<PAGE> 1
File Nos. 2-98772
811-4347
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 16, 1998
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. 41 / X /
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 44 / X /
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 Tax-Managed U.S. Core Fund and
GMO Tax-Managed International Fund only)
CROSS REFERENCE SHEET
N-1A Item No. Location
PART A
Item 1. Cover Page................................... Cover Page
Item 2. Synopsis..................................... Schedule of Fees and
Expenses
Item 3. Condensed Financial
Information............................. Not Applicable
Item 4. General Description of
Registrant.............................. Organization and
Capitalization of the
Trust; Investment
Objectives and
Policies; Description
and Risks of Fund
Investments; Cover
Page
Item 5. Management of the Funds...................... Management of the
Trust
Item 5A. Management's Discussion
of Fund Performance..................... Not Applicable
Item 6. Capital Stock and Other
Securities.............................. Organization and
Capitalization of the
Trust; Back Cover
(Shareholder
Inquiries)
Item 7. Purchase of Securities Being
Offered................................. Purchase of Shares;
Determination of Net
Asset Value
Item 8. Redemption or Repurchase..................... Redemption of Shares;
Determination of Net
Asset Value
Item 9. Pending Legal Proceedings.................... None
Part B
Item 10. Cover Page................................... Cover Page
Item 11. Table of Contents............................ Table of Contents
Item 12. General Information and
History................................. Not Applicable
Item 13. Investment Objectives
and Policies............................ Investment Objectives
and Policies;
Miscellaneous
Investment Practices
<PAGE> 3
Item 14. Management of the Funds...................... Management of the
Trust
Item 15. Control Persons and Principal
Holders of Securities................... Description of the
Trust and Ownership of
Shares
Item 16. Investment Advisory and Other
Services................................ Investment Advisory
and Other Services
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities.............................. Description of the
Trust and Ownership of
Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered............. See in Part A Purchase
of Shares; Redemption
of Shares;
Determination of Net
Asset Value
Item 20. Tax Status................................... See in Part A
Distributions and
Taxes
Item 21. Underwriters................................. Not Applicable
Item 22. Calculation of Performance
Data.................................... Not Applicable
Item 23. Financial Statements......................... Not Applicable
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 Tax-Managed U.S.
Core Fund and the GMO Tax-Managed International Fund. No information
relating to any other series of the registrant is amended or superseded hereby.
<PAGE> 4
GMO TAX-MANAGED U.S. CORE FUND
GMO TAX-MANAGED INTERNATIONAL FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO TAX-MANAGED U.S. CORE FUND (THE "TAX-MANAGED U.S. CORE FUND")
and the GMO TAX-MANAGED INTERNATIONAL FUND (THE "TAX-MANAGED INTERNATIONAL
FUND") (each a "Fund" and collectively the "Funds") are two of thirty-six
separate investment portfolios of GMO Trust (the "Trust"), an open-end
management investment company. The other portfolios are offered pursuant to a
separate prospectus. The Fund's investment manager is GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO").
The Tax-Managed U.S. Core Fund seeks to maximize after-tax total return
through investment in a portfolio of common stocks traded in the U.S.
The Tax-Managed International Fund seeks to maximize after-tax total
return through investment in a portfolio of common stocks of non-U.S. issuers.
Both Funds are "non-diversified" portfolios, as defined in the
Investment Company Act of 1940 (the "1940 Act"). See "Description and Risks of
Fund Investments--Diversified and Non-Diversified Portfolios." A TABLE OF
CONTENTS APPEARS ON PAGE I OF THIS PROSPECTUS.
Each Fund has 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 THE FUNDS HAVE AN
INTEREST IN THE SAME UNDERLYING ASSETS, ARE MANAGED BY GMO, AND PAY THE SAME
INVESTMENT MANAGEMENT FEE.
INVESTMENT MANAGER
GMO
Grantham, Mayo, Van Otterloo & Co. LLC
<TABLE>
<CAPTION>
CLIENT SERVICE PROVIDER SHAREHOLDER SERVICE FEE
<S> <C>
GMO The level of Shareholder Service Fee for each class is set
Tel: (617) 330-7500 forth on the following page and described more fully
Fax: (617) 439-4192 under "Multiple Classes--Shareholder Service Fee."
</TABLE>
- ---------------------------
This Prospectus concisely describes the information which investors
ought to know about the Funds before investing. Please read this Prospectus
carefully and keep it for further reference. A Statement of Additional
Information dated July 1, 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 Fund, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS JULY 1, 1998
<PAGE> 5
CLASSES AND FEES
<TABLE>
<CAPTION>
ELIGIBILITY
REQUIREMENT* SHAREHOLDER SERVICE FEE**
------------ -------------------------
<S> <C> <C>
TAX-MANAGED U.S. CORE FUND
Class I N/A 0.28%
Class II N/A 0.22%
Class III $1 million 0.15%
Class IV N/A 0.105%
TAX-MANAGED INTERNATIONAL FUND
Class I N/A 0.28%
Class II N/A 0.22%
Class III $1 million 0.15%
Class IV N/A 0.09%
</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 each Fund pay the same investment
management fee.
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 either Fund,
but may be offered 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 either Fund,
but may be offered 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 herein)
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 not currently being offered by either Fund,
but may be offered in the future. Class IV Shares bear a Shareholder Service Fee
of 0.105% and 0.09% for the Tax-Managed U.S. Core Fund and Tax-Managed
International Fund, respectively. See "Multiple Classes--Eligibility for
Classes" 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 all classes of shares should follow purchase
instructions described under "Purchase of Shares" and direct questions to the
Trust at (617) 330-7500.
<PAGE> 6
TABLE OF CONTENTS
SCHEDULE OF FEES AND EXPENSES................................................ 1
INVESTMENT OBJECTIVE AND POLICIES............................................ 3
DESCRIPTION AND RISKS OF FUND
INVESTMENTS............................................................ 4
Portfolio Turnover..................................................... 4
Non-Diversified Portfolios............................................. 4
Certain Risks of Foreign Investments................................... 4
General.......................................................... 4
Emerging Markets................................................. 4
Investments in Asia.............................................. 5
Securities Lending..................................................... 5
Depository Receipts.................................................... 5
Convertible Securities................................................. 6
Futures and Options.................................................... 6
Options.......................................................... 6
Writing Covered Options.......................................... 6
Futures.......................................................... 7
Index Futures.................................................... 8
Interest Rate Futures............................................ 9
Options on Futures Contracts..................................... 9
Uses of Options, Futures and Options on Futures........................ 9
Risk Management.................................................. 9
Hedging.......................................................... 9
Investment Purposes.............................................. 9
Synthetic Sales and Purchases.................................... 10
Swap Contracts and Other Two-Party Contracts........................... 10
Swap Contracts................................................... 10
Interest Rate and Currency Swap Contracts........................ 10
Equity Swap Contracts and Contracts for Differences.............. 10
Interest Rate Caps, Floors and Collars........................... 11
Foreign Currency Transactions ......................................... 12
Repurchase Agreements.................................................. 13
Debt and Other Fixed Income Securities Generally....................... 13
Temporary High Quality Cash Items...................................... 13
U.S. Government Securities and Foreign Government Securities........... 13
Lower Rated Securities................................................. 14
Indexed Securities..................................................... 14
Firm Commitments....................................................... 15
Reverse Repurchase Agreements and Dollar Roll Agreements............... 15
Illiquid Securities.................................................... 15
ADDITIONAL INVESTMENT RESTRICTIONS........................................... 15
MULTIPLE CLASSES............................................................. 17
Shareholder Service Fees............................................... 17
Eligibility for Classes................................................ 17
Conversions Between Classes............................................ 18
PURCHASE OF SHARES........................................................... 19
Purchase Procedures.................................................... 20
REDEMPTION OF SHARES......................................................... 20
DETERMINATION OF NET ASSET VALUE............................................. 21
DISTRIBUTIONS................................................................ 22
i
<PAGE> 7
TAXES........................................................................ 22
Withholding on Distributions to Foreign Investors...................... 23
Foreign Tax Credits.................................................... 23
Tax Implications of Certain Investments................................ 24
Loss of Regulated Investment Company Status............................ 24
MANAGEMENT OF THE TRUST...................................................... 24
ORGANIZATION AND CAPITALIZATION
OF THE TRUST........................................................... 25
Appendix A............................................................. 26
RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS.......................... 26
Limitations on the Use of Options and Futures Portfolio Strategies..... 26
Risk Factors in Options Transactions................................... 26
Risk Factors in Futures Transactions................................... 26
Risk Factors in Swap Contracts, OTC Options and other Two-Party
Contracts........................................................ 27
Additional Regulatory Limitations on the Use of Futures and Related
Options, Interest Rate Floors, Caps and Collars and Interest
Rate and Currency Swap Contracts................................. 27
Appendix B................................................................... 28
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS.................................. 28
Commercial Paper Ratings .............................................. 28
Corporate Debt Ratings................................................. 28
Standard & Poor's Corporation.......................................... 28
Moody's Investors Service, Inc......................................... 28
ii
<PAGE> 8
SCHEDULE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GMO Shareholder
Fund Name Transaction Expenses Annual Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Inv. Share- Other Total You would pay the You would pay the
Premium (as a Fees (as a Mgmt. holder Ex- Operating following expenses on following expenses on
percentage of percentage Fees Service penses Expenses a $1,000 investment the same investment
amount of amount after Fee Fee(2) (3,4) (3) assuming 5% annual assuming no
invested)(1) redeemed)(1) Waiver(3) return with redemption:
redemption at the end
of each time period:
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-MANAGED 1 Yr. 3 Yr. 1 Yr. 3 Yr.
U.S. CORE FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Class I .14%(5) None .25% .28% .08% .61% $ 8 $21 $8 $21
- ------------------------------------------------------------------------------------------------------------------------------------
Class II .14%(5) None .25% .22% .08% .55% $ 7 $19 $7 $19
- ------------------------------------------------------------------------------------------------------------------------------------
Class III .14%(5) None .25% .15% .08% .48% $ 6 $17 $6 $17
- ------------------------------------------------------------------------------------------------------------------------------------
Class IV .14%(5) None .25% .105% .08% .435% $ 6 $15 $6 $15
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-MANAGED
INTERNATIONAL FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Class I .60%(5) None .30% .28% .24% .82% $14 $32 $14 $32
- ------------------------------------------------------------------------------------------------------------------------------------
Class II .60%(5) None .30% .22% .24% .76% $14 $30 $14 $30
- ------------------------------------------------------------------------------------------------------------------------------------
Class III .60%(5) None .30% .15% .24% .69% $13 $28 $13 $28
- ------------------------------------------------------------------------------------------------------------------------------------
Class IV .60%(5) None .30% .09% .24% .63% $12 $26 $12 $26
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The footnotes set forth below are important to understanding this table.
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses of the Funds that are borne by holders of Fund
shares. THE FIVE PERCENT ANNUAL RETURN AND EXPENSE NUMBERS USED ARE NOT
REPRESENTATIONS OF FUTURE PERFORMANCE OR EXPENSES. SUBJECT TO THE MANAGER'S
UNDERTAKING TO WAIVE ITS FEE AND/OR BEAR CERTAIN EXPENSES FOR THE FUNDS AS
DESCRIBED IN THE TABLE, 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 the Funds 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").
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums and redemption fees apply only to cash transactions as
set forth under "Purchase of Shares" and "Redemption of Shares"
respectively. These fees are paid to and retained by the Fund itself and
are designed to allocate transaction costs caused by shareholder activity
to the shareholder generating the activity, rather than to the Fund as a
whole. As described in greater detail in footnotes below, for certain
Funds the Manager may reduce purchase premiums and/or redemption fees if
the Manager determines there are minimal brokerage and/or other
transaction costs caused by a particular purchase or redemption. However,
the instances in which such fees may be properly waived are extremely
limited.
Normally no purchase premium is charged with respect to in-kind purchases
of Fund shares. However, in the case of in-kind purchases involving
transfers of large positions in markets where the cost of re-registration
and/or other transfer expenses are high, the Tax-Managed International
Fund may charge a premium of up to 0.10%, on in-kind purchases.
2. Shareholder Service Fee ("SSF") paid to GMO for providing client services
and reporting services. For Class III Shares, the SSF is 0.15% of daily
net assets.
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.
1
<PAGE> 9
3. The Manager has voluntarily undertaken to reduce its management fees and
to bear certain expenses with respect to the Fund until further notice to
the extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses and transfer taxes) would otherwise
exceed the percentage of that Fund's daily net assets specified below.
Therefore, so long as the Manager agrees to reduce its fees and bear
certain expenses, total annual operating expenses (subject to such
exclusions) of the Fund will not exceed these stated limitations. Absent
such undertakings, management fees for each Fund and the annual operating
expenses for each class would be as shown below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MANAGEMENT
VOLUNTARY FEE
FUND EXPENSE (ABSENT TOTAL CLASS
LIMIT WAIVER) OPERATING EXPENSES (ABSENT WAIVER)
- --------------------------------------------------------------------------------------------------------------------------
Class I Class II Class III Class IV
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Managed U.S. Core Fund .33% .525% .889% .829% .759% .714%
- --------------------------------------------------------------------------------------------------------------------------
Tax-Managed International .54% .75% 1.27% 1.21% 1.14% 1.08%
Fund
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
4. Based on estimated amounts for the Fund's first fiscal year.
5. The purchase premium and/or redemption fee for this Fund may generally not
be waived due to offsetting transactions, and may be waived in only rare
circumstances. The premium or fee will only be waived for this Fund (i) if
the purchase or redemption is part of a transfer from or to another Fund
where the Manager is able to transfer securities among the Funds to effect
the transaction, (ii) during periods (expected to exist only rarely) where
the Manager determines that the Fund is either substantially overweighted
or underweighted with respect to its cash position so that a redemption or
purchase will not require a securities transaction, or (iii) in certain
other instances (not including offsetting transactions) where it is
compelling to the Manager that the purchase or redemption will not result
in transaction costs to the Fund. Any waiver with respect to this Fund
must be arranged in advance with the Manager.
2
<PAGE> 10
INVESTMENT OBJECTIVE AND POLICIES
TAX-MANAGED U.S. CORE FUND
CURRENT BENCHMARK: S&P 500 (AFTER TAX)
The investment objective of the Tax-Managed U.S. Core Fund is to
maximize after-tax total return through investment in a portfolio of common
stocks traded in the U.S. The Fund expects that substantially all of its assets
will be invested in or exposed to the equity securities of at least 125
companies chosen from among the Wilshire 5000 Index (the "WILSHIRE 5000") and
that it will be invested primarily in the approximately 1,200 companies with the
largest equity capitalization (i.e., number of shares outstanding multiplied by
the market price per share) at the time of investment which are also listed on a
United States national securities exchange (the "LARGE CAP 1200"). The
Tax-Managed U.S. Core Fund may, from time to time, invest in fewer issuers if,
in the opinion of the Manager, there are not at least 125 attractive investment
opportunities from among such companies.
The Fund will employ several strategies designed to minimize the impact
of taxes on investors' returns. The Manager will seek to minimize portfolio
turnover in order to defer the realization and minimize the distributions of
capital gains. The Manager may, when appropriate, sell securities in order to
realize capital losses so as to offset realized capital gains, thus reducing net
capital gains distributions. In addition, when making sales of specific
securities, the Manager will attempt to sell shares on which it has the highest
cost basis in order to minimize capital gains distributions. Finally, the
Manager reserves the right to meet redemption requests through in-kind
redemptions, that is, to pay the redemption price in whole or in part by a
distribution of appreciated securities held by the Fund in lieu of cash. By
redeeming a shareholder in kind with appreciated securities, the Fund will not
be required to distribute the capital gains in those securities to the
shareholders in the Fund. The effect to the redeeming shareholder is the same as
a redemption in cash. Shareholders receiving the redemption in kind would pay
tax on the capital gains realized, if any, on the Fund shares redeemed. See
"Redemption of Shares" for more information on in-kind redemptions.
In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in real estate investment trusts ("REITs"). The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.
In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.
It is a policy of the Fund to stay fully invested in domestic common
stocks, index futures, equity swap contracts and contracts for differences even
when the Manager believes that equity securities generally may underperform
other types of investments. The Fund expects that, not including the margin
deposits or the segregated accounts created in connection with index futures and
other derivatives, less than 5% of its total assets will be exposed to cash or
high quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund 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."
TAX-MANAGED INTERNATIONAL FUND
CURRENT BENCHMARK: EAFE - LITE (AFTER TAX)
The investment objective of the Tax-Managed International Fund is to
maximize after-tax total return through investment in a portfolio of common
stocks of non-U.S. issuers. The Fund will usually be primarily invested in or
exposed to common stocks. The Fund may also invest in convertible bonds,
convertible preferred stocks, warrants or rights.
There are no prescribed limits on geographic asset distribution and the
Fund has the authority to invest in securities traded in securities markets of
any country in the world, although under normal market conditions at least 65%
of the Fund's total assets will be invested in or exposed to securities
principally traded in the securities markets of at least three foreign
countries. The responsibility for allocating the Fund's assets among the various
securities markets of the world is borne by the Manager. In making these
allocations, the Manager will consider such factors as the condition and growth
potential of the various economic and securities markets, currency and taxation
considerations and other pertinent financial, social, national and political
factors. The Fund generally will not invest in securities of U.S. issuers,
except that for temporary defensive purposes the Fund may invest up to 100
percent of its assets in United States securities. Normally, at least 90% of the
developed market equity securities held by the Fund will be selected from the
universe of issuers
3
<PAGE> 11
included in the Morgan Stanley Capital International Perspectives publication.
This publication included issuers in the MSCI EAFE index, as well as smaller
companies and companies in Canada.
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management,
although the Fund's foreign currency exposure will not generally vary by more
than 30% from the foreign currency exposure of the EAFE-Lite Index. The put and
call options on currency futures written by the Fund will always be covered. For
more information on foreign currency transactions, see "Description and Risks of
Fund Investments - Foreign Currency Transactions." The stocks held by the Fund
will not be chosen to approximate the weightings of the EAFE-Lite Index.
The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.
In addition, the Fund may invest in securities of foreign issuers
traded on U.S. exchanges and securities traded abroad, American Depositary
Receipts, European Depository Receipts and other similar securities convertible
into securities of foreign issuers. The Fund may also enter into repurchase
agreements, lend portfolio securities valued at up to 25% of total assets, and
may invest up to 15% of its net assets in illiquid securities. The Fund may
invest up to 15% of its assets in securities of issuers in newly industrializing
countries of the type invested in by the Emerging Markets Fund. The Fund expects
that, not including the margin deposits or the segregated accounts created in
connection with index futures and other derivatives, less than 5% of its total
assets will be exposed to cash or high quality money market instruments such as
securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
DESCRIPTION AND RISKS OF FUND
INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Not all Funds may engage in all practices described below. Please refer to
"Investment Objectives and Policies" above for a determination of which
practices a particular Fund may engage in.
PORTFOLIO TURNOVER
The after-tax impact of portfolio turnover will be considered when
making investment decisions for the Funds. Each Fund's portfolio turnover rate
is not expected to exceed 15%.
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 Funds.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
The Funds are each "non-diversified" funds under the 1940 Act, and as
such are not required to satisfy the "diversified" fund requirement set forth in
the 1940 Act. As non-diversified funds, each of the Funds is permitted to (but
not required to) invest a higher percentage of its assets in the securities of
fewer issuers relative to diversified funds. Such concentration could increase
the risk of loss to each Fund should there be a decline in the market value of
any one portfolio security relative to diversified funds. Investment in a
non-diversified fund may therefore entail greater risks than investment in 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
4
<PAGE> 12
regulations (including currency blockage), expropriation or nationalization of
assets, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against foreign
entities. Furthermore, issuers of foreign securities are subject to different,
often less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The securities of some foreign governments and companies and
foreign securities markets are less liquid and at times more volatile than
comparable U.S. securities and securities markets. Foreign brokerage commissions
and other fees are also generally higher than in the United States. The laws of
some foreign countries may limit a Fund's ability to invest in securities of
certain issuers located in these foreign countries. There are also special tax
considerations which apply to securities of foreign issuers and securities
principally traded overseas. Investors should also be aware that under certain
circumstances, markets which are perceived to have similar characteristics to
troubled markets may be adversely affected whether or not similarities actually
exist.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the securities markets of the U.S. and developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent than in
the U.S. and developed foreign markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce a
Fund's income from such securities. Finally, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation in the
world debt markets, there is little historical data or related market experience
concerning the attributes of such instruments under all economic, market and
political conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause the Funds to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
SECURITIES LENDING
Each Fund may make secured loans of portfolio securities amounting to
not more than one-third of such 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. Each Fund may also call such
loans in order to sell the securities involved. The Manager has retained lending
agents on behalf of the Funds that are compensated based on a percentage of each
Fund's return on the securities lending activity. The Funds also pay 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
A Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with the Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
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CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature, an
opportunity to participate in capital appreciation resulting from a market price
advance in a convertible security's underlying common stock. The price of a
convertible security is influenced by the market value of the underlying common
stock and tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. The Manager regards convertible securities as a form of equity
security.
FUTURES AND OPTIONS
As described under "Investment Objectives and Policies" above, each
Fund may use futures and options for various purposes. Such transactions may
involve options, futures and related options on futures contracts, and those
instruments may relate to particular equity and fixed income securities, equity
and fixed income indexes, and foreign currencies. The 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 the Funds 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 a Fund than if it
had not entered into any futures contracts or options transactions. Losses
incurred in transactions in futures and options on futures and the costs of
these transactions will affect a Fund's performance. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Funds' investments in futures contracts and
related options.
OPTIONS. As has been noted above, the Funds may use options and (1) may
enter into contracts giving third parties the right to buy the Funds' 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 Funds 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. A Fund 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 Funds will receive a premium for writing put or call options, 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, a 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, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than their 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 a Fund writes a
put on an index, the Fund may be required to make a cash settlement greater than
the premium received if the index declines.
A call option on a security is "covered" if the Fund owns the
underlying security or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same security
as the call written where the exercise price of the call held is equal to or
less than the exercise price of the call written or greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government Securities or other high grade debt obligations in a segregated
account with its custodian. A put option is "covered" if the Fund maintains
cash, U.S. Government Securities or other high grade debt obligations with a
value equal to the exercise price in a segregated account with its custodian, or
else holds on a share-for-share basis a put on the same security as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the writer of an option wishes to terminate its obligation, it may
effect a "closing purchase transaction." This is accomplished, in the case of
exchange traded options, by buying an option of the same series as the option
previously written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. The writer of an option may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. Likewise, an investor who is the holder of an option may liquidate
its
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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.
Effecting a closing transaction in the case of a written call option
will permit a 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, a 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 Funds may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which a Fund will be able to write and purchase call and
put options may be restricted by each Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
FUTURES. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some
futures contracts are "cash settled" (rather than "physically settled," as
described above) which means that the purchase price is subtracted from the
current market value of the instrument and the net amount if positive is paid to
the purchaser, and if negative is paid by the purchaser. Futures contracts are
traded in the United States only on commodity exchanges or boards of trade --
known as "contract markets" -- approved for such trading by the Commodity
Futures Trading Commission ("CFTC"), and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant contract
market. Under U.S. law, futures contracts on individual equity securities are
not permitted. See Appendix A, "Risks and Limitations of Options, Futures and
Swaps" for more information concerning these practices and their accompanying
risks.
The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short
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positions in the futures contract more or less valuable, a process known as
"marking to market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a commission is paid on each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. Each Fund may purchase futures contracts on various
securities indexes ("Index Futures"). The Funds' 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 the Fund purchases foreign stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the S&P 500 Index and futures markets. Secondly, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
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, a Fund
may engage in a variety of transactions involving the use of futures with
respect to U.S. Government Securities and other fixed income securities. The use
of interest rate futures involves risk. See Appendix A, "Risks and Limitations
of Options, Futures and Swaps" for a more detailed discussion of the limits,
conditions and risks of the Fund's investment in futures contracts.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. A Fund may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, a Fund may purchase
put
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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. The Funds will not, however, use futures
and options on futures to obtain greater volatility than they could obtain
through direct investment in securities; that is, the Funds will not normally
engage in risk management to increase the average volatility (beta) of the
relevant 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 the 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 the Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in the Fund's portfolio is expected to decline as a
result of an increase in rates, a Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, a 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 Funds' currency hedging practices.
INVESTMENT PURPOSES. To the extent indicated elsewhere, the Fund may
also enter into futures contracts and buy and sell options thereon for
investment. For example, the Funds may invest in futures when its Manager
believes that there are not enough attractive securities available to maintain
the standards of diversity and liquidity set for the Funds pending investment in
such securities if or when they do become available. Through this use of futures
and related options, the Fund may diversify risk in its portfolio without
incurring the substantial brokerage costs which may be associated with
investment in the securities of multiple issuers. This use may also permit a
Fund to avoid potential market and liquidity problems (e.g., driving up the
price of a security by purchasing additional shares of a portfolio security or
owning so much of a particular issuer's stock that the sale of such stock
depresses that stock's price) which may result from increases in positions
already held by the Fund.
When a 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
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a "synthetic" bond with a futures contract, it will maintain cash, U.S.
Government securities or other high grade debt obligations in a segregated
account with its custodian with a value at least equal to the face amount of the
futures contract (less the amount of any initial or variation margin on
deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to
reduce transaction costs associated with short-term restructuring of the Funds'
portfolios. 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, a 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 Funds 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, a 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).
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 a Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. A Fund 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 Funds' 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 the 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
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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. A Fund may also use actual long and short futures positions to achieve
the same market exposure(s) as contracts for differences. A Fund will only enter
into contracts for differences where payment obligations of the two legs of the
contract are netted and thus based on changes in the relative value of the
baskets of securities rather than on the aggregate change in the value of the
two legs. A Fund will only enter into contracts for differences (and analogous
futures positions) when the Manager believes that the basket of securities
constituting the long leg will outperform the basket constituting the short leg.
However, it is possible that the short basket will outperform the long basket -
resulting in a loss to the Fund, even in circumstances where the securities in
both the long and short baskets appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to
the 10% limitation mentioned above, the Funds will maintain cash, U.S.
Government Securities or other high grade debt obligations in a segregated
account with its custodian in an amount equal to the aggregate of net payment
obligations on its swap contracts and contracts for differences, marked to
market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contacts, when
aggregated with the Index Futures and equity swaps contracts as described above,
does not exceed 10% of the 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, the Fund will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount at least equal to its
obligations, if any, under interest rate cap, floor and collar arrangements. As
with futures contracts, when 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. A 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 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 each Fund's limitation on investment in
illiquid securities. See "Description and Risks of Fund Investments -- Illiquid
Securities."
FOREIGN CURRENCY TRANSACTIONS
A Fund may be permitted to invest in securities denominated in foreign
currencies and may buy or sell foreign currencies, deal in forward foreign
currency contracts, currency futures contracts and related options and options
on currencies. A Fund 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 quality 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.
A Fund may enter into forward contracts for hedging under three
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By
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entering into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transaction, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold and the date on which payment is made or received.
Second, when the Manager of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, a Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps."
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, a
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
A Fund may also enter foreign currency forward contracts for investment
and currency risk management. When a Fund uses currency instruments for such
purposes, the foreign currency exposure of the Fund may differ substantially
from the currencies in which the Fund's investment securities are denominated.
However, a Fund's aggregate foreign currency exposure will not normally exceed
100% of the value of the Fund's securities, except that a Fund may use currency
instruments without regard to this limitation if the amount of such excess, when
aggregated with futures contracts, equity swap contracts and contracts for
differences used in similar ways, does not exceed 10% of the 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. The Fund's ability to engage in
forward contracts may be limited by tax considerations.
A Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which they use currency forwards.
Except to the extent that a Fund 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, such 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, a Fund may cover the call option by owning securities
denominated in the currency with a value equal to the face amount of the
contract(s) or through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and
broker-dealers by which the Fund acquires a security (usually an obligation of
the Government where the transaction is initiated or in whose currency the
agreement is denominated) for a relatively short period (usually not more than a
week) for cash and obtains a simultaneous commitment from the seller to
repurchase the security at an agreed-on price and date. The resale price is in
excess of the acquisition price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
an opportunity for a 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
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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 a 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, a Fund
may temporarily invest a portion of its assets in cash or cash items pending
other investments or in connection with the maintenance of a segregated account.
These cash items must be of high quality and may include a number of money
market 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. 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 the Fund to enforce its rights against the foreign government
issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, a Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or both, in U.S. Government Securities and
Foreign Government Securities. These certificates of accrual and similar
instruments may be more volatile than other government securities.
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LOWER RATED SECURITIES
A Fund may invest some or all of its 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.
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 a Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage, since they will generally increase
or decrease in value in response to changes in market interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.
A Fund's investment in indexed securities may also create taxable
income in excess of the cash such investments generate. See "Taxes - Tax
Implications of Certain Investments" in this Prospectus.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. A Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. A Fund will only enter into firm commitment
arrangements with banks and broker-dealers which the Manager determines present
minimal credit risks. Each 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.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
A Fund 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.
Each 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 the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party or its trustee or receiver whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and dollar rolls are
not considered borrowings by a Fund for purposes of a Fund's fundamental
investment restriction with respect to borrowings.
ILLIQUID SECURITIES
A Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Funds currently intend 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 guide lines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps,
floors and collars to be illiquid securities. Consequently, while the staff
maintains this position, a 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.
ADDITIONAL INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to such Fund as indicated:
(1) Borrow money except under the following circumstances: (i) A 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) A
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) A 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.)
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(3) Make short sales of securities or maintain a short position for a
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of a Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Purchase or sell commodities or commodity contracts, except that a
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 the 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 policies of each Fund which may be
changed by the Trustees without shareholder approval, to:
(1) Invest in warrants or rights excluding options (other than warrants
or rights acquired by the Fund as a part of a unit or attached to securities at
the time of purchase), except that the Fund may invest in such warrants or
rights so long as the aggregate value thereof (taken at the lower of cost or
market) does not exceed 5% of the value of the fund's total net assets; provided
that within this 5%, not more than 2% of its net assets may be invested in
warrants that are not listed on the New York or American Stock Exchange or a
recognized foreign exchange.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) Make investments for the purpose of gaining control of a company's
management.
(4) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
(5) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 33 1/3% of the Fund's total assets (taken at cost). (For the purposes
of this restriction, collateral arrangements with respect to swap agreements,
the writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)
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
16
<PAGE> 24
of the Fund, or (2) 67% or more of the shares of the Fund present at a meeting
if more than 50% of the outstanding shares are represented at the meeting in
person or by proxy.
MULTIPLE CLASSES
Each Fund has four classes of shares, Class I, Class II, Class III and
Class IV Shares, but is currently offering only Class III Shares. See
"Eligibility for Classes" below.
SHAREHOLDER SERVICE FEES
The principal economic difference among the various classes of shares
is the level of Shareholder Service Fee which the classes bear for client and
shareholder service, reporting and other support. The existence of multiple
classes reflects the fact that, as the size of a client relationship increases,
the cost to service that client decreases as a percentage of the assets in that
account. Thus, the Shareholder Service Fee is lower for classes where
eligibility criteria require greater total assets under GMO's management.
The Trust has adopted a Shareholder Servicing Plan with respect to the
Funds' multiple classes of shares. Pursuant to the terms of the Shareholder
Servicing Plan, the Funds' 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>
- --------------------------------------------------------------------------------
Fund Class I Class II Class III Class IV
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Managed U.S. 0.28% 0.22% 0.15% .105%
Core Fund
- --------------------------------------------------------------------------------
Tax-Managed 0.28% 0.22% 0.15% .09%
International
Fund
- --------------------------------------------------------------------------------
</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 establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater of (a) the market value of
assets managed by GMO and its affiliates for the client (whether in a pooled
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's Domestic Active Division as of the previous
Determination Date), plus contributions made to, and less Large Withdrawals
(defined below) from, any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) since the previous Determination Date
(plus the market value of any account managed by GMO's Domestic Active Division
as of the then current Determination Date). For these purposes, "Large
Withdrawals" means the total of all withdrawals made from any GMO-managed
product or account (other than any account managed by GMO's Domestic Active
Division) since the previous Determination Date if such total exceeds 7% of the
sum of the client's Total Investment as of the previous Determination Date and
any contributions to any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) made since the previous Determination
Date. For clients that have accounts with GMO as of November 30, 1997, their
initial Total Investment is the greater of the market value of assets managed by
GMO and its affiliates for the client as of the close of business on November
30, 1997 or on December 31, 1997. For clients establishing a relationship with
GMO on or after December 1, 1997, their Total Investment will be determined as
described above. Notwithstanding anything to the contrary in this Prospectus,
assets invested in the Pelican Fund will not be considered when determining a
client's Total Investment. For purposes of this Prospectus, accounts managed by
GMO's Domestic Active Division do not include any GMO Trust Funds (other than
the Pelican Fund), and include only certain separate accounts managed by GMO.
Clients with any questions regarding whether certain of their assets are deemed
to be managed by GMO's Domestic Active Division should call GMO at
(617) 330-7500.
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:
17
<PAGE> 25
<TABLE>
<CAPTION>
CLASS OF SHARES MINIMUM TOTAL INVESTMENT
--------------- ------------------------
<S> <C>
Class I N/A*
Class II N/A*
Class III $1 Million
</TABLE>
*not presently being offered by the Fund
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.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
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 the Funds or that are making investments into the
Funds in conjunction with a very large commitment of assets to investment
management by GMO.
Eligibility for Class IV 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 relevant Fund or (ii) a minimum "Total
Investment" requirement calculated as described above for Class I, Class II and
Class III Shares.
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 Shares will be the greater of the market
value of all of their investments advised by GMO and its affiliates, or the
market value of their investment in the Funds, as the case may be, as of the
close of business on November 30, 1997 or December 31, 1997. For clients
establishing a relationship with GMO on or after December 1, 1997, their Total
Fund Investment and Total Investment will be determined as described above.
The minimum Total Fund Investment and/or Total Investment for a client
to be eligible for Class IV Shares is set forth in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS OF SHARES MINIMUM TOTAL FUND INVESTMENT MINIMUM TOTAL INVESTMENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Class IV N/A* N/A*
- --------------------------------------------------------------------------------
</TABLE>
*not presently being offered by the Fund
There is no minimum for subsequent investments into any class of shares
of the Funds.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
CONVERSIONS BETWEEN CLASSES
On December 31 of each year and on such other dates as may be
determined by GMO (each a "DETERMINATION DATE") the value of each client's Total
Investment and Total Fund Investment with GMO, as defined above, will be
determined. Based on that determination, each client's shares of each Fund will
be automatically converted to the class of shares of such Fund which is then
being offered with the lowest Shareholder Service Fee for which the client is
eligible based on the amount of their Total Investment or Total Fund Investment,
as the case may be, on the Determination Date. The conversion will occur within
15 business days following the Determination Date. Also, if a client makes an
investment in a GMO Fund (except for the Pelican Fund) or puts additional assets
under GMO's management (except for accounts managed by GMO Domestic Active
Division) 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 calendar quarter in which the investment was made, and the conversion will
be effected within 15 business days of that quarter.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in
18
<PAGE> 26
the new class of shares immediately after the conversion should equal the
client's basis in the converted shares immediately before conversion, and the
holding period of the new class of shares should include the holding period of
the converted shares.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million 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), and such
conversion will not occur until on or after July 31, 1997. Notwithstanding the
foregoing special rules, clients shall always remain eligible to remain in
and/or to be converted to any class of shares of the Fund which the client would
be eligible to purchase pursuant to the eligibility requirements set forth
herein.
Investors should be aware that not all classes of the Funds are
available in all jurisdictions.
PURCHASE OF SHARES
Shares of the Funds 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.
The purchase price of a share of a 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. 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 the investment to work in
the relevant markets. Each class of shares of a Fund has the same rate of
purchase premium.
The purchase premiums currently in effect for the Tax-Managed U.S. Core
Fund and Tax-Managed International Fund are .14% and .60%, respectively.
Purchase premiums generally apply only to cash transactions. These 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, 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 a 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. However, in the case of in-kind purchases involving
transfers of large positions in markets where the costs of re-registration
and/or other transfer expenses are high, the Tax-Managed International Fund
may charge a premium of 0.10%.
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
19
<PAGE> 27
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 Subscription Agreement is not
considered to be in good order and is required to be resubmitted on the
following business day. With the prior consent of the Manager, in certain
circumstances the Manager may, in its discretion, permit purchases based on
receiving adequate written assurances that Federal Funds or securities, as the
case may be, will be delivered to the Trust by 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
SUBSCRIPTION AGREEMENT which can be obtained from the Trust at the telephone
numbers set forth above.
Purchases will be made in full and fractional shares of the relevant
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: Investors must submit a Purchaser Order to the
Trust and it must be accepted by the Trust before it will be considered in
"good order."
A Purchase Order for Shares may be obtained by calling the Trust at
(617) 330-7500. The Purchase Order 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 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 Fund. "Federal funds" are monies credited
to Investors Bank & Trust Company's account with the Federal Reserve Bank of
Boston.
Note: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above, but, in such cases, the
investor should carefully review confirmations sent by the Trust to verify that
the order was properly executed. The Trust cannot be held responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.
REDEMPTION OF SHARES
Shares of a 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 the Fund bear the same redemption fee rate, if any.
Neither Fund currently has a redemption fee in effect.
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 a Fund, if any, 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 Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a
20
<PAGE> 28
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.
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.
A Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because a Fund may 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 a Fund's shares may be significantly
affected on days when shareholders have no access to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for each Fund once on each
day on which the New York Stock Exchange is open as of 4:15 p.m., New York City
Time, except that a Fund may not determine its net asset value on days during
which no security is tendered for redemption and no order to purchase or sell
such security is received by the relevant Fund. A Fund's net asset value is
determined by dividing the total market value of the Fund's portfolio
investments and other assets, less any liabilities, by the total outstanding
shares of the Fund. Portfolio securities listed on a securities exchange for
which market quotations are available are valued at the last quoted sale price
on each business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken from
the closing price on the exchange where the security is primarily traded.
Unlisted securities for which market quotations are readily available are valued
at the most recent quoted bid price, except that debt obligations with sixty
days or less remaining until maturity may be valued at their amortized cost,
unless circumstances dictate otherwise. Circumstances may dictate otherwise,
among other times, when the issuer's creditworthiness has become impaired.
All other fixed income securities (which includes bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another source)
because of such price activity or because the Manager has other reasons to
suspect that a price supplied may not be reliable.
Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Trustees
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Trustees may determine in computing net asset value.
Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the New York
Stock Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may occasionally
occur between the earlier closings of such exchanges and securities markets and
the closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of a Fund. If an event materially affecting
the value of such foreign
21
<PAGE> 29
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 a Fund even though there has not been any change in the values of such
securities and options, measured in terms of the foreign currencies in which
they are denominated.
DISTRIBUTIONS
Each Fund intends to pay out as dividends, at least annually,
substantially all of its net investment income (which is derived from dividends
and interest it receives from its portfolio investments and net short-term
capital gains). For these purposes and for federal income tax purposes, a
portion of the premiums from certain expired call or put options written by the
Funds, net gains from certain closing purchase and sale transactions with
respect to such options and a portion of net gains from other options and
futures transactions are treated as short-term capital gain. Each Fund also
intends to distribute substantially all of its net long-term capital gains, if
any, after giving effect to any available capital loss carryovers. It is the
policy of 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 Tax-
Managed U.S. Core Fund is to declare and pay distributions of its dividends and
interest quarterly. The policy of the Tax-Managed International Fund is to
declare and pay distributions of its dividends, interest and foreign currency
gains semi-annually. Each Fund also intends to distribute net short-term capital
gains and net long-term capital gains at least annually. Investors should be
aware that by purchasing shares shortly before the record date of a dividend or
capital gains distribution, they will pay the full price of the shares and
shortly thereafter will receive some portion of the price paid back as a taxable
dividend or taxable capital gains distribution.
All dividends and/or distributions will be paid in shares of the
relevant Fund, at net asset value, unless the shareholder elects to receive
cash. There is no purchase premium on reinvested dividends or distributions.
Shareholders may make this election by marking the appropriate box on the
Application or by writing to the Trust.
Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "indexed securities," will create taxable
income in excess of the cash they generate. In such cases, the relevant 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 each 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.
22
<PAGE> 30
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 a Fund from REITs will not qualify for the corporate
dividends-received deduction. A Fund's investments in REIT equity securities, if
any, may require the Fund to accrue and distribute income not yet received. In
order to generate sufficient cash to make the requisite distributions, a Fund
may be required to sell securities in its portfolio that it otherwise would have
continued to hold (including when it is not advantageous to do so). A Fund's
investments in REIT equity securities may at other times result in the Fund's
receipt of cash in excess of the REIT's earnings; if the Funds distribute 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
appropriate certification has not been provided for a foreign shareholder, or
where the Trust is notified that the shareholder has underreported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding).
The foregoing is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in a Fund in light
of each shareholder's particular tax situation. Shareholders should also consult
their own tax advisors about consequences under foreign, state, local or other
applicable tax laws (including possible liability for federal alternative
minimum tax).
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder will ordinarily not be subject to U.S.
taxation, unless the recipient or seller is a nonresident alien individual who
is present in the United States for more than 182 days during the taxable year.
However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Federal regulations generally require the Funds to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and gains realized upon a sale of securities
paid to a shareholder if such shareholder fails to certify either that the TIN
furnished in connection with opening an account is correct or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Also, the IRS may notify a Fund
to institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a Federal income tax return. A TIN is either the Social
Security number or employer identification number of the record owner of the
account. Any tax withheld as a result of backup withholding does not constitute
an additional tax imposed on the record owner of the account, and may be claimed
as a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the 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 a 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 a
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.
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TAX IMPLICATIONS OF CERTAIN INVESTMENTS
As described above under the heading "Distributions," certain of the
Funds' investments, including assets "marked to the market" for federal income
tax purposes, debt obligations issued or purchased at a discount and potentially
so-called "index securities," will create taxable income in excess of the cash
they generate. In such cases, the relevant 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.
A 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 a Fund's
ability to engage in these transactions, 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 a Fund in certain "passive foreign investment companies"
could subject the Fund to a U.S. federal income tax (including interest charges)
on distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to Fund shareholders. However, a Fund may elect to treat a passive
foreign investment company as a "qualified electing fund," in which case the
Fund will be required to include its share of the company's income and net
capital gain annually, regardless of whether it receives any distributions from
the company. A Fund may also make an election to mark the gains (and to a
limited extent losses) in such holdings "to the market" as though it had sold
and repurchased its holdings in those PFIC's on the last day of the Fund's
taxable year. Such gains and losses are treated as ordinary income and loss. The
QEF and mark-to-market elections may have the effect of accelerating the
recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the Fund to avoid taxation. Making either of
these elections may therefore require a Fund to liquidate other investments
(including when it is not advantageous to do so) to meet its distribution
requirement, which may also accelerate the recognition of gain and affect the
Funds' total return.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If a
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, a 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, the Manager selects
and reviews each Fund's investments and provides executive and other personnel
for the management of the Trust. Pursuant to the Trust's Agreement and
Declaration of Trust, the Board of Trustees supervises the affairs of the Trust
as conducted by the Manager. In the event that the Manager ceases to be the
manager of the 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. In
addition, with respect to the Fund, the Manager has voluntarily agreed to waive
its fee and to bear certain expenses until further notice in order to limit each
Fund's annual expenses to specified limits (with certain exclusions). These
limits and the terms applicable to them are described under the Schedule of Fees
and Expenses.
Mr. R. Jeremy Grantham and Mr. Richard McQuaid will be primarily
responsible for the day to day management of the Tax-Managed U.S. Core Fund
and the Tax-Managed International Fund.
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Pursuant to an Administrative Services Agreement with GMO, Investors
Bank & Trust Company provides administrative services to each Fund. GMO pays
Investors Bank & Trust Company an annual fee for its services to the Funds.
Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of each Fund of the Trust, 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-six series of shares, including for the
Tax-Managed U.S. Core Fund and the Tax-Managed International Fund, as well
as the Asia Fund, International Core Plus Allocation Fund, Fundamental Value
Fund, Pelican Fund, U.S. 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 the 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.
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.
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APPENDIX A
RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS
Limitations on the Use of Options and Futures Portfolio Strategies. As
noted in "Descriptions and Risks of Fund Investment Practices--Futures and
Options" above, the Funds may use futures contracts and related options for
hedging and, in some circumstances, for risk management or investment but not
for speculation. Thus, except when used for risk management or investment, a
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.
A 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 a Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, a 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
the Funds' ability to purchase or sell options on a particular security.
The amount of risk the Funds assume when they purchase 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
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a Fund may purchase or sell futures contracts in a greater amount than the
hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the futures contracts. Conversely, a Fund may
purchase or sell fewer contracts if the volatility of the price of the hedged
securities is historically less than that of the futures contract.
As noted in the Prospectus, a Fund may also purchase futures contracts
(or options thereon) as an anticipatory hedge against a possible increase in the
price of currency in which is denominated the securities the Fund anticipates
purchasing. In such instances, it is possible that the currency may instead
decline. If the Fund does not then invest in such securities because of concern
as to possible further market and/or currency decline or for other reasons, the
Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
a Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that the Fund might realized in trading could be eliminated by adverse changes
in the exchange rate, or the Fund could incur losses as a result of those
changes.
Risk Factors in Swap Contracts, OTC Options and other Two-Party
Contracts. 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, the Fund will succeed in pursuing contractual
remedies. A 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 the Fund as
provided in the Prospectus in futures contracts and related options for purposes
other than bona fide hedging are limited such that the aggregate amount that the
Funds may commit to initial margin on such contracts or time premiums on such
options may not exceed 5% of that Funds' net assets.
The Manager and the Trust do not believe that a 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 the 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 the Fund's net
payment obligation that is not segregated against in the case of interest rate
floors, caps and collars and interest rate and currency swap contracts.
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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)
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A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.(1)
Baa - Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing. Should no rating be assigned by Moody's, the reason
may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols 1Aa1,
A1, Baa1, and B1.
29
<PAGE> 37
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries
to Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
(1-617-330-7500)
30
<PAGE> 38
GMO TAX-MANAGED U.S. CORE FUND
GMO TAX-MANAGED INTERNATIONAL FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus for the GMO Tax-Managed U.S.
Core Fund and GMO Tax-Managed International Fund dated July 1, 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> 39
Table of Contents
Caption Page
------- ----
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............................ 6
-i-
<PAGE> 40
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the GMO Tax-Managed U.S. Core
Fund (the "Tax-Managed U.S. Core Fund") and the GMO Tax-Managed International
Fund (the "Tax-Managed International Fund") (each a "Fund" and collectively the
"Funds") are described in the Prospectus. Unless otherwise indicated in the
Prospectus or this Statement of Additional Information, the investment
objectives 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," each Fund may purchase
futures contracts on various securities indexes ("Index Futures"). As indicated
in the Prospectus, an Index Future is a contract to buy or sell an integral
number of units of the particular stock index at a specified future date at a
price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. Entering into a contract to buy units is commonly
referred to as buying or purchasing a contract or holding a long position in the
relevant index.
For example, if the value of a unit of a particular index were $1,000, a
contract to purchase 500 units would be worth $500,000 (500 units x $1,000). The
Index Futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the relevant index at the expiration
of the contract. For example, if a Fund enters into one futures contract to buy
500 units of an index at a specified future date at a contract price of $1,000
per unit and the index is at $1,010 on that future date, the Fund will gain
$5,000 (500 units x gain of $10).
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> 41
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 and Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC
Susan Randall Harbert. Secretary and 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 each
Fund.
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> 42
<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 Contract
As disclosed in the Prospectus under the heading "Management of the Fund,"
under a separate Management Contract (the "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 each Fund and place all orders for each
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 with respect
to a Fund will be reduced to the extent that the Fund's annual expenses incurred
in the operation of the Fund (including the management fee but excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses and
transfer taxes) would 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 term "expenses" is defined in the statutes or regulations of
such jurisdictions, and, generally
-3-
<PAGE> 43
speaking, excludes brokerage commissions, taxes, interest and extraordinary
expenses. The Funds are 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 the relevant 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 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.
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116 serves as the Trust's custodian on
behalf of the Tax-Managed U.S. Core Fund. Brown Brothers Harriman & Co. ("BBH"),
40 Water Street, Boston, Massachusetts 02109 serves as the Trust's custodian on
behalf of the Tax-Managed International Fund. 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 relevant Fund. Upon instruction, IBT and BBH receive and deliver cash and
securities of the relevant Fund in connection with the relevant Fund's
transactions and collects all dividends and other distributions made with
respect to the relevant Fund's 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 relevant Fund on a
daily basis.
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 each Fund. 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
-4-
<PAGE> 44
(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 initially entered into the Servicing Agreement with GMO on May
30, 1996.
Independent Accountants. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts annual audits of the Trust's financial statements,
assists in the preparation of each Fund's federal and state income tax returns,
consults with the Trust as to matters of accounting and federal and state income
taxation and provides assistance in connection with the preparation of various
Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account's being
preferred over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the relevant Fund; (b) such securities are acquired for
investment and not for resale; (c) such securities are liquid securities which
are not restricted as to transfer either by law or liquidity of market; and (d)
such securities have a value which is readily ascertainable as evidenced by a
listing on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of the Funds, 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 relevant
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
-5-
<PAGE> 45
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 Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients
(including other Funds of the Trust) 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.
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-six series: one for each of the Tax-Managed U.S. Core Fund and
Tax-Managed International Fund and one for each of the Asia Fund, International
Core Plus Allocation Fund, Fundamental Value Fund, Pelican Fund, U.S. 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
-6-
<PAGE> 46
Fund. Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or more
additional separate portfolios for investments in the Trust or merge two or more
existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the Investment Company Act of 1940 (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 1940 Act, 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
-7-
<PAGE> 47
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for 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
-8-
<PAGE> 48
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.
-9-
<PAGE> 49
GMO TRUST
PART C. OTHER INFORMATION
Note: This Part C relates solely to the GMO Tax-Managed U.S. Core Fund and the
GMO Tax-Managed International Fund. No information relating to any other
series of GMO Trust is amended or superseded hereby.
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: Not Applicable.
(b) Exhibits
1. Amended and Restated Agreement and Declaration of Trust --
Exhibit 1.
2. Amended and Restated By-laws of the Trust (1).
3. None.
4. Not Applicable.
5. (a) Form of Management Contract between the Trust, on behalf of
its GMO Tax- Managed U.S. Core Fund (the "TM Core Fund"),
and Grantham, Mayo, Van Otterloo & Co. LLC ("GMO") --
Exhibit 5.1;
(b) Form of Management Contract between the Trust, on behalf of
its GMO Tax-Managed International Fund (the "TM
International Fund"), and GMO -- Exhibit 5.2.
6. None.
7. None.
<PAGE> 50
8. (a) Custodian Agreement (the "IBT Custodian Agreement") among
the Trust, on behalf of its GMO Core Fund, GMO Currency
Hedged International Bond Fund (formerly "GMO SAF Core
Fund"), GMO Value Fund (formerly "GMO Value Allocation
Fund"), GMO Growth Fund (formerly "GMO Growth Allocation
Fund"), and GMO Short-Term Income Fund, GMO and Investors
Bank & Trust Company ("IBT")(1);
(b) Custodian Agreement (the "BBH Custodian Agreement") among
the Trust, on behalf of its GMO International Core Fund and
GMO Japan Fund, GMO and Brown Brothers Harriman & Co.
("BBH");
(c) Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its TM Core Fund,
GMO and IBT -- Exhibit 8.1; and
(d) Form of Letter Agreement with respect to the BBH Custodian
Agreement among the Trust, on behalf of its TM International
Fund, GMO and BBH --Exhibit 8.2.
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 TM Core Fund and TM
International Fund, GMO and IBT -- Exhibit 9.1;
(c) 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 -- See Item 10 of
Pre-Effective Amendment No. 1 which is hereby incorporated by
reference.
11. Not Applicable.
12. None.
13. None.
-2-
<PAGE> 51
14. Prototype Retirement Plans(1).
15. None.
16. Not Applicable.
17. Not Applicable.
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
Not Applicable.
Item 27. INDEMNIFICATION
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 29. PRINCIPAL UNDERWRITERS
Not Applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 31. MANAGEMENT SERVICES
Not Applicable.
-3-
<PAGE> 52
Item 32. UNDERTAKINGS
(a) See Item 33 of Post-Effective Amendment No. 1 which is hereby
incorporated by reference.
(b) Not Applicable.
(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 filed with the Securities and Exchange Commission and
incorporated herein by reference.
-4-
<PAGE> 53
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. 41 to the Trust's Registration
Statement under the Securities Act and Post-Effective Amendment No. 44 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
___th day of April, 1998.
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. 41 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.
Signatures Title Date
- ---------- ----- ----
R. JEREMY GRANTHAM* President - Quantitative; Principal April 16, 1998
- ------------------- Executive Officer; Trustee
R. Jeremy Grantham
KINGSLEY DURANT* Treasurer; Principal Financial and April 16, 1998
- ------------------- Accounting Officer
Kingsley Durant
HARVEY R. MARGOLIS* Trustee April 16, 1998
- -------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee April 16, 1998
- -------------------
Jay O. Light
* By: /S/ WILLIAM R. ROYER
--------------------------
William R. Royer
Attorney-in-Fact
<PAGE> 54
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
Signature Title Date
- --------- ----- ----
/s/ R. JEREMY GRANTHAM President-Domestic; March 12, 1996
- -------------------------- Principal Executive
R. Jeremy Grantham Officer; Trustee
/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
/s/ KINGSLEY DURANT Treasurer; Principal March 12, 1996
- -------------------------- Financial and
Kingsley Durant Accounting Officer
<PAGE> 55
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
- --------- ----- ----
/s/ JAY O. LIGHT Trustee May 23, 1996
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Jay O. Light
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EXHIBIT INDEX
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GMO TRUST
Exhibit No. Title of Exhibit
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1 Form of Amended and Restated Agreement and Declaration of Trust.
5.1 Form of Management Contract between the Trust, on behalf of the
TM Core Fund, and GMO.
5.2 Form of Management Contract between the Trust, on behalf of the
TM International Fund, and GMO.
8.1 Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its TM Core Fund, GMO and
IBT.
8.2 Form of Letter Agreement with respect to the BBH Custodian
Agreement among the Trust, on behalf of its TM International
Fund, GMO and BBH
9.1 Form of Letter Agreement to the Transfer Agency Agreement among
the Trust, on behalf of its TM Core Fund and TM International
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.
18 Form of Rule 18f-3 Multi-Class Plan.
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Exhibit 1
AMENDED AND RESTATED
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AGREEMENT AND DECLARATION OF TRUST
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GMO TRUST
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THIS AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made at
Boston, Massachusetts this day of April, 1998 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.
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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
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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 transferable 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
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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;
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(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 liquidation of such
assets, and any funds or payments derived from any reinvestment of such
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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.
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(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.
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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,
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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;
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(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 unpaid dividends
owed such Shareholder and/or by reducing the number of Shares in the
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account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
SECTION 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,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE 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 By-Laws. 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, executed
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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 meeting of shareholders or
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<PAGE> 14
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.
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<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.
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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
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<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 the Shareholders of that
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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.
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IN WITNESS WHEREOF, the Trustees as aforesaid do hereto set their hands
this ____ day of April, 1998.
----------------------------------------
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
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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 April ___, 1998
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.
CLASS I, CLASS II AND CLASS III SHARES:
With certain exceptions described below, eligibility for Class I, Class II and
Class III Shares depends on a client's "TOTAL INVESTMENT" with GMO.
For clients establishing a relationship with GMO on or after June 1, 1996:
A client's Total Investment will be determined by GMO as of December 31 of each
year and on such other dates as may be determined by GMO (each a "Determination
Date"). Subject to as provided below, a client's Total Investment as of any
Determination Date will equal the greater
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of (a) the market value of assets managed by GMO and its affiliates for the
client (whether in a pooled vehicle or otherwise) as of such Determination Date,
and (b) the client's Total Investment as of the previous Determination Date
(less the market value of any account managed by GMO's Domestic Active Division
as of the previous Determination Date), plus contributions made to, and less
Large Withdrawals (defined below) from, any GMO-managed product or account
(other than any account managed by GMO's Domestic Active Division) since the
previous Determination Date (plus the market value of any account managed by
GMO's Domestic Active Division as of the then current Determination Date). For
these purposes, "Large Withdrawals" means the total of all withdrawals made from
any GMO-managed product or account (other than any account managed by GMO's
Domestic Active Division) since the previous Determination Date if such total
exceeds 7% of the sum of the client's Total Investment as of the previous
Determination Date and any contributions to any GMO-managed product or account
(other than any account managed by GMO's Domestic Active Division) made since
the previous Determination Date. For clients that have accounts with GMO as of
November 30, 1997, their Initial Total Investment is the greater of the market
value of assets managed by GMO and its affiliates for the client as of the close
of business on November 30, 1997 or on December 31, 1997. For clients
establishing a relationship with GMO on or after December 1, 1997, their Total
Investment will be determined as described above. Assets invested in the Pelican
Fund will not be considered when determining a client's Total Investment.
Investments by defined contribution pension plans (such as 401(k) plans)
will always be invested in the class of shares of the relevant Fund(s) with the
highest Shareholder Service Fee offered from time to time by the relevant
Fund(s) regardless of the size of the investment, and will not be eligible to
convert to other classes.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose Total
Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
CLASS IV, CLASS V, CLASS VI, CLASS VII AND CLASS VIII SHARES:
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, calculated as
described above for Class I, Class II and Class III Shares. For clients that
have accounts with GMO as of November 30, 1997,
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<PAGE> 22
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 be the greater of 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 or December 31, 1997. For clients establishing a relationship with GMO
on or after December 1, 1997, their Total Fund Investment and Total Investment
will be determined as described above.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
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.
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 services
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
- --------------
(1) All purchase premiums are paid to and retained by the relevant Fund and
are intended to cover the brokerage and other costs associated with putting an
investment to work in the relevant markets. All redemption fees are paid to and
retained by the relevant Fund and are designed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity.
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<PAGE> 23
assessable at the class level) in the future be allocated on a class-by-class
basis: (a) transfer agency costs attributable to each class, (b) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxy statements to current shareholders
of a specific Class, (c) SEC registration fees incurred with respect to a
specific class, (d) blue sky and foreign registration fees and expenses incurred
with respect to a specific class, (e) the expenses of administrative personnel
and services required to support shareholders of a specific class (including,
but not limited to, maintaining telephone lines and personnel to answer
shareholder inquiries about their accounts or about the Trust), (f) litigation
and other legal expenses relating to a specific class of shares, (g) Trustees'
fees or expenses incurred as a result of issues relating to a specific class of
shares, (h) accounting and consulting expenses relating to a specific class of
shares, (i) any fees imposed pursuant to a non-Rule 12b-1 shareholder service
plan that relate to a specific class of shares, and (j) any additional expenses,
not including advisory or custodial fees or other expenses related to the
management of the Trust's assets, if these expenses are actually incurred in a
different amount with respect to a class, or if services are provided with
respect to a class, or if services are provided with respect to a class that are
of a different kind or to a different degree than with respect to one or more
other classes.
All expenses not now or hereafter designated as Class Expenses ("Fund
Expenses") will be allocated to each class on the basis of the net asset value
of that class in relation to the net asset value of the relevant Fund.
However, notwithstanding the above, a Fund may allocate all expenses other
than Class Expenses on the basis of 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.
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CONVERSION AND EXCHANGE FEATURES
On December 31 of each year and on such other dates as may be determined by
GMO (each a "DETERMINATION DATE") the value of each client's Total Investment
and Total Fund Investment with GMO will be determined. Based on that
determination, each client's shares of each Fund will be automatically converted
to the class of shares of such Fund which is then being offered with the lowest
Shareholder Service Fee for which the client is eligible based on the amount of
their Total Investment or Total Fund Investment, as the case may be, on the
Determination Date. The conversion will occur within 15 business days following
the Determination Date. Also, if a client makes an investment in a GMO Fund
(except for the Pelican Fund) or puts additional assets under GMO's management
(except for accounts managed by GMO's Domestic Active Division) 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 calendar quarter in
which the investment was made, and the conversion will be effected within 15
business days of that quarter. 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 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 Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million 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), and such
conversion will not occur until on or after July 31, 1997. 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.
-24-
<PAGE> 25
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."
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 Shareholder 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.
-25-
<PAGE> 26
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 , 1998
--- --------
By:
-------------------------
Alison E. Baur
Clerk
-26-
<PAGE> 27
Schedule 3.6 to Decl. of Trust
SERIES
- ------
GMO U.S. 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 Evolving Countries Fund
GMO World Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO Global Balanced Allocation Fund
GMO International Core Plus Allocation Fund
Pelican Fund
GMO Asia Fund
GMO Tax-Managed Core Fund
GMO Tax-Managed International Fund
-27-
<PAGE> 1
Exhibit 5.1
MANAGEMENT CONTRACT
Management Contract executed as of __________, 1998 between GMO TRUST, a
Massachusetts business trust (the "Trust") on behalf of its GMO Tax-Managed U.S.
Core Fund (the "Fund"), and GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC, a
Massachusetts limited liability company (the "Manager").
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Trust and to such
policies as the Trustees may determine, the Manager will, at its expense, (i)
furnish continuously an investment program for the Fund and will make investment
decisions on behalf of the Fund and place all orders for the purchase and sale
of its portfolio securities and (ii) furnish office space and equipment, provide
bookkeeping and clerical services (excluding determination of net asset value,
shareholder accounting services and the fund accounting services for the Fund
being supplied by Investors Bank & Trust Company) and pay all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. In the performance of its duties, the Manager will comply with the
provisions of the Agreement and Declaration of Trust and By-laws of the Trust
and the Fund's stated investment objective, policies and restrictions.
(b) In placing orders for the portfolio transactions of the Fund, the
Manager will seek the best price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In using its best efforts to obtain for
the Fund the most favorable price and execution available, the Manager shall
consider all factors it deems relevant, including, without limitation, the
overall net economic result to the Fund (involving price paid or received and
any commissions and other costs paid), the efficiency with which the transaction
is effected, the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future and financial strength and stability of the
broker. Subject to such policies as the Trustees may determine, the Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Contract or otherwise solely by reason of its having caused a
Fund to pay a broker or dealer that provides brokerage and research services to
the Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Manager determines in good
<PAGE> 2
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Manager's overall
responsibilities with respect to the Trust and to other clients of the Manager
as to which the Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to pay any
expenses of or for the Trust or of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any person
controlled by or under common control with the Manager, and that the Manager and
any person controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and persons
controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's services
rendered, for the facilities furnished and for the expenses borne by the Manager
pursuant to Section 1, a fee, computed and paid monthly at the annual rate of
0.525% of the Fund's average daily net asset value. Such average daily net asset
value of the Fund shall be determined by taking an average of all of the
determinations of such net asset value during such month at the close of
business on each business day during such month while this Contract is in
effect. Such fee shall be payable for each month within five (5) business days
after the end of such month.
In the event that expenses of the Fund for any fiscal year should exceed
the expense limitation on investment company expenses imposed by any statute or
regulatory authority of any jurisdiction in which shares of the Trust are
qualified for offer and sale, the compensation due the Manager for such fiscal
year shall be reduced by the amount of such excess by a reduction or refund
thereof. In the event that the expenses of the Fund exceed any expense
limitation which the Manager may, by written notice to the Trust, voluntarily
declare to be effective with respect to the Fund, subject to such terms and
conditions as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the Fund's
expenses to the extent required by such expense limitation.
-2-
<PAGE> 3
If the Manager shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall remain
in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract by not more
than sixty days' written notice delivered or mailed by registered mail, postage
prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the affirmative
vote of a majority of the outstanding shares of the Fund, and (ii) a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Manager, by vote cast in person at a meeting called for the purpose of voting on
such approval, do not specifically approve at least annually the continuance of
this Contract, then this Contract shall automatically terminate at the close of
business on the second anniversary of its execution, or upon the expiration of
one year from the effective date of the last such continuance, whichever is
later; provided, however, that if the continuance of this Contract is submitted
to the shareholders of the Fund for their approval and such shareholders fail to
approve such continuance of this Contract as provided herein, the Manager may
continue to serve hereunder in a manner consistent with the Investment Company
Act of 1940 and the rules and regulations thereunder.
Action by the Trust under (a) above may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be without
the payment of any penalty.
-3-
<PAGE> 4
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority of
the outstanding shares" of the Fund means the affirmative vote, at a duly called
and held meeting of shareholders, (a) of the holders of 67% or more of the
shares of the Fund present (in person or by proxy) and entitled to vote at such
meeting, if the holders of more than 50% of the outstanding shares of the Fund
entitled to vote at such meeting are present in person or by proxy, or (b) of
the holders of more than 50% of the outstanding shares of the Fund entitled to
vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and the phrase
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and regulations
thereunder.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, or to
any shareholder of the Trust, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. INITIALS "GMO".
The Manager owns the initials "GMO" which may be used by the Trust only
with the consent of the Manager. The Manager consents to the use by the Trust of
the name "GMO Trust" or any other name embodying the initials "GMO", in such
forms as the Manager shall in writing approve, but only on condition and so long
as (i) this Contract shall remain in full force and (ii) the Trust shall fully
perform, fulfill and comply with all provisions of this Contract expressed
herein to be performed, fulfilled or complied with by it. No such name shall be
used by the Trust at any time or in any place or for any purposes or under any
conditions except as in this section provided. The foregoing authorization by
the Manager to the Trust to use said initials as part of a business or name is
not exclusive of the right of the Manager itself to use, or to authorize others
to use, the same; the Trust acknowledges and agrees that as between the Manager
and the Trust, the Manager has the exclusive right so to authorize others to use
the same; the Trust acknowledges and agrees that as between the Manager and the
Trust, the Manager has the exclusive right so to use, or authorize others to
use, said initials and the Trust agrees to take such action as may reasonably be
requested by the Manager to give full effect to the provisions of this section
(including, without limitation, consenting to such use of said initials).
Without limiting the generality of the foregoing, the Trust agrees that, upon
any termination of this Contract by either party or upon the violation of
-4-
<PAGE> 5
any of its provisions by the Trust, the Trust will, at the request of the
Manager made within six months after the Manager has knowledge of such
termination or violation, use its best efforts to change the name of the Trust
so as to eliminate all reference, if any, to the initials "GMO" and will not
thereafter transact any business in a name containing the initials "GMO" in any
form or combination whatsoever, or designate itself as the same entity as or
successor to an entity of such name, or otherwise use the initials "GMO" or any
other reference to the Manager. Such covenants on the part of the Trust shall be
binding upon it, its trustees, officers, stockholders, creditors and all other
persons claiming under or through it.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund.
-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 5.2
MANAGEMENT CONTRACT
-------------------
Management Contract executed as of __________, 1998 between GMO TRUST, a
Massachusetts business trust (the "Trust") on behalf of its GMO Tax-Managed
International Fund (the "Fund"), and GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC, a
Massachusetts limited liability company (the "Manager").
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Trust and to such
policies as the Trustees may determine, the Manager will, at its expense, (i)
furnish continuously an investment program for the Fund and will make investment
decisions on behalf of the Fund and place all orders for the purchase and sale
of its portfolio securities and (ii) furnish office space and equipment, provide
bookkeeping and clerical services (excluding determination of net asset value,
shareholder accounting services and the fund accounting services for the Fund
being supplied by Investors Bank & Trust Company) and pay all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. In the performance of its duties, the Manager will comply with the
provisions of the Agreement and Declaration of Trust and By-laws of the Trust
and the Fund's stated investment objective, policies and restrictions.
(b) In placing orders for the portfolio transactions of the Fund, the
Manager will seek the best price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In using its best efforts to obtain for
the Fund the most favorable price and execution available, the Manager shall
consider all factors it deems relevant, including, without limitation, the
overall net economic result to the Fund (involving price paid or received and
any commissions and other costs paid), the efficiency with which the transaction
is effected, the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future and financial strength and stability of the
broker. Subject to such policies as the Trustees may determine, the Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Contract or otherwise solely by reason of its having caused a
Fund to pay a broker or dealer that provides brokerage and research services to
the Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Manager determines in good
<PAGE> 2
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Manager's overall
responsibilities with respect to the Trust and to other clients of the Manager
as to which the Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to pay any
expenses of or for the Trust or of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any person
controlled by or under common control with the Manager, and that the Manager and
any person controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and persons
controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's services
rendered, for the facilities furnished and for the expenses borne by the Manager
pursuant to Section 1, a fee, computed and paid monthly at the annual rate of
0.75% of the Fund's average daily net asset value. Such average daily net asset
value of the Fund shall be determined by taking an average of all of the
determinations of such net asset value during such month at the close of
business on each business day during such month while this Contract is in
effect. Such fee shall be payable for each month within five (5) business days
after the end of such month.
In the event that expenses of the Fund for any fiscal year should exceed
the expense limitation on investment company expenses imposed by any statute or
regulatory authority of any jurisdiction in which shares of the Trust are
qualified for offer and sale, the compensation due the Manager for such fiscal
year shall be reduced by the amount of such excess by a reduction or refund
thereof. In the event that the expenses of the Fund exceed any expense
limitation which the Manager may, by written notice to the Trust, voluntarily
declare to be effective with respect to the Fund, subject to such terms and
conditions as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the Fund's
expenses to the extent required by such expense limitation.
-2-
<PAGE> 3
If the Manager shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall remain
in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract by not more
than sixty days' written notice delivered or mailed by registered mail, postage
prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the affirmative
vote of a majority of the outstanding shares of the Fund, and (ii) a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Manager, by vote cast in person at a meeting called for the purpose of voting on
such approval, do not specifically approve at least annually the continuance of
this Contract, then this Contract shall automatically terminate at the close of
business on the second anniversary of its execution, or upon the expiration of
one year from the effective date of the last such continuance, whichever is
later; provided, however, that if the continuance of this Contract is submitted
to the shareholders of the Fund for their approval and such shareholders fail to
approve such continuance of this Contract as provided herein, the Manager may
continue to serve hereunder in a manner consistent with the Investment Company
Act of 1940 and the rules and regulations thereunder.
Action by the Trust under (a) above may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be without
the payment of any penalty.
-3-
<PAGE> 4
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority of
the outstanding shares" of the Fund means the affirmative vote, at a duly called
and held meeting of shareholders, (a) of the holders of 67% or more of the
shares of the Fund present (in person or by proxy) and entitled to vote at such
meeting, if the holders of more than 50% of the outstanding shares of the Fund
entitled to vote at such meeting are present in person or by proxy, or (b) of
the holders of more than 50% of the outstanding shares of the Fund entitled to
vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and the phrase
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and regulations
thereunder.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, or to
any shareholder of the Trust, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. INITIALS "GMO".
The Manager owns the initials "GMO" which may be used by the Trust only
with the consent of the Manager. The Manager consents to the use by the Trust of
the name "GMO Trust" or any other name embodying the initials "GMO", in such
forms as the Manager shall in writing approve, but only on condition and so long
as (i) this Contract shall remain in full force and (ii) the Trust shall fully
perform, fulfill and comply with all provisions of this Contract expressed
herein to be performed, fulfilled or complied with by it. No such name shall be
used by the Trust at any time or in any place or for any purposes or under any
conditions except as in this section provided. The foregoing authorization by
the Manager to the Trust to use said initials as part of a business or name is
not exclusive of the right of the Manager itself to use, or to authorize others
to use, the same; the Trust acknowledges and agrees that as between the Manager
and the Trust, the Manager has the exclusive right so to authorize others to use
the same; the Trust acknowledges and agrees that as between the Manager and the
Trust, the Manager has the exclusive right so to use, or authorize others to
use, said initials and the Trust agrees to take such action as may reasonably be
requested by the Manager to give full effect to the provisions of this section
(including, without limitation, consenting to such use of said initials).
Without limiting the generality of the foregoing, the Trust agrees that, upon
any termination of this Contract by either party or upon the violation of
-4-
<PAGE> 5
any of its provisions by the Trust, the Trust will, at the request of the
Manager made within six months after the Manager has knowledge of such
termination or violation, use its best efforts to change the name of the Trust
so as to eliminate all reference, if any, to the initials "GMO" and will not
thereafter transact any business in a name containing the initials "GMO" in any
form or combination whatsoever, or designate itself as the same entity as or
successor to an entity of such name, or otherwise use the initials "GMO" or any
other reference to the Manager. Such covenants on the part of the Trust shall be
binding upon it, its trustees, officers, stockholders, creditors and all other
persons claiming under or through it.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund.
-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 8.1
____________ ___, 1998
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 Tax-Managed U.S. Core 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 8.2
_____________ ___, 1998
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Re: Custodian Agreement dated September 1, 1991 by and among
GMO Trust, Grantham, Mayo, Van Otterloo & Co. LLC and
Brown Brothers Harriman & Co. (the "Agreement")
--------------------------------------------------------
Ladies and Gentlemen:
GMO Trust (the "Trust") hereby notifies you that it has created a new
series of the Trust, namely, the "GMO Tax-Managed International 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.
BROWN BROTHERS HARRIMAN & CO.
By
-------------------------------------
Name:
Title:
<PAGE> 1
Exhibit 9.1
_____________ ___ , 1998
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 two new series of shares, namely, the "GMO
Tax-Managed U.S. Core Fund" and the "GMO Tax-Managed International Fund"
(the "New Funds"), 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 Funds, kindly sign
and return to the Company the enclosed counterpart hereof, whereupon each 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 ______________ ___, 1998 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 Asia
Fund, 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 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% GMO Asia Fund 0.81%
GMO Tax-Managed U.S. Core Fund 0.33% GMO Tax-Managed International Fund 0.54%
</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 April ____, 1998 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 Evolving Countries Fund
GMO International Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO World Equity Allocation Fund
GMO Global Balanced Allocation Fund
GMO International Core Plus Allocation Fund
GMO Asia Fund
GMO Tax-Managed U.S. Core Fund
GMO Tax-Managed International Fund
-5-
<PAGE> 6
SERVICE FEE SCHEDULE EXHIBIT II
- -------------------- ----------
CLASS I SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
GMO Core Fund 0.28%
- --------------------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.28%
- --------------------------------------------------------------------------------
GMO Value Fund 0.28%
- --------------------------------------------------------------------------------
GMO Growth Fund 0.28%
- --------------------------------------------------------------------------------
GMO U.S. Sector Fund 0.28%
- --------------------------------------------------------------------------------
GMO Small Cap Value Fund 0.28%
- --------------------------------------------------------------------------------
GMO Fundamental Value Fund 0.28%
- --------------------------------------------------------------------------------
GMO Small Cap Growth Fund 0.28%
- --------------------------------------------------------------------------------
GMO REIT Fund 0.28%
- --------------------------------------------------------------------------------
GMO International Core Fund 0.28%
- --------------------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.28%
- --------------------------------------------------------------------------------
GMO Foreign Fund 0.28%
- --------------------------------------------------------------------------------
GMO U.S. Bond/Global Alpha 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 Asia Fund 0.28%
- --------------------------------------------------------------------------------
GMO Tax-Managed U.S. Core Fund 0.28%
- --------------------------------------------------------------------------------
GMO Tax-Managed International 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%
- --------------------------------------------------------------------------------
-6-
<PAGE> 7
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS II SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
GMO Core Fund 0.22%
- --------------------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.22%
- --------------------------------------------------------------------------------
GMO Value Fund 0.22%
- --------------------------------------------------------------------------------
GMO Growth Fund 0.22%
- --------------------------------------------------------------------------------
GMO U.S. Sector Fund 0.22%
- --------------------------------------------------------------------------------
GMO Small Cap Value Fund 0.22%
- --------------------------------------------------------------------------------
GMO Fundamental Value Fund 0.22%
- --------------------------------------------------------------------------------
GMO Small Cap Growth Fund 0.22%
- --------------------------------------------------------------------------------
GMO REIT Fund 0.22%
- --------------------------------------------------------------------------------
GMO International Core Fund 0.22%
- --------------------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.22%
- --------------------------------------------------------------------------------
GMO Foreign Fund 0.22%
- --------------------------------------------------------------------------------
GMO U.S. Bond/Global Alpha 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 Asia Fund 0.22%
- --------------------------------------------------------------------------------
GMO Tax-Managed U.S. Core Fund 0.22%
- --------------------------------------------------------------------------------
GMO Tax-Managed International Fund 0.22%
- --------------------------------------------------------------------------------
GMO International Equity Allocation Fund 0.07%
- --------------------------------------------------------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.07%
- --------------------------------------------------------------------------------
GMO World Equity Allocation Fund 0.07%
- --------------------------------------------------------------------------------
GMO Global Balanced Allocation Fund 0.07%
- --------------------------------------------------------------------------------
GMO International Core Plus Allocation Fund 0.07%
- --------------------------------------------------------------------------------
-7-
<PAGE> 8
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS III SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
GMO Core Fund 0.15%
- --------------------------------------------------------------------------------
GMO Tobacco-Free Core Fund 0.15%
- --------------------------------------------------------------------------------
GMO Value Fund 0.15%
- --------------------------------------------------------------------------------
GMO Growth Fund 0.15%
- --------------------------------------------------------------------------------
GMO U.S. Sector Fund 0.15%
- --------------------------------------------------------------------------------
GMO Small Cap Value Fund 0.15%
- --------------------------------------------------------------------------------
GMO Fundamental Value Fund 0.15%
- --------------------------------------------------------------------------------
GMO Small Cap Growth Fund 0.15%
- --------------------------------------------------------------------------------
GMO REIT Fund 0.15%
- --------------------------------------------------------------------------------
GMO International Core Fund 0.15%
- --------------------------------------------------------------------------------
GMO Currency Hedged International Core Fund 0.15%
- --------------------------------------------------------------------------------
GMO Foreign Fund 0.15%
- --------------------------------------------------------------------------------
GMO U.S. Bond/Global Alpha 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%
- --------------------------------------------------------------------------------
GMO Asia Fund 0.15%
- --------------------------------------------------------------------------------
GMO Tax-Managed U.S. Core Fund 0.15%
- --------------------------------------------------------------------------------
GMO Tax-Managed International Fund 0.15%
- --------------------------------------------------------------------------------
-8-
<PAGE> 9
CLASS III SHARES (CONT'D)
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
-9-
<PAGE> 10
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS IV SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
GMO U.S. Core Fund 0.105%
- --------------------------------------------------------------------------------
GMO Tax-Managed U.S. 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 REIT Fund 0.12%
- --------------------------------------------------------------------------------
GMO International Core Fund 0.09%
- --------------------------------------------------------------------------------
GMO Tax-Managed International 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 0.10%
- --------------------------------------------------------------------------------
GMO Global Hedged Equity Fund 0.13%
- --------------------------------------------------------------------------------
GMO Inflation Indexed Bond Fund 0.13%
- --------------------------------------------------------------------------------
GMO Evolving Countries Fund 0.10%
- --------------------------------------------------------------------------------
GMO Fundamental Value Fund 0.13%
- --------------------------------------------------------------------------------
GMO Asia Fund 0.105%
- --------------------------------------------------------------------------------
-10-
<PAGE> 11
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS V SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
-11-
<PAGE> 12
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS VI SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
-12-
<PAGE> 13
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
- -------------------- ----------
CLASS VII SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
CLASS VIII SHARES
FUND SERVICE FEE
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
-13-
<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 February ___, 1998
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.
CLASS I, CLASS II AND CLASS III SHARES:
With certain exceptions described below, eligibility for Class I, Class II and
Class III Shares depends on a client's "TOTAL INVESTMENT" with GMO.
For clients establishing a relationship with GMO on or after June 1, 1996:
A client's Total Investment will be determined by GMO as of December 31 of each
year and on such other dates as may be determined by GMO (each a "Determination
Date"). Subject to as provided below, a client's Total Investment as of any
Determination Date will equal the greater of (a) the market value of assets
managed by GMO and its affiliates for the client (whether in a pooled
<PAGE> 2
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's Domestic Active Division as of the previous
Determination Date), plus contributions made to, and less Large Withdrawals
(defined below) from, any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) since the previous Determination Date
(plus the market value of any account managed by GMO's Domestic Active Division
as of the then current Determination Date). For these purposes, "Large
Withdrawals" means the total of all withdrawals made from any GMO-managed
product or account (other than any account managed by GMO's Domestic Active
Division) since the previous Determination Date if such total exceeds 7% of the
sum of the client's Total Investment as of the previous Determination Date and
any contributions to any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) made since the previous Determination
Date. For clients that have accounts with GMO as of November 30, 1997, their
Initial Total Investment is the greater of the market value of assets managed by
GMO and its affiliates for the client as of the close of business on November
30, 1997 or on December 31, 1997. For clients establishing a relationship with
GMO on or after December 1, 1997, their Total Investment will be determined as
described above. Assets invested in the Pelican Fund will not be considered when
determining a client's Total Investment.
Investments by defined contribution pension plans (such as 401(k) plans)
will always be invested in the class of shares of the relevant Fund(s) with the
highest Shareholder Service Fee offered from time to time by the relevant
Fund(s) regardless of the size of the investment, and will not be eligible to
convert to other classes.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose Total
Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
CLASS IV, CLASS V, CLASS VI, CLASS VII AND CLASS VIII SHARES:
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, calculated as
described above for Class I, Class II and Class III Shares. 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 be the greater
of the market value of all of their investments advised by GMO and its
affiliates, or the market value of their investment
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in the particular Fund, as the case may be, as of the close of business on
November 30, 1997 or December 31, 1997. For clients establishing a relationship
with GMO on or after December 1, 1997, their Total Fund Investment and Total
Investment will be determined as described above.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
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.
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 services
of the Trust's shares (the "Shareholder Servicer") shall be allocated, to the
extent practicable, on a class-byclass 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
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(1) All purchase premiums are paid to and retained by the relevant Fund and
are intended to cover the brokerage and other costs associated with putting an
investment to work in the relevant markets. All redemption fees are paid to and
retained by the relevant Fund and are designed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity.
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specific class, (e) the expenses of administrative personnel and services
required to support shareholders of a specific class (including, but not limited
to, maintaining telephone lines and personnel to answer shareholder inquiries
about their accounts or about the Trust), (f) litigation and other legal
expenses relating to a specific class of shares, (g) Trustees' fees or expenses
incurred as a result of issues relating to a specific class of shares, (h)
accounting and consulting expenses relating to a specific class of shares, (i)
any fees imposed pursuant to a non-Rule 12b-1 shareholder service plan that
relate to a specific class of shares, and (j) any additional expenses, not
including advisory or custodial fees or other expenses related to the management
of the Trust's assets, if these expenses are actually incurred in a different
amount with respect to a class, or if services are provided with respect to a
class, or if services are provided with respect to a class that are of a
different kind or to a different degree than with respect to one or more other
classes.
All expenses not now or hereafter designated as Class Expenses ("Fund
Expenses") will be allocated to each class on the basis of the net asset value
of that class in relation to the net asset value of the relevant Fund.
However, notwithstanding the above, a Fund may allocate all expenses other
than Class Expenses on the basis of 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 December 31 of each year and on such other dates as may be determined by
GMO (each a "DETERMINATION DATE") the value of each client's Total Investment
and Total Fund Investment with GMO will be determined. Based on that
determination, each client's shares of each Fund will be automatically converted
to the class of shares of such Fund which is then
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being offered with the lowest Shareholder Service Fee for which the client is
eligible based on the amount of their Total Investment or Total Fund Investment,
as the case may be, on the Determination Date. The conversion will occur within
15 business days following the Determination Date. Also, if a client makes an
investment in a GMO Fund (except for the Pelican Fund) or puts additional assets
under GMO's management (except for accounts managed by GMO's Domestic Active
Division) 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 calendar quarter in which the investment was made, and the conversion will
be effected within 15 business days of that quarter. 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 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 Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million 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), and such
conversion will not occur until on or after July 31, 1997. 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."
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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 Shareholder 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 , 1998
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By:
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Alison E. Baur
Clerk
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