R. Jeremy Grantham
KINGSLEY DURANT* Treasurer; Principal Financial and December 4, 1997
- ------------------- Accounting Officer
Kingsley Durant
HARVEY R. MARGOLIS* Trustee December 4, 1997
- -------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee December 4, 1997
- -------------------
Jay O. Light
* By: /S/ WILLIAM R. ROYER
--------------------
William R. Royer
Attorney-in-Fact
</TABLE>
<PAGE> 59
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
President-Domestic;
Principal Executive
/S/ R. Jeremy Grantham Officer; Trustee March 12, 1996
- -------------------------
R. Jeremy Grantham
/S/ Eyk H.A. Van Otterloo President-International March 12, 1996
- -------------------------
Eyk H.A. Van Otterloo
/S/ Harvey Margolis Trustee March 12, 1996
- -------------------------
Harvey Margolis
Treasurer; Principal
Financial and
/S/ Kingsley Durant Accounting Officer March 12, 1996
- -------------------------
Kingsley Durant
</TABLE>
<PAGE> 60
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/S/ JAY O. LIGHT Trustee May 23, 1996
- -------------------
Jay O. Light
</TABLE>
<PAGE> 61
EXHIBIT INDEX
GMO TRUST
<TABLE>
<CAPTION>
Exhibit No. Title of Exhibit
- ----------- ----------------
<S> <C>
1 Form of Amended and Restated Agreement and Declaration of Trust.
5 Form of Management Contract between the Trust, on behalf of the
ICPA Fund, and GMO.
8 Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its ICPA Fund, GMO and
IBT.
9.1 Form of Letter Agreement to the Transfer Agency Agreement among
the Trust, on behalf of its ICPA Fund, GMO and IBT.
9.2 Form of Notification of Fee Waiver and Expense Limitation by GMO
to the Trust relating to all Funds of the Trust.
9.3 Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of the Funds, and GMO.
11 Consent of Price Waterhouse LLP
17 Financial Data Schedules - Fundamental Value Fund
18 Form of Rule 18f-3 Multiclass Plan
</TABLE>
<PAGE> 1
EXHIBIT 1
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
GMO TRUST
THIS AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made at
Boston, Massachusetts this day of December, 1997 by the Trustees hereunder and
the holders of shares of beneficial interest issued hereunder and to be issued
hereunder as hereinafter provided:
WITNESSETH that
WHEREAS the Trustees desire to restate all prior Amendments to the
original Agreement and Declaration of Trust made to date and additionally desire
to amend and restate this Agreement and Declaration of Trust in connection with
the creation of Classes within each Series of the GMO Trust pursuant to the
power of the Trustees set forth in Article III, Section 5 of the original
Agreement and Declaration of Trust.
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that this Amended and
Restated Agreement and Declaration of Trust be filed with the Secretary of The
Commonwealth of Massachusetts and with the City Clerk of the City of Boston and
do hereby declare that they will hold all cash, securities and other assets,
which they may from time to time acquire in any manner as Trustees hereunder IN
TRUST to manage and dispose of the same upon the following terms and conditions
for the pro rata benefit of the holders from time to time of Shares in this
Trust as hereinafter set forth.
ARTICLE I.
Name and Definitions
SECTION 1. This Trust shall be known as GMO Trust with its principal place of
business at 40 Rowes Wharf, Boston, Massachusetts 02110, and the Trustees shall
conduct the business of the Trust under that name or any other name as they may
from time to time determine.
<PAGE> 2
SECTION 2. DEFINITIONS. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) "Trust" refers to the Massachusetts business trust established by this
Amended and Restated Agreement and Declaration of Trust, as amended from time to
time;
(b) "Trustees" refers to the Trustees of the Trust named in Article IV
hereof or elected in accordance with such Article;
(c) "Shares" means the equal proportionate units of interest into which the
beneficial interest in the Trust or in the Trust property belonging to any
Series of the Trust (or in the property belonging to any Series allocable to any
Class of that Series) (as the context may require) shall be divided from time to
time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(f) The terms "Commission" and "principal underwriter" shall have the
meanings given to them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust, as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time;
(i) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision;
(j) "Series" refers to Series of Shares established and designated under or
in accordance with the provisions of Article III; and
(k) "Class" refers to any Class of Shares established and designated under
or in accordance with the provisions of Article III. The Shares of any Class
shall represent a subset of Shares of a Series, and together with all other
Classes of the same Series, shall constitute all Shares of that Series.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in
-2-
<PAGE> 3
securities (including options), debt instruments, commodities, commodity
contracts and options thereon.
ARTICLE III.
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, without
par value. Subject to the provisions of Section 6 of this Article III, each
Share shall have voting rights as provided in Article V hereof, and holders of
the Shares of any Series or Class shall be entitled to receive dividends, when
and as declared with respect thereto in the manner provided in Article VI,
Section 1 hereof. No Share shall have any priority or preference over any other
Share of the same Series and Class with respect to dividends or distributions
upon termination of the Trust or of such Series or Class made pursuant to
Article VIII, Section 4 hereof. All dividends and distributions shall be made
ratably among all Shareholders of a particular Series or Class from the assets
belonging to such Series (or, in the case of a Class, allocable to such Class)
according to the number of Shares of such Series or Class held of record by such
Shareholders on the record date for any dividend or on the date of termination,
as the case may be. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust. The
Trust may from time to time divide or combine the Shares of any particular
Series or Class into a greater or lesser number of Shares of that Series or
Class without thereby changing the proportionate beneficial interest of the
Shares of that Series or Class in the assets belonging to that Series (or, in
the case of a Class, allocable to such Class) in any way affecting the rights of
Shares of any other Series or Class.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be recorded on
the books of the Trust or a transfer or similar agent for the Trust, which books
shall be maintained separately for the Shares of each Series and Class. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the transfer of Shares of each Series and
Class and similar matters. The record books of the Trust as kept by the Trust or
any transfer or similar agent, as the case may be, shall be conclusive as to who
are the Shareholders of each Series and Class and as to the number of Shares of
each Series and Class held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. The Trustees shall accept investments in
the Trust from such persons and on such terms and for such consideration as they
from time to time authorize.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to
-3-
<PAGE> 4
the terms hereof and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to terminate the same nor
entitle the representative of any deceased Shareholder to an accounting or to
take any action in court or elsewhere against the Trust or the Trustees, but
entitles such representative only to the rights of said deceased Shareholder
under this Trust. Ownership of Shares shall not entitle the Shareholder to any
title in or to the whole or any part of the Trust property or right to call for
a partition or division of the same or for an accounting, nor shall the
ownership of Shares constitute the Shareholders partners. Neither the Trust nor
the Trustees, nor any officer, employee or agent of the Trust shall have any
power to bind personally any Shareholders, nor except as specifically provided
herein to call upon any Shareholder for the payment of any sum of money or
assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay.
SECTION 5. POWER OF TRUSTEES TO CHANGE PROVISIONS RELATING TO SHARES.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as provided
elsewhere herein, the Trustees shall have the power to amend this Declaration of
Trust, at any time and from time to time, in such manner as the Trustees may
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust for the purpose of (i) responding
to or complying with any regulations, orders, rulings or interpretations of any
governmental agency or any laws, now or hereafter applicable to the Trust, or
(ii) designating and establishing Series and Classes in addition to the Series
and Classes established in Section 6 of this Article III; provided that before
adopting any such amendment without Shareholder approval the Trustees shall
determine that it is consistent with the fair and equitable treatment of all
Shareholders. The establishment and designation of any Series or Class of Shares
in addition to the Series and Classes established and designated in Section 6 of
this Article III shall be effective upon the execution by a majority of the then
Trustees of an amendment to this Declaration of Trust, taking the form of a
complete restatement or otherwise, setting forth such establishment and
designation and the relative rights and preferences of such Series or Class, as
the case may be, or as otherwise provided in such instrument.
Without limiting the generality of the foregoing, the Trustees may, for
the above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or Classes of Shares (in addition to any
Series or Classes already existing or otherwise) with such rights and
preferences and such eligibility requirements for investment therein as the
Trustees shall determine and reclassify any or all outstanding Shares as shares
of particular Series or Classes in accordance with such eligibility
requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j) of
Section 6 of this Article III;
-4-
<PAGE> 5
(c) combine one or more Series or Classes of Shares into a single Series or
Class on such terms and conditions as the Trustees shall determine;
(d) change or eliminate any eligibility requirements for investment in
Shares of any Series or Class, including without limitation the power to provide
for the issue of Shares of any Series or Class in connection with any merger or
consolidation of the Trust with another trust or company or any acquisition by
the Trust of part or all of the assets of another trust or company;
(e) change the designation of any Series or Class of Shares;
(f) change the method of allocating dividends among the various Series and
Classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any
specific items of income or expense of the Trust to one or more Series or
Classes of Shares; and
(h) specifically allocate assets to any or all Series or Classes of Shares
or create one or more additional Series or Classes of Shares which are preferred
over all other Series or Classes of Shares in respect of assets specifically
allocated thereto or any dividends paid by the Trust with respect to any net
income, however determined, earned from the investment and reinvestment of any
assets so allocated or otherwise and provide for any special voting or other
rights with respect to such Series or Classes.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SERIES. Without limiting the
authority of the Trustees set forth in Section 5, INTER ALIA, to establish and
designate any further Series or Classes or to modify the rights and preferences
of any Series, each Series set forth on Schedule 3.6 hereto (as may be amended
from time to time by the Trustees) shall be, and are hereby, established and
designated. In addition, with respect to each such Series, the Class I Shares,
Class II Shares, Class III Shares, Class IV Shares, Class V Shares, Class VI
Shares, Class VII Shares and Class VIII Shares which each such Series may issue
from time to time, shall be, and are hereby, established and designated, which
Classes shall have the respective rights and preferences as are set forth in
Exhibit 3.6 attached hereto as it may be amended from time to time by the Board
of Trustees.
Shares of each Series (or Class, as the case may be) established in this
Section 6 shall have the following relative rights and preferences:
(a) ASSETS BELONGING TO SERIES. All consideration received by the Trust for
the issue or sale of Shares of a particular Series, together with all assets in
which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or
-5-
<PAGE> 6
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of account of the Trust.
Such consideration, assets, income, earnings, profits and proceeds thereof, from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds, in whatever form the same may
be, are herein referred to as "assets belonging to" that Series. In the event
that there are any assets, income, earnings, profits and proceeds thereof, funds
or payments which are not readily identifiable as belonging to any particular
Series (collectively "General Assets"), the Trustees shall allocate such General
Assets to, between or among any one or more of the Series established and
designated from time to time in such manner and on such basis as they, in their
sole discretion, deem fair and equitable, and any General Asset so allocated to
a particular Series shall belong to that Series. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of all Series for
all purposes.
(b) LIABILITIES BELONGING TO SERIES. The assets belonging to each
particular Series shall be charged solely with the liabilities of the Trust in
respect to that Series, expenses, costs, charges and reserves attributable to
that Series, and any general liabilities of the Trust which are not readily
identifiable as belonging to any particular Series but which are allocated and
charged by the Trustees to and among any one or more of the Series established
and designated from time to time in a manner and on such basis as the Trustees
in their sole discretion deem fair and equitable. The liabilities, expenses,
costs, charges, and reserves so charged to a Series are herein referred to as
"liabilities belonging to" that Series. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive and
binding upon the holders of all Series for all purposes.
(c) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS, AND REPURCHASES. Notwithstanding
any other provisions of this Declaration, including, without limitation, Article
VI, no dividend or distribution (including, without limitation, any distribution
paid upon termination of the Trust or of any Series or Class) with respect to,
nor any redemption or repurchase of, the Shares of any Series shall be effected
by the Trust other than from the assets belonging to such Series, nor shall any
Shareholder of any particular Series otherwise have any right or claim against
the assets belonging to any other Series except to the extent that such
Shareholder has such a right or claim hereunder as a Shareholder of such other
Series.
(d) VOTING. Notwithstanding any of the other provisions of this
Declaration, including, without limitation, Section 1 of Article V, the
Shareholders of any particular Series or Class shall not be entitled to vote on
any matters as to which such Series or Class is not affected except as otherwise
required by the 1940 Act or other applicable law. On any matter submitted to a
vote of Shareholders, all Shares of the Trust then entitled to vote shall be
voted by individual Series, unless otherwise required by the 1940 Act or other
applicable law.
-6-
<PAGE> 7
(e) EQUALITY. All the Shares of each particular Class of a Series shall
represent an equal proportionate interest in the assets allocable to that Class,
and each Share of any particular Series shall be equal to each other Share of
that Series (subject to the liabilities allocated to each Class of that Series).
(f) FRACTIONS. Any fractional Share of a Series or Class shall carry
proportionately all the rights and obligations of a whole share of that Series
or Class, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) EXCHANGE PRIVILEGE. The Trustees shall have the authority to provide
that the holders of Shares of any Series or Class shall have the right to
exchange said Shares for Shares of one or more other Series or Class of Shares
in accordance with such requirements and procedures as may be established by the
Trustees.
(h) COMBINATION OF SERIES OR CLASSES. The Trustees shall have the
authority, without the approval of the Shareholders of any Series or Class
unless otherwise required by applicable law, to combine the assets and
liabilities belonging to any two or more Series (or the assets allocable to any
two or more Classes) into assets and liabilities belonging (or allocable) to a
single Series (or Class).
(i) ELIMINATION OF SERIES OR CLASSES. At any time that there are no Shares
outstanding of any particular Series or Class previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series or Class and to rescind the establishment and designation thereof, such
amendment to be effected in the manner provided in Section 5 of this Article
III.
(j) ASSETS AND LIABILITIES ALLOCABLE TO A CLASS. The assets and liabilities
belonging to a Series shall be proportionately allocated among all the Classes
of that Series according to the percentage of net assets allocated to each
particular Class. For purposes of determining the assets and liabilities
belonging to a Series that are allocable to a Class of that Series, subject to
the provisions of paragraph (g) of Section 5 of this Article III, expenses shall
be accrued as set forth in Exhibit 3.6 attached hereto.
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder or former
Shareholder shall be held to be personally liable solely by reason of his or her
being or having been a Shareholder of the Trust or of a particular Series and
not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets of the Series of which he is a Shareholder or former Shareholder to
be held harmless from and indemnified against all loss and expense arising from
such liability.
-7-
<PAGE> 8
SECTION 8. NO PREEMPTIVE RIGHTS. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust.
ARTICLE IV.
The Trustees
SECTION 1. ELECTION AND TENURE. The Trustees may fix the number of vacancies
arising from an increase in the number of Trustees, or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he dies, resigns or is removed, or if sooner, until the next meeting
of Shareholders called for the purpose of electing Trustees and until the
election and qualification of his successor. Any Trustee may resign at any time
by written instrument signed by him and delivered to any officer of the Trust or
to a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee resigning
and no Trustee removed shall have any right to any compensation for any period
following his resignation or removal, or any right to damages on account of such
removal. The Shareholders may fix the number of Trustees and elect Trustees at
any meeting of Shareholders called by the Trustees for that purpose.
SECTION 2. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The death,
declination, resignation, retirement, removal, or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
SECTION 3. POWERS. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Trustees, and they shall have
all powers necessary or convenient to carry out that responsibility including
the power to engage in securities transactions of all kinds on behalf of the
Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; they may appoint from their
own number and terminate one or more committees consisting of two or more
Trustees which may exercise the powers and authority of the Trustees to the
extent that the Trustees determine; they may employ one or more custodians of
the assets of the Trust and may authorize such custodians to employ
subcustodians and to deposit all or any part of such assets in a system or
systems for the central handling of securities or with a Federal Reserve Bank,
retain a transfer agent or a shareholder servicing agent, or both, provide for
the distribution of Shares by the Trust, through one or more principal
underwriters or otherwise,
-8-
<PAGE> 9
set record dates for the determination of Shareholders with respect to various
matters, and in general delegate such authority as they consider desirable to
any officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write
options with respect to or otherwise deal in any property rights relating to any
or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise power and rights of subscription or otherwise which in any
Manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own name or
in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
-9-
<PAGE> 10
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other obligations
of any person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property such insurance
as they may deem necessary or appropriate for the conduct of the business,
including without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, principal underwriters, or independent contractors
of the Trust individually against all claims and liabilities of every nature
arising by reason of holding being or having held any such office or position,
or by reason of any action alleged to have been taken or omitted by any such
person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust would
have the power to indemnify such person against liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to adopt,
establish and carry out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity contracts as
a means of providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. The Trustees shall
not be required to obtain any court order to deal with any assets of the Trust
or take any other action hereunder.
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust, or partly
out of principal and partly out of income, as they deem fair, all expenses,
fees, charges, taxes and liabilities incurred or arising in connection with the
Trust, or in connection with the management thereof, including but not limited
to, the Trustees' compensation and such expenses and charges for the services of
the Trust's officers, employees, investment adviser or manager, principal
underwriter, auditor, counsel, custodian, transfer agent, shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series or Class, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, shareholder servicing
or similar agent, an amount fixed from time to time by the Trustees, by setting
off such charges due from such Shareholder from declared but
-10-
<PAGE> 11
unpaid dividends owed such Shareholder and/or by reducing the number of Shares
in the account of such Shareholder by that number of full and/or fractional
Shares which represents the outstanding amount of such charges due from such
Shareholder.
SECTION 6. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trustees.
SECTION 7. ADVISORY, MANAGEMENT AND DISTRIBUTION CONTRACTS. Subject to such
requirements and restrictions as may be set forth in the By-Laws, the Trustees
may, at any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services for the Trust or for any Series with
Grantham, Mayo, Van Otterloo & Co. LLC (including any limited liability company,
provided that a majority of the beneficial owners of Grantham, Mayo, Van
Otterloo & Co. LLC hold a majority of the equity interest in such entity and
substantially all business of Grantham, Mayo, Van Otterloo & Co. LLC is assigned
thereto) or any other partnership, corporation, trust, association or other
organization (the "Manager"); and any such contract may contain such other terms
as the Trustees may determine, including, without limitation, authority for a
Manager to determine from time to time without prior consultation with the
Trustees what investments shall be purchased, held, sold or exchanged and what
portion, if any, of the assets of the Trust shall be held uninvested and to make
changes in the Trust's investments. The Trustees may also, at any time and from
time to time, contract with the Manager or any other partnership, corporation,
trust, association or other organization, appointing it exclusive or
nonexclusive distributor or principal underwriter for the Shares, every such
contract to comply with such requirements and restrictions as may be set forth
in the By-Laws; and any such contract may contain such other terms as the
Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter, distributor or affiliate or agent of or for any
partnership, corporation, trust, association, or other organization, or of or
for any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may have been or may
hereafter be made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract with one or more other
corporations, trusts, associations, or other organizations, or has other
business or interests,
-11-
<PAGE> 12
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V.
Shareholders' Voting Powers and Meetings
SECTION 1. VOTING POWERS. The Shareholders shall have power to vote only (i)
for the election of Trustees as provided in Article IV, Section 1, (ii) with
respect to any amendment of this Declaration of Trust to the extent and as
provided in Article VIII, Section 8, (iii) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(iv) with respect to the termination of the Trust or any Series or Class to the
extent and as provided in Article VIII, Section 4, and (v) with respect to such
additional matters relating to the Trust as may be required by this Declaration
of Trust, the By-Laws or any registration of the Trust with the Commission (or
any successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. At any time when no Shares of a Series
or Class are outstanding the Trustees may exercise all rights of Shareholders of
that Series or Class with respect to matters affecting that Series or Class and
may with respect to that Series or Class take any action required by law, this
Declaration of Trust or the By-Laws to be taken by the Shareholders.
SECTION 2. VOTING POWER AND MEETINGS. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the ByLaws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven days before
such meeting, postage prepaid, stating the time and place of the meeting, to
each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust or the By-Laws, a written waiver thereof,
-12-
<PAGE> 13
executed before or after the meeting by such Shareholder or his attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
SECTION 3. QUORUM AND REQUIRED VOTE. Except when a larger quorum is required
by law, by the By-Laws or by this Declaration of Trust, 40% of the Shares
entitled to vote shall constitute a quorum at a Shareholders' meeting. When any
one Series or Class is to vote separately from any other Shares which are to
vote on the same matters as a separate Series or Class, 40% of the Shares of
each such Series or Class entitled to vote shall constitute a quorum at a
Shareholder's meeting of that Series or Class. Any meeting of Shareholders may
be adjourned from time to time by a majority of the votes property cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the original meeting
without further notice. When a quorum is present at any meeting, a majority of
the Shares voted shall decide any questions and a plurality shall elect a
Trustee, except when a larger vote is required by any provision of this
Declaration of Trust or the By-Laws or by law. If any question on which the
Shareholders are entitled to vote would adversely affect the rights of any
Series or Class of Shares, the vote of a majority (or such larger vote as is
required as aforesaid) of the Shares of such Series or Class which are entitled
to vote, voting separately, shall also be required to decide such question.
SECTION 4. ACTION BY WRITTEN CONSENT. Any action taken by Shareholders may be
taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or Class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
SECTION 5. RECORD DATES. For the purpose of determining the Shareholders of
any Series or Class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 60 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series or Class having the
right to notice of and to vote at such meeting and any adjournment thereof, and
in such case only Shareholders of record on such record date shall have such
right, notwithstanding any transfer of shares on the books of the Trust after
the record date. For the purpose of determining the Shareholders of any Series
or Class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be
before the date for the payment of such dividend or such other payment, as the
record date for determining the Shareholders of such Series or Class having the
right to receive such dividend or distribution. Without fixing a record date the
Trustees may for voting and/or distribution purposes close the register or
transfer books for one or more Series or Class for all or any part of the period
between a record date and a
-13-
<PAGE> 14
meeting of shareholders or the payment of a distribution. Nothing in this
section shall be construed as precluding the Trustees from setting different
record dates for different Series or Classes.
SECTION 6. ADDITIONAL PROVISIONS. The By-Laws may include further provisions
for Shareholders' votes and meetings and related matters.
ARTICLE VI.
Net Income, Distributions, and Redemptions and Repurchases
SECTION 1. DISTRIBUTIONS OF NET INCOME. The Trustees shall each year, or more
frequently if they so determine in their sole discretion, distribute to the
Shareholders of each Series or Class, in shares of that Series or Class, cash or
otherwise, an amount approximately equal to the net income attributable to the
assets belonging to such Series (or the assets allocable to such Class) and may
from time to time distribute to the Shareholders of each Series or Class, in
shares of that Series, cash or otherwise, such additional amounts, but only from
the assets belonging to such Series (or allocable to that Class), as they may
authorize. All dividends and distributions on Shares of a particular Series or
Class shall be distributed pro rata to the holders of that Series or Class in
proportion to the number of Shares of that Series or Class held by such holders
and recorded on the books of the Trust at the date and time of record
established for that payment or such dividend or distributions.
The manner of determining net income, income, asset values, capital gains,
expenses, liabilities and reserves of any Series or Class may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such person
as they may authorize at the times and in the manner provided in the By-Laws.
Determinations of net income of any Series or Class and determination of income,
asset value, capital gains, expenses, and liabilities made by the Trustees, or
by such person as they may authorize, in good faith, shall be binding on all
parties concerned. The foregoing sentence shall not be construed to protect any
Trustee, officer or agent of the Trust against any liability to the Trust or its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
If, for any reason, the net income of any Series or Class determined at any time
is a negative amount, the pro rata share of such negative amount allocable to
each Shareholder of such Series or Class shall constitute a liability of such
Shareholder to that Series or Class which shall be paid out of such
Shareholder's account at such times and in such manner as the Trustees may from
time to time determine (x) out of the accrued dividend account of such
Shareholder, (y) by reducing the number of Shares of that Series or Class in the
account of such Shareholder, or (z) otherwise.
-14-
<PAGE> 15
SECTION 2. REDEMPTIONS AND REPURCHASES. The Trust shall purchase such Shares
as are offered by any Shareholder for redemption, upon the presentation of a
proper instrument of transfer together with a request directed to the Trust or a
person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, as determined in accordance with the By-Laws, next determined. Payment
for said Shares shall be made by the Trust to the Shareholder within seven days
after the date on which the request is made. The obligation set forth in this
Section 2 is subject to the provision that in the event that any time the New
York Stock Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Trust to dispose of the investments of the applicable Series or to determine
fairly the value of the net assets belonging to such Series (or net assets
allocable to such Class) or during any other period permitted by order of the
Commission for the protection of investors, such obligations may be suspended or
postponed by the Trustees. The Trust may also purchase or repurchase Shares at a
price not exceeding the net asset value of such Shares in effect when the
purchase or repurchase or any contract to purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or partly
in kind if the Trustees determine that such payment is advisable in the interest
of the remaining Shareholders of the Series or Class the Shares of which are
being redeemed. In making any such payment wholly or partly in kind, the Trust
shall, so far as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the Series (or
allocable to the Class) the Shares of which are being redeemed. Subject to the
foregoing, the fair value, selection and quantity of securities or other
property so paid or delivered as all or part of the redemption price may be
determined by or under authority of the Trustees. In no case shall the Trust be
liable for any delay of any corporation or other person in transferring
securities selected for delivery as all or part of any payment in kind.
SECTION 3. REDEMPTIONS AT THE OPTION OF THE TRUST. The Trust shall have the
right at its option and at any time to redeem Shares of any Shareholder at the
net asset value thereof as described in Section 1 of this Article VI: (i) if at
such time such Shareholder owns Shares of any Series or Class having an
aggregate net asset value of less than an amount determined from time to time by
the Trustees; or (ii) to the extent that such Shareholder owns Shares equal to
or in excess of a percentage determined from time to time by the Trustees of the
outstanding Shares of the Trust or of any Series or Class.
-15-
<PAGE> 16
ARTICLE VII.
Compensation and Limitation of Liability of Trustees
SECTION 1. COMPENSATION. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust.
SECTION 2. LIMITATION OF LIABILITY. The Trustees shall not be responsible or
liable in any event for any neglect or wrong-doing of any officer, agent,
employee, Manager or principal underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Every note, bond, contract, instrument, certificate or undertaking and every
other act or thing whatsoever issued, executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII.
Miscellaneous
SECTION 1. TRUSTEES, SHAREHOLDERS, ETC. NOT PERSONALLY LIABLE; NOTICE. All
persons extending credit to, contracting with or having any claim against the
Trust or any Series or Class shall look only to the assets of the Trust, or, to
the extent that the liability of the Trust may have been expressly limited by
contract to the assets of a particular Series (or the assets allocable to a
particular Class), only to the assets belonging to the relevant Series (or
allocable to the relevant Class), for payment under such credit, contract or
claim; and neither the Shareholders nor the Trustees, nor any of the Trust's
officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such Trustee would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued on behalf of the Trust by the Trustees, by any officers or officer or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts and shall recite that the same
was executed or made by or on behalf of the Trust or by them as Trustee or
Trustees or as officers or officer or otherwise and not individually
-16-
<PAGE> 17
and that the obligations of such instrument are not binding upon any of them or
the shareholders individually but are binding only upon the assets and property
of the Trust or upon the assets belonging to the Series (or allocable to the
Class) for the benefit of which the Trustees have caused the note, bond,
contract, instrument, certificate or undertaking to be made, or issued, and may
contain such further recital as he or they may deem appropriate, but the
omission of any such recital shall not operate to bind any Trustee or Trustees
or officers or officer or Shareholders or any other person individually.
SECTION 2. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY. The
exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the meaning
and operation of this Declaration of Trust, and shall be under no liability for
any act or omission in accordance with such advice or for failing to follow such
advice. The Trustees shall not be required to give any bond as such, nor any
surety if a bond is required.
SECTION 3. LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
SECTION 4. TERMINATION OF TRUST OR SERIES OR CLASS. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by vote of at least 66-2/3% of the Shares of each
Series entitled to vote and voting separately by Series or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of at least 66-2/3% of the Shares of that Series or by the Trustees by
written notice to the Shareholders of that Series. Any Class may be separately
terminated at any time by vote of at least a majority of the Shares of that
Class present and voting on the question (a quorum being present) or by the
Trustees by written notice to the Shareholders of that Class.
Upon termination of the Trust (or any Series or Class, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series or allocable to each Class (or
the applicable Series or Classes, as the case may be), whether due or accrued or
anticipated as may be determined by the Trustees, the Trust shall in accordance
with such procedures as the Trustees consider appropriate reduce the remaining
assets belonging, severally, to each Series or allocable to each Class (or the
applicable Series or Classes, as the case may be), to distributable form in cash
or shares or other securities, or any combination thereof, and distribute the
proceeds belonging to each Series or allocable to each Class (or the applicable
Series or Classes, as the case may be), to
-17-
<PAGE> 18
the Shareholders of that Series or Class, as a Series or Class, ratably
according to the number of Shares of that Series or Class held by the several
Shareholders on the date of termination.
SECTION 5. MERGER AND CONSOLIDATION. The Trustees may cause the Trust to be
merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger or consolidation or
share exchange has been authorized by vote of a majority of the outstanding
Shares; provided that in all respects not governed by statute or applicable law,
the Trustees shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or consolidation.
SECTION 6. FILING OF COPIES, REFERENCES, HEADINGS. The original or a copy of
this instrument and of each amendment hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. A copy of this instrument
and of each amendment hereto shall be filed by the Trust with the Secretary of
The Commonwealth of Massachusetts and with any other governmental office where
such filing may from time to time be required. Anyone dealing with the Trust may
rely on a certificate by an officer of the Trust as to whether or not any such
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such amendments. In this instrument and in any such amendment, references to
this instrument, and all expressions like "herein", "hereof" and "hereunder",
shall be deemed to refer to this instrument as amended or affected by any such
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
SECTION 7. APPLICABLE LAW. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
SECTION 8. AMENDMENTS. This Declaration of Trust may be amended at any time
by an instrument in writing signed by a majority of the then Trustees when
authorized so to do by vote of a majority of the Shares entitled to vote, except
that amendments described in Article III, Section 5 hereof or having the purpose
of changing the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision contained herein shall not require authorization by Shareholder vote.
-18-
<PAGE> 19
IN WITNESS WHEREOF, the Trustees as aforesaid do hereto set their hands
this ____ day of ____________, 1997.
_________________________
R. Jeremy Grantham
40 Rowes Wharf
Boston, MA 02110
_________________________
Jay O. Light
30 Wellesley Road
Belmont, MA 02178
_________________________
Harvey R. Margolis
50 Pinckney Street
Boston, MA 02114
-19-
<PAGE> 20
Exhibit 3.6 to Decl. of Trust
GMO TRUST
Plan pursuant to Rule 18f-3 under the
INVESTMENT COMPANY ACT OF 1940
Effective June 1, 1996
As Amended November ___, 1997
This Plan (the "Plan") is adopted by GMO Trust (the "Trust") pursuant
to Rule 18f-3 under the Investment Company Act of 1940 (the "Act") and sets
forth the general characteristics of, and the general conditions under which the
Trust may offer, multiple classes of shares of its now existing and hereafter
created portfolios ("Funds"). This Plan may be revised or amended from time to
time as provided below.
CLASS DESIGNATIONS
Each Fund of the Trust may from time to time issue one or more of the
following classes of shares: Class I Shares, Class II Shares, Class III Shares,
Class IV Shares, Class V Shares, Class VI Shares, Class VII Shares and Class
VIII Shares. Each of the classes of shares of any Fund will represent interests
in the same portfolio of investments and, except as described herein, shall have
the same rights and obligations as each other class. Each class shall be subject
to such investment minimums and other conditions of eligibility as are set forth
in the Trust's prospectus or statement of additional information as from time to
time in effect (the "Prospectus").
CLASS ELIGIBILITY
Class eligibility is generally dependent on the size of the client's
total account under the management of Grantham, Mayo, Van Otterloo & Co. LLC,
the Trust's investment adviser (referred to herein as "GMO" or the "Adviser"),
as described from time to time in the Prospectus.
Eligibility for Class I, Class II and Class III Shares is dependent on
the size of a client's minimum "Total Investment" with GMO. For clients that had
accounts with GMO as of May 31, 1996, their initial Total Investment will equal
the market value of all of their investments advised by GMO as of the close of
business on May 31, 1996. For clients establishing a relationship with GMO on or
after June 1, 1996, their Total Investment at any date is equal to the aggregate
of all amounts contributed to (less amounts withdrawn from) any Fund on or after
June 1, 1996, plus the market value of any non-mutual fund investment with GMO
as of the month-end prior to the date that "Total Investment" is being computed.
For purposes of class eligibility, market appreciation or depreciation of a
Fund's account is not
-20-
<PAGE> 21
considered; the Total Investment of a client is affected only by (i) the amount
of contributions to and withdrawals from Funds made by the client; and (ii)
changes in the market value of any non-mutual fund investment with GMO as of the
month-end prior to the date that "Total Investment" is being computed. It is
assumed that any Fund redemptions or withdrawals made by a client are satisfied
first from market appreciation in their shares, so that a redemption or
withdrawal does not lower a client's Total Investment unless the redemption or
withdrawal exceeds the value of market appreciation.
Eligibility for Class IV, Class V, Class VI, Class VII and Class VIII
Shares is dependent upon the client meeting either (i) a minimum "Total Fund
Investment" requirement which includes only a client's total investment in the
particular Fund, OR (ii) a minimum "Total Investment" requirement as set forth
in the Prospectus in effect from time to time. For clients that have accounts
with GMO as of November 30, 1997, their initial Total Investment or initial
Total Fund Investment for purposes of determining eligibility for Class IV,
Class V, Class VI, Class VII and Class VIII Shares will equal the market value
of all of their investments advised by GMO and its affiliates, or the market
value of their investment in the particular Fund, as the case may be, as of the
close of business on November 30, 1997. For clients establishing a relationship
with GMO on or after December 1, 1997, their Total Fund Investment and Total
Investment for purposes of determining eligibility for Class IV, Class V, Class
VI, Class VII and Class VIII Shares will be determined similarly to the
determination of Total Investment for purposes of eligibility for Class I, Class
II and Class III Shares described above ( i.e., appreciation and depreciation of
Fund shares is not considered in either calculation; a client's Total Investment
is affected only by the amount of contributions to and withdrawals from Fund
accounts made by the client and changes in the market value of any non-mutual
fund investment with GMO or its affiliates as of the month-end prior to the date
that Total Investment is being computed; a client's Total Fund Investment is
affected only by the amount of contributions to and withdrawals from the
relevant Fund made by the client). Similar to Class I, Class II and Class III
Shares, it is assumed that any Fund redemptions or withdrawals made by a client
are satisfied first from market appreciation in their shares, so that a
redemption or withdrawal does not lower a client's Total Investment unless the
redemption or withdrawal exceeds the value of market appreciation. However, with
respect to Class IV Shares only, a withdrawal from a non-mutual fund account, or
a withdrawal of Fund shares in excess of market appreciation, will only affect a
client's Total Investment or Total Fund Investment if, on the date of
computation, the aggregate value of such withdrawals since the previous
computation of Total Investment or Total Fund Investment, as the case may be
(the "prior computation date"), equals or exceeds 10% of the value of such
client's Total Investment or Total Fund Investment as of the prior computation
date.
CLASS CHARACTERISTICS
The sole difference among the various classes of shares is the level of
shareholder service fee ("Shareholder Service Fee") borne by the class for
client and shareholder service, reporting and other support provided to such
class by GMO.
-21-
<PAGE> 22
The multiple class structure reflects the fact that, as the size of the
client relationship increases, the cost to service that relationship is expected
to decrease as a percentage of the account. Thus, the Shareholder Service Fee is
lower for classes for which eligibility criteria generally require greater
assets under GMO's management.
Certain Funds are subject to either an initial purchase premium, a
redemption fee, or both. The initial purchase premium and redemption fee, if
any, may, in some limited cases, be subject to reduction or waiver if the
Adviser determines that there are minimal brokerage and/or transaction costs
incurred as a result of the purchase or redemption, as set forth in the
Prospectus in effect from time to time.(1)
ALLOCATIONS TO EACH CLASS
EXPENSE ALLOCATIONS
Shareholder Service Fees payable by the Trust to the shareholder
servicer of the Trust's shares (the "Shareholder Servicer") shall be allocated,
to the extent practicable, on a class-by-class basis. Subject to the approval of
the Trust's Board of Trustees, including a majority of the independent Trustees,
the following "Class Expenses" may (if such expense is properly assessable at
the class level) in the future be allocated on a class-by-class basis: (a)
transfer agency costs attributable to each class, (b) printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxy statements to current shareholders of a specific
Class, (c) SEC registration fees incurred with respect to a specific class, (d)
blue sky and foreign registration fees and expenses incurred with respect to a
specific class, (e) the expenses of administrative personnel and services
required to support shareholders of a specific class (including, but not limited
to, maintaining telephone lines and personnel to answer shareholder inquiries
about their accounts or about the Trust), (f) litigation and other legal
expenses relating to a specific class of shares, (g) Trustees' fees or expenses
incurred as a result of issues relating to a specific class of shares, (h)
accounting and consulting expenses relating to a specific class of shares, (i)
any fees imposed pursuant to a non-Rule 12b-1 shareholder service plan that
relate to a specific class of shares, and (j) any additional expenses, not
including advisory or custodial fees or other expenses related to the management
of the Trust's assets, if these expenses are actually incurred in a different
amount with respect to a class, or if services are provided with respect to a
class, or if services are provided with respect to a class that are of a
different kind or to a different degree than with respect to one or more other
classes.
- -------------------
(1) All purchase premiums are paid to and retained by the relevant Fund
and are intended to cover the brokerage and other costs associated with putting
an investment to work in the relevant markets. All redemption fees are paid to
and retained by the relevant Fund and are designed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity.
-22-
<PAGE> 23
All expenses not now or hereafter designated as Class Expenses ("Fund
Expenses") will be allocated to each class on the basis of the net asset value
of that class in relation to the net asset value of the relevant Fund.
However, notwithstanding the above, a Fund may allocate all expenses
other than Class Expenses on the basis of any methodology permitted by Rule
18f-3(c) under the Act, provided, however, that until such time as this Plan is
amended with respect to the Fund's allocation methodology, the Fund will
allocate all expenses other than Class Expenses on the basis of relative net
assets.
WAIVERS AND REIMBURSEMENTS
The Adviser and the Shareholder Servicer may choose to waive or
reimburse Shareholder Service Fees, or any other Class Expenses on a voluntary
or temporary basis.
INCOME, GAINS AND LOSSES
Income and realized and unrealized capital gains and losses shall be
allocated to each class on the basis of the net asset value of that class in
relation to the net asset value of the relevant Fund.
Each Fund may allocate income and realized and unrealized capital gains
and losses to each share based on any methodology permitted by Rule 18f-3(c)(2)
under the Act, consistent with the provisions set forth in "Expense Allocations"
above.
CONVERSION AND EXCHANGE FEATURES
On July 31 of each year and on such other dates as may be determined by
GMO with notice to the Trustees (each a "Conversion Date"), each client's Total
Investment and Total Fund Investment, as previously defined and as described in
the Prospectus, will be determined. Based on that determination, the client's
shares of each Fund will be automatically converted to the class of shares of
such Fund with the lowest Shareholder Service Fee which the client would be
eligible to purchase based on such Total Investment or Total Fund Investment, as
the case may be, which are then being offered by the Trust. Further, if a client
makes an investment in a GMO Fund or a non-mutual account advised by GMO or its
affiliates that causes the client to be eligible for a class of shares with a
lower Shareholder Service Fee, or the Trust commences offering a new class of
shares of a particular GMO Fund with a lower Shareholder Service Fee which such
client is eligible to purchase, such conversion will be effected within 15 days
after the end of the month during which such investment was made or such class
offered, as the case may be. Notwithstanding the foregoing, there will be no
automatic conversion from a class of shares with a lower Shareholder Service Fee
to a class of shares with a higher Shareholder Service Fee unless
-23-
<PAGE> 24
appropriate disclosure regarding the higher Shareholder Service Fee has been
given to the affected client(s) in the Prospectus or otherwise.
Shares of one class will always convert into shares of another class on
the basis of the relative net asset value of the two classes, without the
imposition of any sales load, fee or other charge. The conversion of a client's
investment from one class of shares to another is not a taxable event, and will
not result in the realization of gain or loss that may exist in Fund shares held
by the client. The client's tax basis in the new class of shares will equal
their basis in the old class before conversion. The conversion of shares from
one class to another class of shares may be suspended if the opinion of counsel
obtained by the Trust that the conversion does not constitute a taxable event
under current federal income tax law is no longer available.
Certain special rules will be applied by the Adviser with respect to
clients who owned shares of Funds upon the creation of multiple classes on May
31, 1996. First, all clients existing on May 31, 1996 received Class III Shares
on June 1, 1996 regardless of the size of their GMO investment. Second, the
conversion of existing clients to any class of shares with a higher Shareholder
Service Fee will not occur until July 31, 1997 (or such later date as may be
determined by the Adviser), based on the client's Total Investment as of such
date (or such later date as may be determined by the Adviser). Third, existing
clients whose Total Investment as of May 31, 1996 was equal to $7 million or
more will be eligible to remain invested in Class III Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum set forth in
the Prospectus), provided such client makes no subsequent redemptions or
withdrawals other than of amounts attributable to market appreciation of its
account value as of June 1, 1996. Fourth, existing clients whose Total
Investment as of May 31, 1996 was less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum set forth in
the Prospectus), provided that such client makes no subsequent redemptions or
withdrawals other than of amounts attributable to market appreciation of its
account value as of June 1, 1996. Notwithstanding the foregoing special rules
applicable to clients owning shares of the Funds on May 31, 1996, such clients
shall always be eligible to remain in and/or be converted to any class of shares
of the relevant Fund with a lower Shareholder Service Fee which the client would
be eligible to purchase pursuant to the eligibility requirements set forth
elsewhere in this Plan or in the Prospectus.
Notwithstanding anything to the contrary in this Plan, pursuant to
Article VI, Section 3 of the Trust's Amended and Restated Agreement and
Declaration of Trust, the Trust has the right to redeem unilaterally any
shareholder of any Fund if at such time such shareholder owns shares of any Fund
or class thereof "having an aggregate net asset value of less than an amount
determined from time to time by the Trustees."
-24-
<PAGE> 25
DIVIDENDS
Dividends paid by the Trust with respect to its Class I, Class II,
Class III, Class IV, Class V, Class VI, Class VII and Class VIII Shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time and will be in the same amount, except that any Service Fee payments
relating to a class of shares will be borne exclusively by that class and, if
applicable, Class Expenses relating to a class shall be borne exclusively by
that class.
VOTING RIGHTS
Each share of the Trust entitles the shareholder of record to one vote.
Each class of shares of the Trust will vote separately as a class on matters for
which class voting is required under applicable law.
RESPONSIBILITIES OF THE TRUSTEES
On an ongoing basis, the Trustees will monitor the Trust for the
existence of any material conflicts among the interests of the eight classes of
shares. The Trustees shall further monitor on an ongoing basis the use of
waivers or reimbursement of expenses by the Adviser to guard against
cross-subsidization between classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop.
REPORTS TO THE TRUSTEES
The Adviser and the Shareholder Servicer will be responsible for
reporting any potential or existing conflicts among the eight classes of shares
to the Trustees.
AMENDMENTS
The Plan may be amended from time to time in accordance with the
provisions and requirements of Rule 18f-3 under the Act.
Adopted this ____ day of ___________, 1997
By: ________________________
Alison E. Baur
Clerk
-25-
<PAGE> 26
Schedule 3.6 to Decl. of Trust
SERIES
GMO Core Fund
GMO Tobacco-Free Core Fund
GMO Value Fund
GMO Growth Fund
GMO U.S. Sector Fund
GMO Small Cap Value Fund
GMO Fundamental Value Fund
GMO REIT Fund
GMO Small Cap Growth Fund
GMO International Core Fund
GMO Currency Hedged International Core Fund
GMO Foreign Fund
GMO U.S. Bond/Global Alpha A Fund
GMO U.S. Bond/Global Alpha B Fund
GMO International Small Companies Fund
GMO Japan Fund
GMO Emerging Markets Fund
GMO Global Properties Fund
GMO Short-Term Income Fund
GMO Global Hedged Equity Fund
GMO Domestic Bond Fund
GMO International Bond Fund
GMO Currency Hedged International Bond Fund
GMO Global Bond Fund
GMO Emerging Country Debt Fund
GMO Inflation Indexed Bond Fund
GMO International Equity Allocation Fund
GMO World Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO Global Balanced Allocation Fund
GMO International Core Plus Allocation Fund
GMO Evolving Countries Fund
Pelican Fund
-26-
<PAGE> 1
EXHIBIT 5
MANAGEMENT CONTRACT
Management Contract executed as of December ___, 1997 between GMO
TRUST, a Massachusetts business trust (the "Trust") on behalf of its GMO
International Core Plus Allocation Fund (the "Fund"), and GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC, a Massachusetts limited liability company (the "Manager").
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Trust and to
such policies as the Trustees may determine, the Manager will, at its expense,
(i) furnish continuously an asset allocation program for the Fund and will make
investment decisions on behalf of the Fund and place all orders for the purchase
and sale of its portfolio securities and (ii) furnish office space and
equipment, provide bookkeeping and clerical services (excluding determination of
net asset value, shareholder accounting services and the fund accounting
services for the Fund being supplied by Investors Bank & Trust Company) and pay
all salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and By-laws
of the Trust and the Fund's stated investment objective, policies and
restrictions.
(b) In placing orders for the portfolio transactions of the Fund, the
Manager will seek the best price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In using its best efforts to obtain for
the Fund the most favorable price and execution available, the Manager shall
consider all factors it deems relevant, including, without limitation, the
overall net economic result to the Fund (involving price paid or received and
any commissions and other costs paid), the efficiency with which the transaction
is effected, the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future and financial strength and stability of the
broker. Subject to such policies as the Trustees may determine, the Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Contract or otherwise solely by reason of its having caused a
Fund to pay a broker or dealer that provides brokerage and research services to
the Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Manager determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage
<PAGE> 2
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Trust and to other clients of the Manager as to which the
Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to pay any
expenses of or for the Trust or of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any person
controlled by or under common control with the Manager, and that the Manager and
any person controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and persons
controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
The Fund will pay no direct fee to the Manager as compensation for the
Manager's allocation services rendered hereunder. Since the Manager intends to
invest most or all of the Fund's assets in other Funds of GMO Trust, the Manager
will be indirectly compensated for its services rendered hereunder pursuant to
the terms of other Management Contracts between the Trust, on behalf of such
other Funds of GMO Trust, and the Manager.
In the event that expenses of the Fund for any fiscal year should
exceed the expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of the Trust
are qualified for offer and sale, the compensation due the Manager for such
fiscal year shall be reduced by the amount of such excess by a reduction or
refund thereof. In the event that the expenses of the Fund exceed any expense
limitation which the Manager may, by written notice to the Trust, voluntarily
declare to be effective with respect to the Fund, subject to such terms and
conditions as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the Fund's
expenses to the extent required by such expense limitation.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is
-2-
<PAGE> 3
approved at a meeting by the affirmative vote of a majority of the outstanding
shares of the Fund, and by the vote, cast in person at a meeting called for the
purpose of voting on such approval, of a majority of the Trustees of the Trust
who are not interested persons of the Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract by not
more than sixty days' written notice delivered or mailed by registered mail,
postage prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on the second anniversary of
its execution, or upon the expiration of one year from the effective date of the
last such continuance, whichever is later; provided, however, that if the
continuance of this Contract is submitted to the shareholders of the Fund for
their approval and such shareholders fail to approve such continuance of this
Contract as provided herein, the Manager may continue to serve hereunder in a
manner consistent with the Investment Company Act of 1940 and the rules and
regulations thereunder.
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of the Fund means the affirmative vote, at a duly
called and held meeting of shareholders, (a) of the holders of 67% or more of
the shares of the Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the outstanding shares of the
Fund entitled to vote at such meeting are present in person or by proxy, or (b)
of the holders of more than 50% of the outstanding shares of the Fund entitled
to vote at such meeting, whichever is less.
-3-
<PAGE> 4
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and the phrase
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and regulations
thereunder.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, or to
any shareholder of the Trust, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. INITIALS "GMO".
The Manager owns the initials "GMO" which may be used by the Trust only
with the consent of the Manager. The Manager consents to the use by the Trust of
the name "GMO Trust" or any other name embodying the initials "GMO", in such
forms as the Manager shall in writing approve, but only on condition and so long
as (i) this Contract shall remain in full force and (ii) the Trust shall fully
perform, fulfill and comply with all provisions of this Contract expressed
herein to be performed, fulfilled or complied with by it. No such name shall be
used by the Trust at any time or in any place or for any purposes or under any
conditions except as in this section provided. The foregoing authorization by
the Manager to the Trust to use said initials as part of a business or name is
not exclusive of the right of the Manager itself to use, or to authorize others
to use, the same; the Trust acknowledges and agrees that as between the Manager
and the Trust, the Manager has the exclusive right so to authorize others to use
the same; the Trust acknowledges and agrees that as between the Manager and the
Trust, the Manager has the exclusive right so to use, or authorize others to
use, said initials and the Trust agrees to take such action as may reasonably be
requested by the Manager to give full effect to the provisions of this section
(including, without limitation, consenting to such use of said initials).
Without limiting the generality of the foregoing, the Trust agrees that, upon
any termination of this Contract by either party or upon the violation of any of
its provisions by the Trust, the Trust will, at the request of the Manager made
within six months after the Manager has knowledge of such termination or
violation, use its best efforts to change the name of the Trust so as to
eliminate all reference, if any, to the initials "GMO" and will not thereafter
transact any business in a name containing the initials "GMO" in any form or
combination whatsoever, or designate itself as the same entity as or successor
to an entity of such name, or otherwise use the initials "GMO" or any other
reference to the Manager. Such covenants on the part of the Trust shall be
binding upon it, its trustees, officers, stockholders, creditors and all other
persons claiming under or through it.
-4-
<PAGE> 5
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
-5-
<PAGE> 6
IN WITNESS WHEREOF, GMO TRUST and GRANTHAM, MAYO, VAN OTTERLOO & CO.
LLC have each caused this instrument to be signed in duplicate on its behalf by
its duly authorized representative, all as of the day and year first above
written.
GMO TRUST
By _______________________________
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO.
LLC
By _______________________________
Title:
-6-
<PAGE> 1
EXHIBIT 8
_____________ ___, 1997
Investors Bank & Trust Company
Financial Product Services
200 Clarendon Street
Boston, MA 02116
Re: Custodian Agreement dated August 1, 1991 by and among
GMO Trust, Grantham, Mayo, Van Otterloo & Co. and
Investors Bank & Trust Company
-----------------------------------------------------
Ladies and Gentlemen:
GMO Trust (the "Trust") hereby notifies you that it has established an
additional series of shares, namely, the "GMO International Core Plus Allocation
Fund" (the "New Fund"). The Trust and the Manager (as defined in the Agreement)
desire that you serve as custodian of the assets of the New Fund under the terms
of the Agreement.
If you agree to so serve as custodian for the New Fund, kindly sign and
return to the Trust the enclosed counterpart hereof, whereupon the New Fund
shall be deemed a "Fund" under the Agreement. This letter agreement shall
constitute an amendment to the Agreement and, as such, a binding agreement among
the Trust, the Manager and you in accordance with its terms.
Very truly yours,
GMO TRUST
By ___________________________________
Name:
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By ___________________________________
Name:
Title:
The foregoing is hereby
accepted and agreed.
INVESTORS BANK & TRUST COMPANY
By ___________________________
Name:
Title:
<PAGE> 1
EXHIBIT 9.1
_____________ ___ , 1997
Investors Bank & Trust Company
Financial Product Services
200 Clarendon Street
Boston, MA 02116
Re: Transfer Agency and Service Agreement dated August 1, 1991
by and among GMO Trust, Grantham, Mayo, Van Otterloo &
Co. LLC And Investors Bank & Trust Co. (The "Agreement")
----------------------------------------------------------
Ladies and Gentlemen:
Pursuant to Article 17 of the Agreement, GMO Trust (the "Company")
hereby notifies you that it has created a new series of shares, namely, the "GMO
International Core Plus Allocation Fund" (the "New Fund"), with respect to which
the Company and the Manager (as defined in the Agreement) desire that you serve
as transfer agent under the terms of the Agreement.
If you agree to so serve as transfer agent for the New Fund, kindly
sign and return to the Company the enclosed counterpart hereof, whereupon the
New Fund shall be deemed a "Fund" under the Agreement. This letter agreement
shall constitute an amendment to the Agreement and, as such, a binding agreement
among the Trust, the Manager and you in accordance with its terms.
Very truly yours,
GMO TRUST
By ___________________________________
Name:
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By ___________________________________
Name:
Title:
The foregoing is hereby
accepted and agreed.
INVESTORS BANK & TRUST COMPANY
By ___________________________
Name:
Title:
<PAGE> 1
EXHIBIT 9.2
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
NOTIFICATION OF FEE WAIVER AND
EXPENSE LIMITATION
NOTIFICATION made December ____, 1997 by GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC, a Massachusetts limited liability company (the "Advisor"), to GMO
TRUST, a Massachusetts business trust (the "Trust").
WITNESSETH:
WHEREAS, the Advisor has organized the Trust to serve primarily as an
investment vehicle for certain large institutional accounts; and
WHEREAS, the Advisor believes it would benefit from a high sales volume
of shares of the Trust in that such a volume would maximize the Advisor's fee as
investment advisor to each series of the Trust constituting a separate
investment portfolio set forth below (each a "Fund" and, collectively, the
"Funds"); and
WHEREAS, the Advisor has agreed to furnish certain services or to bear
the costs thereof so as to enable the Funds to offer competitive returns with
respect to investments in the Funds.
NOW, THEREFORE, pursuant to Section 3 of each Management Contract (each
a "Management Contract") currently in effect between the Advisor and the Trust,
on behalf of each Fund, the Advisor hereby notifies the Trust that the Advisor
shall voluntarily, until further notice, and subject to any board of trustee
approvals required by the Trust's June 26, 1996 SEC Exemptive Order (Investment
Company Act Release No. 22043), reduce its compensation due under each
Management Contract, if necessary, to the extent that a Fund's total annual
operating expenses (excluding Shareholder Service Fees, brokerage commissions
and other investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes), securities
lending fees and expenses and transfer taxes; and, in the case of the GMO
Emerging Markets Fund, GMO Evolving Countries Fund, GMO Emerging Country Debt
Fund, GMO Global Hedged Equity Fund and GMO Global Properties Fund, excluding
custodial fees; and, in the case of the International Equity Allocation Fund,
World Equity Allocation Fund, Global (U.S.+) Equity Allocation Fund, Global
Balanced Allocation Fund, International Core Plus Allocation Fund, U.S. Sector
Fund and Global Hedged Equity Fund, excluding expenses indirectly incurred by
investment in other Funds of the Trust), will not exceed the following annual
rate of such Fund's average daily net asset value:
<PAGE> 2
<TABLE>
<S> <C> <C> <C>
GMO Core Fund 0.33% GMO U.S. Bond/Global Alpha B Fund 0.25%
GMO Tobacco-Free Core Fund 0.33% GMO Foreign Fund 0.60%
GMO Value Fund 0.46% GMO International Small Companies Fund Fundnd 0.60%
GMO Growth Fund 0.33% GMO Japan Fund 0.54%
GMO U.S. Sector Fund 0.33% GMO Emerging Markets Fund 0.81%
GMO Small Cap Value Fund 0.33% GMO Short-Term Income Fund 0.05%
GMO Fundamental Value Fund 0.60% GMO Global Hedged Equity Fund 0.50%
GMO REIT Fund 0.54% GMO Domestic Bond Fund 0.10%
GMO Small Cap Growth Fund 0.33% GMO International Bond Fund 0.25%
GMO International Core Fund 0.54% GMO Currency Hedged International Bond Fund 0.25%
GMO Currency Hedged International Core Fund 0.54% GMO Global Bond Fund 0.19%
GMO Emerging Country Debt Fund 0.35% GMO World Equity Allocation Fund 0.00%
GMO Inflation Indexed Bond Fund 0.10% GMO Global (U.S.+) Equity Allocation Fund 0.00%
GMO International Equity Allocation Fund 0.00% GMO Global Balanced Allocation Fund 0.00%
GMO Global Properties Fund 0.60% Pelican Fund 0.95%
GMO U.S. Bond/Global Alpha A Fund 0.25% GMO Evolving Countries Fund 0.65%
GMO International Core Plus Allocation Fund 0.00%
</TABLE>
Please be advised that all previous notifications by the Advisor with
respect to expense limitations regarding any of the Funds shall hereafter be
null and void and of no further force and effect.
IN WITNESS WHEREOF, the Advisor has executed this Notification of
Expense Limitation on the day and year first above written.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By: __________________________________
Title: Member
The foregoing is hereby accepted:
GMO TRUST
on behalf of each
Fund named above
By: _______________________________
Title:
-2-
<PAGE> 1
Exhibit 9.3
AMENDED AND RESTATED SERVICING AGREEMENT
The Servicing Agreement executed as of May 30, 1996 between GMO TRUST,
a Massachusetts business trust (the "Trust") on behalf of each of its Class I,
Class II, Class III, Class IV, Class V, Class VI, Class VII and Class VIII (each
a "Class" and collectively the "Classes") Shares (the "Shares") of each Fund
listed on Exhibit I hereto, (collectively, the "Funds"), and GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC, a Massachusetts limited liability company (the "Shareholder
Servicer"), is hereby amended and restated effective December 15, 1997 by the
Trustees:
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY SERVICING AGENT TO THE TRUST.
(a) The Shareholder Servicer will, at its expense, provide direct
client service, maintenance and reporting to shareholders of each Class of
Shares of each Fund set forth on Exhibit 1 hereto, such services and reporting
to include, without limitation, professional and informative reporting, client
account information, personal and electronic access to Fund information, access
to analysis and explanations of Fund reports, and assistance in the correction
and maintenance of client-related information.
(b) The Shareholder Servicer shall not be obligated under this
agreement to pay any expenses of or for the Trust or of or for the Fund not
expressly assumed by the Shareholder Servicer pursuant to this Section 1.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Shareholder Servicer, and in any
person controlled by or under common control with the Shareholder Servicer, and
that the Shareholder Servicer and any person controlled by or under common
control with the Shareholder Servicer may have an interest in the Trust. It is
also understood that the Shareholder Servicer and persons controlled by or under
common control with the Shareholder Servicer may have advisory, servicing,
distribution or other contracts with other organizations and persons, and may
have other interests and businesses.
<PAGE> 2
3. COMPENSATION TO BE PAID BY THE TRUST TO THE SERVICING AGENT.
Each Class of Shares of each Fund will pay to the Shareholder Servicer
as compensation for the Shareholder Servicer's services rendered and for the
expenses borne by the Shareholder Servicer with respect to such Class of Shares
of such Fund pursuant to Section 1, a fee, computed and accrued daily, and paid
monthly or at such other intervals as the Trustees shall determine, at the
annual rate of such Class' average daily net asset value set forth on the Fee
Rate Schedule attached as Exhibit II hereto. Such fee shall be payable for each
month (or other interval) within five (5) business days after the end of such
month (or other interval).
If the Servicing Agent shall serve for less than the whole of a month
(or other interval), the foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; provided, however, in the event of
consolidation or merger in which the Shareholder Servicer is not the surviving
corporation or which results in the acquisition of substantially all the
Shareholder Servicer's outstanding stock by a single person or entity or by a
group of persons and/or entities acting in concert, or in the event of the sale
or transfer of substantially all the Shareholder Servicer's assets, the
Shareholder Servicer may assign any such agreement to such surviving entity,
acquiring entity, assignee or purchaser, as the case may be. This Contract shall
not be amended unless such amendment is approved by the vote, cast in person at
a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Shareholder Servicer.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract (or
this Contract's application to one or more Classes or Funds) by not more than
sixty days' written notice delivered or mailed by registered mail, postage
prepaid, to the other party, or
(b) If (i) a majority of the Trustees of the Trust, and (ii) a majority
of the Trustees of the Trust who are not interested persons of the Trust or of
the Shareholder Servicer, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on the second anniversary of
its execution, or
-2-
<PAGE> 3
upon the expiration of one year from the effective date of the last such
continuance, whichever is later.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and the phrase
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and regulations
thereunder.
7. NONLIABILITY OF SERVICING AGENT.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Shareholder Servicer, or reckless disregard of its obligations
and duties hereunder, the Shareholder Servicer shall not be subject to any
liability to the Trust, or to any shareholder of the Trust, for any act or
omission in the course of, or connected with, rendering services hereunder.
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
-3-
<PAGE> 4
IN WITNESS WHEREOF, GMO TRUST and GRANTHAM, MAYO, VAN OTTERLOO & CO.
LLC have each caused this instrument to be signed in duplicate on its behalf by
its duly authorized representative, all as of the day and year first above
written.
GMO TRUST
By__________________________
Title:
GRANTHAM, MAYO, VAN OTTERLOO
& CO. LLC
By__________________________
Title:
-4-
<PAGE> 5
EXHIBIT I
GMO Core Fund
GMO Tobacco-Free Core Fund
GMO Value Fund
GMO Growth Fund
GMO U.S. Sector Fund
GMO Small Cap Value Fund
GMO Fundamental Value Fund
GMO Small Cap Growth Fund
GMO REIT Fund
GMO International Core Fund
GMO Currency Hedged International Core Fund
GMO Foreign Fund
GMO U.S. Bond/Global Alpha B Fund
GMO U.S. Bond/Global Alpha A Fund
GMO International Small Companies Fund
GMO Japan Fund
GMO Emerging Markets Fund
GMO Global Properties Fund
GMO Domestic Bond Fund
GMO Global Hedged Equity Fund
GMO Short-Term Income Fund
GMO International Bond Fund
GMO Currency Hedged International Bond Fund
GMO Global Bond Fund
GMO Emerging Country Debt Fund
GMO Inflation Indexed Bond Fund
GMO International Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO World Equity Allocation Fund
GMO Global Balanced Allocation Fund
GMO Evolving Countries Fund
GMO International Core Plus Allocation Fund
-5-
<PAGE> 6
SERVICE FEE SCHEDULE EXHIBIT II
CLASS I SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO Core Fund 0.28%
- ----------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.28%
- ----------------------------------------------------------------------
GMO Value Fund 0.28%
- ----------------------------------------------------------------------
GMO Growth Fund 0.28%
- ----------------------------------------------------------------------
GMO U.S. Sector Fund 0.28%
- ----------------------------------------------------------------------
GMO Small Cap Value Fund 0.28%
- ----------------------------------------------------------------------
GMO Fundamental Value Fund 0.28%
- ----------------------------------------------------------------------
GMO Small Cap Growth Fund 0.28%
- ----------------------------------------------------------------------
GMO REIT Fund 0.28%
- ----------------------------------------------------------------------
GMO International Core Fund 0.28%
- ----------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.28%
- ----------------------------------------------------------------------
GMO Foreign Fund 0.28%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha B Fund 0.28%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.28%
- ----------------------------------------------------------------------
GMO International Small Companies Fund 0.28%
- ----------------------------------------------------------------------
GMO Japan Fund 0.28%
- ----------------------------------------------------------------------
GMO Emerging Markets Fund 0.28%
- ----------------------------------------------------------------------
GMO Global Properties Fund 0.28%
- ----------------------------------------------------------------------
GMO Domestic Bond Fund 0.28%
- ----------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.28%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.28%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.28%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.28%
- ----------------------------------------------------------------------
GMO Emerging Country Debt Fund 0.28%
- ----------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.28%
- ----------------------------------------------------------------------
GMO Evolving Countries Fund 0.28%
- ----------------------------------------------------------------------
GMO International Equity Allocation Fund 0.13%
- ----------------------------------------------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.13%
- ----------------------------------------------------------------------
GMO World Equity Allocation Fund 0.13%
- ----------------------------------------------------------------------
GMO Global Balanced Allocation Fund 0.13%
- ----------------------------------------------------------------------
GMO International Core Plus Allocation Fund 0.13%
- ----------------------------------------------------------------------
</TABLE>
-6-
<PAGE> 7
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS II SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO Core Fund 0.22%
- ----------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.22%
- ----------------------------------------------------------------------
GMO Value Fund 0.22%
- ----------------------------------------------------------------------
GMO Growth Fund 0.22%
- ----------------------------------------------------------------------
GMO U.S. Sector Fund 0.22%
- ----------------------------------------------------------------------
GMO Small Cap Value Fund 0.22%
- ----------------------------------------------------------------------
GMO Fundamental Value Fund 0.22%
- ----------------------------------------------------------------------
GMO Small Cap Growth Fund 0.22%
- ----------------------------------------------------------------------
GMO REIT Fund 0.22%
- ----------------------------------------------------------------------
GMO International Core Fund 0.22%
- ----------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.22%
- ----------------------------------------------------------------------
GMO Foreign Fund 0.22%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha B Fund 0.22%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.22%
- ----------------------------------------------------------------------
GMO International Small Companies Fund 0.22%
- ----------------------------------------------------------------------
GMO Japan Fund 0.22%
- ----------------------------------------------------------------------
GMO Emerging Markets Fund 0.22%
- ----------------------------------------------------------------------
GMO Global Properties Fund 0.22%
- ----------------------------------------------------------------------
GMO Domestic Bond Fund 0.22%
- ----------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.22%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.22%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.22%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.22%
- ----------------------------------------------------------------------
GMO Emerging Country Debt Fund 0.22%
- ----------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.22%
- ----------------------------------------------------------------------
GMO Evolving Countries Fund 0.22%
- ----------------------------------------------------------------------
GMO International Equity Allocation Fund 0.07%
- ----------------------------------------------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.07%
- ----------------------------------------------------------------------
GMO World Equity Allocation Fund 0.07%
- ----------------------------------------------------------------------
GMO International Core Plus Allocation Fund 0.07%
- ----------------------------------------------------------------------
GMO Global Balanced Allocation Fund 0.07%
- ----------------------------------------------------------------------
</TABLE>
-7-
<PAGE> 8
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS III SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO Core Fund 0.15%
- ----------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.15%
- ----------------------------------------------------------------------
GMO Value Fund 0.15%
- ----------------------------------------------------------------------
GMO Growth Fund 0.15%
- ----------------------------------------------------------------------
GMO U.S. Sector Fund 0.15%
- ----------------------------------------------------------------------
GMO Small Cap Value Fund 0.15%
- ----------------------------------------------------------------------
GMO Fundamental Value Fund 0.15%
- ----------------------------------------------------------------------
GMO Small Cap Growth Fund 0.15%
- ----------------------------------------------------------------------
GMO REIT Fund 0.15%
- ----------------------------------------------------------------------
GMO International Core Fund 0.15%
- ----------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.15%
- ----------------------------------------------------------------------
GMO Foreign Fund 0.15%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha B Fund 0.15%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.15%
- ----------------------------------------------------------------------
GMO International Small Companies Fund 0.15%
- ----------------------------------------------------------------------
GMO Japan Fund 0.15%
- ----------------------------------------------------------------------
GMO Emerging Markets Fund 0.15%
- ----------------------------------------------------------------------
GMO Global Properties Fund 0.15%
- ----------------------------------------------------------------------
GMO Domestic Bond Fund 0.15%
- ----------------------------------------------------------------------
GMO Short-Term Income Fund 0.15%
- ----------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.15%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.15%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.15%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.15%
- ----------------------------------------------------------------------
GMO Emerging Country Debt Fund 0.15%
- ----------------------------------------------------------------------
GMO Evolving Countries Fund 0.15%
- ----------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.15%
- ----------------------------------------------------------------------
</TABLE>
-8-
<PAGE> 9
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS III SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO International Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------
GMO World Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------
GMO Global Balanced Allocation Fund 0.00%
- ----------------------------------------------------------------------
GMO International Core Plus Allocation Fund 0.00%
- ----------------------------------------------------------------------
</TABLE>
-9-
<PAGE> 10
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS IV SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO Core Fund 0.105%
- ----------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.12%
- ----------------------------------------------------------------------
GMO Value Fund 0.095%
- ----------------------------------------------------------------------
GMO Growth Fund 0.12%
- ----------------------------------------------------------------------
GMO U.S. Sector Fund 0.12%
- ----------------------------------------------------------------------
GMO Small Cap Value Fund 0.12%
- ----------------------------------------------------------------------
GMO Small Cap Growth Fund 0.12%
- ----------------------------------------------------------------------
GMO Fundamental Value Fund 0.13%
- ----------------------------------------------------------------------
GMO REIT Fund 0.12%
- ----------------------------------------------------------------------
GMO International Core Fund 0.09%
- ----------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.09%
- ----------------------------------------------------------------------
GMO Foreign Fund 0.09%
- ----------------------------------------------------------------------
GMO International Small Companies Fund 0.11%
- ----------------------------------------------------------------------
GMO Japan Fund 0.11%
- ----------------------------------------------------------------------
GMO Emerging Markets Fund 0.105%
- ----------------------------------------------------------------------
GMO Global Properties Fund 0.11%
- ----------------------------------------------------------------------
GMO Domestic Bond Fund 0.13%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.13%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.13%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.13%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.13%
- ----------------------------------------------------------------------
GMO Emerging Country Debt Fund 0.13%
- ----------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.13%
- ----------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.13%
- ----------------------------------------------------------------------
GMO Evolving Countries Fund 0.10%
- ----------------------------------------------------------------------
</TABLE>
-10-
<PAGE> 11
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS V SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO Core Fund 0.09%
- ----------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.09%
- ----------------------------------------------------------------------
GMO Value Fund 0.09%
- ----------------------------------------------------------------------
GMO Growth Fund 0.09%
- ----------------------------------------------------------------------
GMO U.S. Sector Fund 0.09%
- ----------------------------------------------------------------------
GMO Small Cap Value Fund 0.09%
- ----------------------------------------------------------------------
GMO Small Cap Growth Fund 0.09%
- ----------------------------------------------------------------------
GMO REIT Fund 0.09%
- ----------------------------------------------------------------------
GMO International Core Fund 0.07%
- ----------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.07%
- ----------------------------------------------------------------------
GMO Foreign Fund 0.10%
- ----------------------------------------------------------------------
GMO International Small Companies Fund 0.07%
- ----------------------------------------------------------------------
GMO Japan Fund 0.07%
- ----------------------------------------------------------------------
GMO Emerging Markets Fund 0.05%
- ----------------------------------------------------------------------
GMO Global Properties Fund 0.07%
- ----------------------------------------------------------------------
GMO Domestic Bond Fund 0.12%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.12%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.12%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.12%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.12%
- ----------------------------------------------------------------------
GMO Emerging Country Debt Fund 0.12%
- ----------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.12%
- ----------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.12%
- ----------------------------------------------------------------------
GMO Evolving Countries Fund 0.05%
- ----------------------------------------------------------------------
</TABLE>
-11-
<PAGE> 12
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS VI SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO Core Fund 0.07%
- ----------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.07%
- ----------------------------------------------------------------------
GMO Value Fund 0.07%
- ----------------------------------------------------------------------
GMO Growth Fund 0.07%
- ----------------------------------------------------------------------
GMO U.S. Sector Fund 0.07%
- ----------------------------------------------------------------------
GMO Small Cap Value Fund 0.07%
- ----------------------------------------------------------------------
GMO Small Cap Growth Fund 0.07%
- ----------------------------------------------------------------------
GMO REIT Fund 0.07%
- ----------------------------------------------------------------------
GMO International Core Fund 0.04%
- ----------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.04%
- ----------------------------------------------------------------------
GMO Foreign Fund 0.08%
- ----------------------------------------------------------------------
GMO International Small Companies Fund 0.04%
- ----------------------------------------------------------------------
GMO Japan Fund 0.04%
- ----------------------------------------------------------------------
GMO Emerging Markets Fund 0.02%
- ----------------------------------------------------------------------
GMO Global Properties Fund 0.04%
- ----------------------------------------------------------------------
GMO Domestic Bond Fund 0.10%
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.10%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.10%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.10%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.10%
- ----------------------------------------------------------------------
GMO Emerging Country Debt Fund 0.10%
- ----------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.10%
- ----------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.10%
- ----------------------------------------------------------------------
GMO Evolving Countries Fund 0.02%
- ----------------------------------------------------------------------
</TABLE>
-12-
<PAGE> 13
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS VII SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.06%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.06%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.06%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.06%
- ----------------------------------------------------------------------
</TABLE>
-13-
<PAGE> 14
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS VIII SHARES
<TABLE>
<CAPTION>
FUND SERVICE FEE
<S> <C>
- ----------------------------------------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.01%
- ----------------------------------------------------------------------
GMO International Bond Fund 0.01%
- ----------------------------------------------------------------------
GMO Currency Hedged International Bond Fund 0.01%
- ----------------------------------------------------------------------
GMO Global Bond Fund 0.01%
- ----------------------------------------------------------------------
</TABLE>
-14-
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 40 under the Securities Act of 1933 (Post-Effective Amendment No.
42 under the Investment Company Act of 1940) to GMO Trust's registration
statement on Form N-1A (the "Registration Statement") of our report dated April
10, 1997, relating to the financial statements and financial highlights of the
GMO Fundamental Value Fund series of GMO Trust which appears in the related
February 28, 1997 Annual Report and which are also incorporated by reference in
the Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services - Independent Accountants" and
"Financial Highlights" in such Statement of Additional Information and the
reference to us under the heading "Financial Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 3, 1997
<PAGE> 1
EXHIBIT 18
GMO TRUST
Plan pursuant to Rule 18f-3 under the
Investment Company Act Of 1940
-------------------------------------
Effective June 1, 1996
As Amended November ___, 1997
This Plan (the "Plan") is adopted by GMO Trust (the "Trust") pursuant
to Rule 18f-3 under the Investment Company Act of 1940 (the "Act") and sets
forth the general characteristics of, and the general conditions under which the
Trust may offer, multiple classes of shares of its now existing and hereafter
created portfolios ("Funds"). This Plan may be revised or amended from time to
time as provided below.
CLASS DESIGNATIONS
Each Fund of the Trust may from time to time issue one or more of the
following classes of shares: Class I Shares, Class II Shares, Class III Shares,
Class IV Shares, Class V Shares, Class VI Shares, Class VII Shares and Class
VIII Shares. Each of the classes of shares of any Fund will represent interests
in the same portfolio of investments and, except as described herein, shall have
the same rights and obligations as each other class. Each class shall be subject
to such investment minimums and other conditions of eligibility as are set forth
in the Trust's prospectus or statement of additional information as from time to
time in effect (the "Prospectus").
CLASS ELIGIBILITY
Class eligibility is generally dependent on the size of the client's
total account under the management of Grantham, Mayo, Van Otterloo & Co. LLC,
the Trust's investment adviser (referred to herein as "GMO" or the "Adviser"),
as described from time to time in the Prospectus.
Eligibility for Class I, Class II and Class III Shares is dependent on
the size of a client's minimum "Total Investment" with GMO. For clients that had
accounts with GMO as of May 31, 1996, their initial Total Investment will equal
the market value of all of their investments advised by GMO as of the close of
business on May 31, 1996. For clients establishing a relationship with GMO on or
after June 1, 1996, their Total Investment at any date is equal to the aggregate
of all amounts contributed to (less amounts withdrawn from) any Fund on or after
June 1, 1996, plus the market value of any non-mutual fund investment with GMO
as of the month-end prior to the date that "Total Investment" is being computed.
For purposes of class eligibility, market appreciation or depreciation of a
Fund's account is not
<PAGE> 2
considered; the Total Investment of a client is affected only by (i) the amount
of contributions to and withdrawals from Funds made by the client; and (ii)
changes in the market value of any non- mutual fund investment with GMO as of
the month-end prior to the date that "Total Investment" is being computed. It is
assumed that any Fund redemptions or withdrawals made by a client are satisfied
first from market appreciation in their shares, so that a redemption or
withdrawal does not lower a client's Total Investment unless the redemption or
withdrawal exceeds the value of market appreciation.
Eligibility for Class IV, Class V, Class VI, Class VII and Class VIII
Shares is dependent upon the client meeting either (i) a minimum "Total Fund
Investment" requirement which includes only a client's total investment in the
particular Fund, OR (ii) a minimum "Total Investment" requirement as set forth
in the Prospectus in effect from time to time. For clients that have accounts
with GMO as of November 30, 1997, their initial Total Investment or initial
Total Fund Investment for purposes of determining eligibility for Class IV,
Class V, Class VI, Class VII and Class VIII Shares will equal the market value
of all of their investments advised by GMO and its affiliates, or the market
value of their investment in the particular Fund, as the case may be, as of the
close of business on November 30, 1997. For clients establishing a relationship
with GMO on or after December 1, 1997, their Total Fund Investment and Total
Investment for purposes of determining eligibility for Class IV, Class V, Class
VI, Class VII and Class VIII Shares will be determined similarly to the
determination of Total Investment for purposes of eligibility for Class I, Class
II and Class III Shares described above ( i.e., appreciation and depreciation of
Fund shares is not considered in either calculation; a client's Total Investment
is affected only by the amount of contributions to and withdrawals from Fund
accounts made by the client and changes in the market value of any non-mutual
fund investment with GMO or its affiliates as of the month-end prior to the date
that Total Investment is being computed; a client's Total Fund Investment is
affected only by the amount of contributions to and withdrawals from the
relevant Fund made by the client). Similar to Class I, Class II and Class III
Shares, it is assumed that any Fund redemptions or withdrawals made by a client
are satisfied first from market appreciation in their shares, so that a
redemption or withdrawal does not lower a client's Total Investment unless the
redemption or withdrawal exceeds the value of market appreciation. However, with
respect to Class IV Shares only, a withdrawal from a non-mutual fund account, or
a withdrawal of Fund shares in excess of market appreciation, will only affect a
client's Total Investment or Total Fund Investment if, on the date of
computation, the aggregate value of such withdrawals since the previous
computation of Total Investment or Total Fund Investment, as the case may be
(the "prior computation date"), equals or exceeds 10% of the value of such
client's Total Investment or Total Fund Investment as of the prior computation
date.
CLASS CHARACTERISTICS
The sole difference among the various classes of shares is the level of
shareholder service fee ("Shareholder Service Fee") borne by the class for
client and shareholder service, reporting and other support provided to such
class by GMO.
-2-
<PAGE> 3
The multiple class structure reflects the fact that, as the size of the
client relationship increases, the cost to service that relationship is expected
to decrease as a percentage of the account. Thus, the Shareholder Service Fee is
lower for classes for which eligibility criteria generally require greater
assets under GMO's management.
Certain Funds are subject to either an initial purchase premium, a
redemption fee, or both. The initial purchase premium and redemption fee, if
any, may, in some limited cases, be subject to reduction or waiver if the
Adviser determines that there are minimal brokerage and/or transaction costs
incurred as a result of the purchase or redemption, as set forth in the
Prospectus in effect from time to time.(1)
ALLOCATIONS TO EACH CLASS
EXPENSE ALLOCATIONS
Shareholder Service Fees payable by the Trust to the shareholder
servicer of the Trust's shares (the "Shareholder Servicer") shall be allocated,
to the extent practicable, on a class-by-class basis. Subject to the approval
of the Trust's Board of Trustees, including a majority of the independent
Trustees, the following "Class Expenses" may (if such expense is properly
assessable at the class level) in the future be allocated on a class-by-class
basis: (a) transfer agency costs attributable to each class, (b) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxy statements to current shareholders
of a specific Class, (c) SEC registration fees incurred with respect to a
specific class, (d) blue sky and foreign registration fees and expenses
incurred with respect to a specific class, (e) the expenses of administrative
personnel and services required to support shareholders of a specific class
(including, but not limited to, maintaining telephone lines and personnel to
answer shareholder inquiries about their accounts or about the Trust), (f)
litigation and other legal expenses relating to a specific class of shares, (g)
Trustees' fees or expenses incurred as a result of issues relating to a
specific class of shares, (h) accounting and consulting expenses relating to a
specific class of shares, (i) any fees imposed pursuant to a non-Rule 12b-1
shareholder service plan that relate to a specific class of shares, and (j) any
additional expenses, not including advisory or custodial fees or other expenses
related to the management of the Trust's assets, if these expenses are actually
incurred in a different amount with respect to a class, or if services are
provided with respect to a class, or if services are provided with respect to a
class that are of a different kind or to a different degree than with respect
to one or more other classes.
- ----------------
(1) All purchase premiums are paid to and retained by the relevant Fund
and are intended to cover the brokerage and other costs associated with putting
an investment to work in the relevant markets. All redemption fees are paid to
and retained by the relevant Fund and are designed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity.
-3-
<PAGE> 4
All expenses not now or hereafter designated as Class Expenses ("Fund
Expenses") will be allocated to each class on the basis of the net asset value
of that class in relation to the net asset value of the relevant Fund.
However, notwithstanding the above, a Fund may allocate all expenses
other than Class Expenses on the basis of any methodology permitted by Rule
18f-3(c) under the Act, provided, however, that until such time as this Plan is
amended with respect to the Fund's allocation methodology, the Fund will
allocate all expenses other than Class Expenses on the basis of relative net
assets.
WAIVERS AND REIMBURSEMENTS
The Adviser and the Shareholder Servicer may choose to waive or
reimburse Shareholder Service Fees, or any other Class Expenses on a voluntary
or temporary basis.
INCOME, GAINS AND LOSSES
Income and realized and unrealized capital gains and losses shall be
allocated to each class on the basis of the net asset value of that class in
relation to the net asset value of the relevant Fund.
Each Fund may allocate income and realized and unrealized capital gains
and losses to each share based on any methodology permitted by Rule 18f-3(c)(2)
under the Act, consistent with the provisions set forth in "Expense Allocations"
above.
CONVERSION AND EXCHANGE FEATURES
On July 31 of each year and on such other dates as may be determined by
GMO with notice to the Trustees (each a "Conversion Date"), each client's Total
Investment and Total Fund Investment, as previously defined and as described in
the Prospectus, will be determined. Based on that determination, the client's
shares of each Fund will be automatically converted to the class of shares of
such Fund with the lowest Shareholder Service Fee which the client would be
eligible to purchase based on such Total Investment or Total Fund Investment, as
the case may be, which are then being offered by the Trust. Further, if a client
makes an investment in a GMO Fund or a non-mutual account advised by GMO or its
affiliates that causes the client to be eligible for a class of shares with a
lower Shareholder Service Fee, or the Trust commences offering a new class of
shares of a particular GMO Fund with a lower Shareholder Service Fee which such
client is eligible to purchase, such conversion will be effected within 15 days
after the end of the month during which such investment was made or such class
offered, as the case may be. Notwithstanding the foregoing, there will be no
automatic conversion from a class of shares with a lower Shareholder Service Fee
to a class of shares with a higher Shareholder Service Fee unless appropriate
disclosure regarding the
-4-
<PAGE> 5
higher Shareholder Service Fee has been given to the affected client(s) in the
Prospectus or otherwise.
Shares of one class will always convert into shares of another class on
the basis of the relative net asset value of the two classes, without the
imposition of any sales load, fee or other charge. The conversion of a client's
investment from one class of shares to another is not a taxable event, and will
not result in the realization of gain or loss that may exist in Fund shares held
by the client. The client's tax basis in the new class of shares will equal
their basis in the old class before conversion. The conversion of shares from
one class to another class of shares may be suspended if the opinion of counsel
obtained by the Trust that the conversion does not constitute a taxable event
under current federal income tax law is no longer available.
Certain special rules will be applied by the Adviser with respect to
clients who owned shares of Funds upon the creation of multiple classes on May
31, 1996. First, all clients existing on May 31, 1996 received Class III Shares
on June 1, 1996 regardless of the size of their GMO investment. Second, the
conversion of existing clients to any class of shares with a higher Shareholder
Service Fee will not occur until July 31, 1997 (or such later date as may be
determined by the Adviser), based on the client's Total Investment as of such
date (or such later date as may be determined by the Adviser). Third, existing
clients whose Total Investment as of May 31, 1996 was equal to $7 million or
more will be eligible to remain invested in Class III Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum set forth in
the Prospectus), provided such client makes no subsequent redemptions or
withdrawals other than of amounts attributable to market appreciation of its
account value as of June 1, 1996. Fourth, existing clients whose Total
Investment as of May 31, 1996 was less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum set forth in
the Prospectus), provided that such client makes no subsequent redemptions or
withdrawals other than of amounts attributable to market appreciation of its
account value as of June 1, 1996. Notwithstanding the foregoing special rules
applicable to clients owning shares of the Funds on May 31, 1996, such clients
shall always be eligible to remain in and/or be converted to any class of shares
of the relevant Fund with a lower Shareholder Service Fee which the client would
be eligible to purchase pursuant to the eligibility requirements set forth
elsewhere in this Plan or in the Prospectus.
Notwithstanding anything to the contrary in this Plan, pursuant to
Article VI, Section 3 of the Trust's Amended and Restated Agreement and
Declaration of Trust, the Trust has the right to redeem unilaterally any
shareholder of any Fund if at such time such shareholder owns shares of any Fund
or class thereof "having an aggregate net asset value of less than an amount
determined from time to time by the Trustees."
-5-
<PAGE> 6
DIVIDENDS
Dividends paid by the Trust with respect to its Class I, Class II,
Class III, Class IV, Class V, Class VI, Class VII and Class VIII Shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time and will be in the same amount, except that any Service Fee payments
relating to a class of shares will be borne exclusively by that class and, if
applicable, Class Expenses relating to a class shall be borne exclusively by
that class.
VOTING RIGHTS
Each share of the Trust entitles the shareholder of record to one vote.
Each class of shares of the Trust will vote separately as a class on matters for
which class voting is required under applicable law.
RESPONSIBILITIES OF THE TRUSTEES
On an ongoing basis, the Trustees will monitor the Trust for the
existence of any material conflicts among the interests of the eight classes of
shares. The Trustees shall further monitor on an ongoing basis the use of
waivers or reimbursement of expenses by the Adviser to guard against
cross-subsidization between classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop.
REPORTS TO THE TRUSTEES
The Adviser and the Shareholder Servicer will be responsible for
reporting any potential or existing conflicts among the eight classes of shares
to the Trustees.
AMENDMENTS
The Plan may be amended from time to time in accordance with the
provisions and requirements of Rule 18f-3 under the Act.
Adopted this ____ day of ___________, 1997
By: ________________________
Alison E. Baur
Clerk
-6-
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from GMO Trust,
form N-SAR for the period ended February 28, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 12
<NAME> FUNDAMENTAL VALUE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 184,341,071
<INVESTMENTS-AT-VALUE> 243,821,578
<RECEIVABLES> 1,355,477
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 245,177,055
<PAYABLE-FOR-SECURITIES> 295,700
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,298,131
<TOTAL-LIABILITIES> 12,593,831
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 162,849,002
<SHARES-COMMON-STOCK> 14,246,178
<SHARES-COMMON-PRIOR> 14,123,445
<ACCUMULATED-NII-CURRENT> 938,206
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,315,509
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 59,480,507
<NET-ASSETS> 232,583,224
<DIVIDEND-INCOME> 6,026,703
<INTEREST-INCOME> 259,649
<OTHER-INCOME> 0
<EXPENSES-NET> 1,628,003
<NET-INVESTMENT-INCOME> 4,658,349
<REALIZED-GAINS-CURRENT> 18,434,364
<APPREC-INCREASE-CURRENT> 17,227,189
<NET-CHANGE-FROM-OPS> 40,319,902
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,445,572)
<DISTRIBUTIONS-OF-GAINS> (17,043,498)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,028
<NUMBER-OF-SHARES-REDEEMED> (1,045,307)
<SHARES-REINVESTED> 1,161,012
<NET-CHANGE-IN-ASSETS> 20,154,878
<ACCUMULATED-NII-PRIOR> 875,858
<ACCUMULATED-GAINS-PRIOR> 7,774,215
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,627,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,975,375
<AVERAGE-NET-ASSETS> 217,060,018
<PER-SHARE-NAV-BEGIN> 15.04
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 2.53
<PER-SHARE-DIVIDEND> (0.32)
<PER-SHARE-DISTRIBUTIONS> (1.25)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.33
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GMO TRUST,
FORM N-SAR FOR THE PERIOD ENDED AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 13
<NAME> FUNDAMENTAL VALUE FUND, CLASS III
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 156,861,119
<INVESTMENTS-AT-VALUE> 219,284,740
<RECEIVABLES> 824,799
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 220,109,538
<PAYABLE-FOR-SECURITIES> 447,100
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,932,931
<TOTAL-LIABILITIES> 12,380,031
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 116,965,400
<SHARES-COMMON-STOCK> 11,632,360
<SHARES-COMMON-PRIOR> 14,246,178
<ACCUMULATED-NII-CURRENT> 843,392
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 27,497,094
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,423,621
<NET-ASSETS> 207,729,507
<DIVIDEND-INCOME> 2,931,866
<INTEREST-INCOME> 161,149
<OTHER-INCOME> 0
<EXPENSES-NET> 847,830
<NET-INVESTMENT-INCOME> 2,245,185
<REALIZED-GAINS-CURRENT> 27,845,315
<APPREC-INCREASE-CURRENT> 2,943,114
<NET-CHANGE-FROM-OPS> 33,033,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,339,999)
<DISTRIBUTIONS-OF-GAINS> (9,663,730)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,670
<NUMBER-OF-SHARES-REDEEMED> 3,207,188
<SHARES-REINVESTED> 587,700
<NET-CHANGE-IN-ASSETS> (24,853,717)
<ACCUMULATED-NII-PRIOR> 938,206
<ACCUMULATED-GAINS-PRIOR> 9,315,509
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 847,830
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,076,398
<AVERAGE-NET-ASSETS> 226,709,112
<PER-SHARE-NAV-BEGIN> 16.33
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 2.26
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> (0.74)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.86
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
