<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Asia Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Asia Fund at February 28, 1998,
the results of its operations, the changes in its net assets and the financial
highlights for the period from February 18, 1998 (commencement of operations) to
February 28, 1998, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at February
28, 1998 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND EQUIVALENTS - 64.7%
China - 5.2%
898,000 First Tractor Co * 516,125
415,250 Guangdong Kelon Elec Holding Class H 463,922
1,097,000 Qingling Motor Co Ltd Class H 439,225
157,000 Shanghai Industrial Holdings 685,386
-------------
2,104,658
-------------
Indonesia - 4.2%
791,000 Astra Agro Lestari * 308,356
172,000 International Nickel 194,350
609,000 PT Daya Guna Samudera 423,203
889,500 Tambang Timah Persero (Foreign Registered) 758,839
-------------
1,684,748
-------------
Korea - 11.3%
8,610 Dae Duck Electronics 680,153
35,000 Hyundai Heavy Industries 955,909
123,940 LG Electronics Preferred (Non Voting) 569,228
3,700 Medison Co Ltd * 240,171
9,250 Pohang Iron & Steel 554,558
38,500 Saehan Percision 610,625
56,160 Samsung Display Devices Preferred 914,792
-------------
4,525,436
-------------
Malaysia - 5.4%
231,000 Golden Hope Plantations Berhad 308,000
305,000 Kumpulan Guthrie Berhad 215,782
232,000 Malaysian International Ship (Alien Market) 429,279
62,000 Rothmans of Pall Mall Berhad 552,517
214,000 Sime Darby Berhad 279,510
533,000 Tan Chong Motor Holdings Berhad 378,539
-------------
2,163,627
-------------
Phillippines - 10.1%
7,812,000 Aboitiz Equity Ventures Inc * 434,653
2,261,000 Cosmos Bottling Corp 300,333
7,181,000 Digital Telecommunications * 413,942
7,185,700 DMCI Holdings Inc * 435,824
718,000 Ionics Circuits Inc * 395,890
85,000 Manila Electric Class B 253,509
821,800 Music Corp * 319,246
46,750 Philippine Long Distance Telephone 1,259,555
6,322,000 Solid Group Inc 244,007
-------------
4,056,959
-------------
Singapore - 12.7%
16,750 Creative Technology Ltd * 398,859
81,000 Development Bank of Singapore (Foreign Registered) 634,608
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Singapore - continued
69,000 Natsteel Electronics * 124,294
482,000 Natsteel Ltd 666,058
103,000 Overseas Chinese Banking (Foreign Registered) 613,171
165,000 Overseas Union Bank Ltd (Foreign Registered) 620,915
113,000 Singapore Airlines Ltd (Foreign Registered) 836,521
56,000 Singapore Press Holdings (Foreign Registered) 801,481
105,000 Venture Manufacturing 401,604
----------------
5,097,511
----------------
Thailand - 15.8%
12,000 Advanced Info Service Public Co Ltd 91,323
144,700 Advanced Info Service Public Co Ltd (Foreign Registered) 1,101,197
81,600 BEC World Public Co Ltd 477,104
73,900 BEC World Public Co Ltd (Foreign Registered) 432,084
635,000 Cogeneration Public Co (Foreign Registered) 662,993
77,300 Delta Electronics Public Co Ltd (Foreign Registered) 1,276,974
90,700 Electricity Generating Public Co Ltd (Foreign Registered) 237,798
435,000 International Broadcasting Plc * 363,038
100,300 KCE Electronics Plc (Foreign Registered) 744,687
450,087 Land & House Public Co Ltd (Foreign Registered) 279,346
104,876 Shinawatra Computer Public Co Ltd (Foreign Registered) 676,462
----------------
6,343,006
----------------
TOTAL STOCK AND EQUIVALENTS (Cost $25,563,408) 25,975,945
----------------
Par Value SHORT-TERM INVESTMENTS - 44.6%
Cash Equivalents - 44.6%
$ 17,900,000 First National Bank of Chicago Time Deposit, 5.60%, due 3/2/98 17,900,000
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $17,900,000) 17,900,000
----------------
TOTAL INVESTMENTS - 109.3%
(Cost $43,463,408) 43,875,945
Other Assets and Liabilities (net) - -9.3% (3,715,060)
----------------
TOTAL NET ASSETS - 100.0% $ 40,160,885
================
Notes to the Schedule of Investments:
* Non-income producing security. A dividend has not been
declared for the twelve months ended February 28, 1998.
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector diversification of the
Fund's equity investments was as follows:
Industry Sector (Unaudited)
Electronic Equipment 22.2 %
Telecommunications 14.0
Communications 11.0
Metals and Mining 7.6
Banking 7.2
Food and Beverage 5.9
Machinery 5.7
Transportation 4.9
Utilities 4.4
Automotive 3.2
Construction 2.8
Consumer Goods 2.6
Financial Services 2.6
Real Estate 1.2
Miscellaneous 4.7
---------
100.0 %
See accompanying notes to the financial statements. 3
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 28, 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $43,463,408) (Note 1) $ 43,875,945
Foreign currency, at value (cost $493,095) (Note 1) 514,497
Cash 9,581
Receivable for investments sold 246,472
Receivable for Fund shares sold 10,000,000
Interest receivable 5,569
Receivable for expenses waived or borne by Manager (Note 2) 13,543
---------------
Total assets 54,665,607
---------------
Liabilities:
Payable for investments purchased 14,483,094
Payable to affiliate for (Note 2):
Management fee 3,209
Shareholder service fee 481
Accrued expenses 17,938
---------------
Total liabilities 14,504,722
---------------
Net assets $ 40,160,885
===============
Net assets consist of:
Paid-in capital $ 39,654,636
Accumulated undistributed net investment income 110,171
Accumulated net realized loss (17,997)
Net unrealized appreciation 414,075
---------------
$ 40,160,885
===============
Net assets attributable to Class III Shares $ 40,160,885
===============
Shares outstanding - Class III 3,845,283
===============
Net asset value per share - Class III $ 10.44
===============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Statement of Operations -
Period from February 18, 1998 (commencement of operations) to February 28,
1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment income:
<S> <C>
Interest $ 17,279
------------------
Total income 17,279
------------------
Expenses:
Management fee (Note 2) 3,209
Audit fees 11,997
Custodian fees 5,004
Transfer agent fees 693
Legal fees 90
Miscellaneous 153
Fees waived or borne by Manager (Note 2) (13,543)
------------------
7,603
Shareholder service fee - Class III (Note 2) 481
------------------
Net expenses 8,084
------------------
Net investment income 9,195
------------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (17,999)
Foreign currency and foreign currency related
transactions 100,978
------------------
Net realized gain 82,979
------------------
Change in net unrealized appreciation (depreciation) on:
Investments 412,537
Foreign currency and foreign currency related transactions 1,538
------------------
Net unrealized gain 414,075
------------------
Net realized and unrealized gain 497,054
------------------
Net increase in net assets resulting from operations $ 506,249
==================
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from February 18, 1998
(commencement of operations)
to February 28, 1998
-----------------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 9,195
Net realized gain 82,979
Change in net unrealized appreciation 414,075
-----------------------------
Net increase in net assets resulting from operations 506,249
-----------------------------
Net share transactions - Class III (Note 5) 39,654,636
-----------------------------
Total increase in net assets 40,160,885
Net assets:
Beginning of period -
-----------------------------
End of period (including accumulated undistributed
net investment income of $110,171) $ 40,160,885
=============================
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from February 18, 1998
(commencement of operations)
to February 28, 1998
------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
------------------------
Income (loss) from investment operations:
Net investment income 0.01(b)
Net realized and unrealized gain 0.43
------------------------
Total from investment operations 0.44
------------------------
Net asset value, end of period $ 10.44
========================
Total Return (a) 4.40%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 40,161
Net expenses to average daily net assets 2.52%*
Net investment income to average daily net assets 2.86%*
Portfolio turnover rate 1.48%
Average broker commission rate per equity share (c) $ 0.0036
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount: $ 0.01
</TABLE>
* Annualized
(a) Calculation excludes subscription and redemption fees. The total return
would have been lower had certain expenses not been waived during the
period shown.
(b) Computed using average shares outstanding throughout the period.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- ------------------------------------------------------------------------------
1. Significant accounting policies
GMO Asia Fund (the "Fund"), which commenced operations on February 18,
1998, is a series of GMO Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940, as amended, as an open-end, diversified
management investment company. The Fund is advised and managed by Grantham,
Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was
established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a series
into classes.
The Fund seeks long-term capital appreciation through investment in and
exposure to equity and equity-related securities of issuers in countries in
Asia.
The Fund offers four classes of shares: Class I, Class II, Class III, and
Class IV. The principal economic difference among the classes of shares is
the level of shareholder service fee borne by the classes. Eligibility for
and automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
outlined in the Trust's prospectus. At February 28, 1998, Class III was the
only active class of shares of the Fund.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
8
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
9
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
$100,976 $(100,976) -
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.20% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. These fees are allocated relative
to each class' net assets on the share transaction date. Purchase premiums
are included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the period ended February 28, 1998, the Fund
received $475,856 in purchase premiums and no redemption fees. There is no
premium for reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
10
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 1.00% of
average daily net assets. In addition, the Fund has adopted a Shareholder
Service Plan under which the Fund pays GMO a shareholder service fee for
client and shareholder service, reporting and other support. Pursuant to
the Shareholder Service Plan, the shareholder service fee is calculated
based on the average daily net assets of each class at the annual rate of
.28% for Class I shares, .22% for Class II shares, .15% for Class III
shares, and .105% for Class IV shares.
GMO has agreed to waive a portion of its fee until further notice to the
extent that the Fund's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including stamp duties and transfer taxes), shareholder service fees
and extraordinary expenses) exceed .81% of average daily net assets.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
For the period ended February 28, 1998, the Fund incurred no Trustees'
fees.
3. Purchase and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 1998 aggregated
$25,827,963 and $246,556, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
- ------------------------- ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
$43,463,654 $696,844 $284,553 $412,291
</TABLE>
4. Principal shareholders
At February 28, 1998, 88% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
11
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums and redemption fees received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from February 18, 1998
(commencement of operations)
to February 28, 1998
-----------------------------------------
Class III: Shares Amount
----------------- --------------------
<S> <C> <C>
Shares sold 3,845,283 $ 39,654,636
Shares issued to shareholders in reinvestment of
distributions - -
Shares repurchased - -
----------------- --------------------
Net increase 3,845,283 $ 39,654,636
================= ====================
</TABLE>
12
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 1998 post-October losses of $17,753.
13
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO International Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Core Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
STOCK AND EQUIVALENTS - 96.0%
Australia - 5.4%
7,341 Adelaide Brighton Ltd 6,251
75,400 Amalgamated Holdings Ltd 316,416
415,000 Amcor Ltd 1,812,227
3,198,875 Australia and New Zealand Banking Group Ltd 22,010,259
23,500 Australian Gas & Light 187,310
546,134 Australian National Industries Ltd 465,067
3,873,567 Boral Ltd 9,394,368
385,100 Broken Hill Proprietary Ltd 3,804,066
1,131,740 Burns Philp & Co Ltd 185,039
241,769 Caltex Australia Ltd 774,114
180,350 Capcount Property Trust 125,321
301,000 Capital Property Trust 490,084
421,800 Capral Aluminum Ltd 890,789
92,500 Coca-Cola Amatil Ltd 797,148
3,363,187 Coles Myer Ltd 17,458,724
171,700 Comalco Ltd 753,291
255,687 Commonwealth Bank of Australia 3,178,909
528,162 Consolidated Rutile Ltd * 208,690
101,149 Cortecs Plc * 299,749
20,500 Coventry Group Ltd 82,397
107,900 CRA Ltd 1,417,213
42,400 CSL Ltd 327,556
4,030,696 CSR Ltd 13,372,590
637,700 Cultus Petroleum * 1,138,215
331,600 Email Ltd 745,478
54,082 Energy Resources of Australia Class A 160,269
418,331 Foodland Associated 3,149,117
2,955,972 Fosters Brewing Group Ltd 6,544,707
51,090 G E Crane Holdings Ltd 426,362
7,600 Gandel Retail Trust 6,006
1,036,428 General Property Trust Units 2,033,472
4,060,131 Goodman Fielder Ltd 7,025,549
350,107 Hardie (James) Industries Ltd 1,087,607
110,300 Incitec Ltd 404,414
223,000 Jupiters Ltd 437,526
92,500 KLZ Ltd 126,031
45,600 Macquarie Bank Ltd 428,697
95,380 Metal Manufactures Ltd 142,951
3,433,779 MIM Holdings Ltd 1,918,195
250,588 Mirvac Ltd 401,176
37,694 Mount Leyshon Gold Mines 38,519
846,170 National Australia Bank Ltd 11,702,002
91,000 National Food Ltd 171,103
418,650 National Mutual Property Trust 362,211
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Australia - continued
5,748,507 News Corp Ltd 36,616,193
1,505,911 Normandy Mining Ltd 1,497,817
303,639 North Broken Hill Peko Ltd 824,934
97,100 Oil Search Ltd 188,526
1,469,260 Pacific Dunlop Ltd 2,602,427
323,100 Pasminco Ltd 359,002
4,973,770 Pioneer International Ltd 14,400,618
121,421 PMP Communications Ltd 253,944
147,300 Portman Mining Ltd 235,818
1,818,579 Qantas Airways Ltd 3,109,656
231,082 QCT Resources Ltd 197,883
147,607 Rothmans Holdings Ltd 892,949
1,558,992 Santos Ltd 5,995,347
1,513,239 Schroders Property 2,742,178
228,069 Sea World Property Trust 180,232
75,300 Seven Network Ltd 270,341
145,640 Simsmetal Ltd 828,464
172,500 Southcorp Holdings Ltd 639,285
484,400 Sydney Harbour Casinos Preferred * 468,596
111,684 Ticor Ltd * 66,955
18,199 W H Soul Pattison & Co Ltd 371,942
243,348 Walker Corp 149,203
117,900 Westfarmers Ltd 1,138,929
1,847,108 Westfield Trust Units 4,001,529
692,691 Westpac Banking Corp 4,803,899
149,000 Westpac Property Trust 193,877
241,500 Woodside Petroleum Ltd 1,487,278
-------------
201,325,007
-------------
Austria - 2.1%
4,004 Allgemeine Baugesellschaft AG Preferred
7.00% 119,165
57,077 Austrian Airlines * 1,434,949
81,148 Bank Austria AG Preferred * 5,325,890
34,193 Bank Austria AG (Participating Certificate) 2,016,520
107,516 Bank Austria AG * 7,358,769
2,608 Bau Holdings AG 153,602
31,724 Bau Holdings AG Preferred 2.42% (Non Voting) 1,510,643
47,397 Brau Union AG 2,784,085
13,732 EA-Generali AG 4,497,676
1,599 EA-Generali AG Preferred 6.00% 303,064
26,029 EVN Energie-Versorgung Niederoesterreich AG 3,657,213
6,937 Interunfall Versicherung AG 1,062,157
338 Mayr-Melnhof Karton AG (Bearer) 19,589
40,756 OEMV AG 4,938,013
21,231 Oesterreichische Brau Beteiligungs AG 1,243,777
131,571 Oesterreichische Elektrizitaetswirtschafts AG 13,833,905
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Austria - continued
153,919 Oesterreichische Laenderbank AG 10,427,463
39,886 Oesterreichische Laenderbank AG Preferred
2.34% (Non Voting) 2,720,877
134,470 Radex-Heraklith AG 5,402,728
3,029 Strabag Oesterreich AG 153,013
269,783 Voest-Alpine Stahl AG 10,621,694
39 Wiener Allianz Versicherungs AG 4,597
-------------
79,589,389
-------------
Canada - 3.8%
115,319 Abitibi Consolidated Inc 1,644,925
118,900 Anderson Exploration Ltd * 1,403,591
52,000 Avenor Inc 1,101,641
80,900 BC Telecom Inc 2,742,806
317,704 BCE Inc 11,273,620
55,400 Biochem Pharma Inc * 1,245,687
600 Bombardier Inc Class A 13,006
259,300 Bombardier Inc Class B 5,575,365
49,800 Canadian Hotel Inc 3,093,363
181,500 Canadian Tire Corp Ltd Class A 4,342,532
70,000 Canfor Corp 501,704
167,511 Cominco Ltd 2,824,905
70,200 Cott Corp 601,792
505,200 Dofasco Inc 8,856,930
411,118 Domtar Inc 3,134,336
132,500 Donohue Inc Class A 2,662,755
75,400 Edperbrascan Corp Class A Ltd (Voting Shares) 1,425,191
1,500 Extendicare (Voting Shares) * 16,759
184,707 Fletcher Challenge Ltd Class A 2,465,961
263,002 Gulf Canada Resources Ltd * 1,543,103
58,700 Hollinger Inc 598,075
72,510 Hudsons Bay Co 1,401,135
184,500 Imasco Ltd 7,020,114
82,707 Imperial Oil Ltd 4,878,792
171,100 Inco Ltd 2,975,600
234,000 Inmet Mining Ltd * 830,341
105,235 Laidlaw Inc 1,534,361
424,319 Macmillan Bloedel Ltd 5,351,879
32,200 Magna International Class A 1,940,168
59,100 MDS Inc Class B 1,287,356
417,000 Methanex Corp * 3,398,939
90,500 Molson Co Ltd Class A 1,624,758
162,400 Moore Corporation Ltd 2,533,310
111,700 Newbridge Networks Corp * 2,617,570
231,004 Norcen Energy Resource 3,205,796
504,100 Nova Corp of Alberta 5,561,164
117,100 Nova Scotia Power Inc 1,563,363
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Canada - continued
25,500 Potash Corp of Saskatchewan 2,280,065
124,300 Provigo Inc * 816,643
58,200 Quebecor Inc Class B 1,128,707
49,500 Ranger Oil Ltd 318,255
87,800 Rogers Cantel Mobile Communications
Class B * 817,447
140,400 Seagram Ltd 5,327,337
47,300 Suncor Energy Inc 1,736,588
113,906 Teck Corp Class B 1,636,776
151,700 Telus Corp 3,816,084
53,900 Thomson Corp 1,613,421
224,800 Transalta Corp 3,783,129
262,000 Transcanada Pipelines Ltd 5,881,952
83,401 United Dominion Industries Ltd 2,391,012
198,900 Westcoast Energy Inc 5,031,374
10,900 Weston (George) Ltd 919,088
-------------
142,290,571
-------------
Finland - 0.4%
69,000 Amer Group Class A * 1,377,420
7,800 Cultor OY Class 1 465,710
662,500 Enso OY Class R 5,987,424
21,000 Finnair Class A 190,552
25,838 Instrumentarium OY Class A 1,453,601
28,800 Kesko OY 470,392
37,900 Metra AB Class A 990,436
8,000 Metra AB Class B 202,530
113,200 Partek OY 1,931,075
217,071 Rautaruukki OY 1,819,988
2,400 Stockmann AB Class A 198,610
87,100 Valmet OY 1,307,219
-------------
16,394,957
-------------
France - 9.1%
32,259 Accor SA 7,448,562
13,507 Air Liquide L Shares 2,182,681
67,221 Alcatel Alsthom Cie Generale d'Electricite SA 8,743,118
223,091 Assurances Generales De France (Bearer) 12,108,482
364,843 Banque Nationale de Paris 22,049,058
280 Bongrain 126,452
7,480 Bouygues 1,049,049
2,779 Canal Plus 585,533
11,745 Ciments Francais 605,453
9,432 Club Mediterranee SA Rights 3/11/98 * 13,708
9,432 Club Mediterranee SA * 700,130
11,808 Compagnie Generale d'Industrie et de
Participations 5,078,647
110,669 Credit Commercial de France 8,180,337
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
France - continued
34,257 Credit Local de France SA 4,371,259
121,293 Credit Lyonnais * 8,864,045
26,382 Credit National 1,603,045
188,650 Elf Aquitaine SA 21,469,713
71,422 Elf Sanofi SA 8,093,144
77,038 Eridania Beghin-Say SA 13,739,503
387,500 Euro Disney SCA (Bearer) * 563,185
1,096,728 Eurotunnel SA Units (Bearer) * 1,044,632
1,096,728 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 198,120
304,218 Financiere de Paribas SA 28,926,752
35 Fromageries Bel La Vache 26,020
204,729 GAN (Group Assurances National) * 5,039,845
1,539 Gaz Et Eaux 657,125
83,347 Generale Des Eaux 13,112,686
24,647 Generale Des Eaux Warrants 5/2/2001 * 24,691
70,060 Groupe Danone 14,151,791
238,794 Lafarge Coppee SA 17,619,599
27,055 Lyonnaise Des Eaux 3,567,790
80,620 Michelin SA Class B 4,991,377
36,366 Nord-Est 722,632
40,500 Pernod-Ricard 2,647,124
101,482 Peugeot SA 14,449,217
3,120 Pinault Printemps Redoute 2,045,414
111,810 Renault SA * 3,892,716
595,768 Rhone Poulenc SA Class A 27,453,710
67,636 Saint-Gobain 9,474,649
63,360 Seita 2,767,789
61,920 SGS Thomson Microelectronics * 4,743,717
15,826 Societe Eurafrance 7,368,183
153,800 Societe Generale Paris 23,186,501
43,059 Sommer Allibert 1,678,730
105,241 SPIE Batignolles 6,550,288
6,880 Synthelabo 960,381
8,090 Technip SA (Campagnie Francaise) 914,057
69,883 Thomson CSF 2,410,055
57,130 Total SA 6,267,248
206,720 Usinor Sacilor 3,101,182
15,082 Vallourec 1,039,275
58,635 Worms et Compagnie SA 3,659,121
-------------
342,267,521
-------------
Germany - 6.2%
52,750 Adidas Salomon AG 8,313,266
154,795 AGIV AG * 3,326,632
16,650 Axa Colonia Konzern AG 2,018,460
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Germany - continued
35,300 Bankgesellschaft Berlin AG 749,864
335,300 BASF AG 12,142,673
301,800 Bayer AG 12,830,346
4,400 Bayerische Hypotheken und Wechsel - Bank AG 204,513
850 Bayerische Motorenwerke AG 851,054
310,100 Bayerische Vereinsbank 19,206,635
153,140 Berliner Kraft & Licht AG Class A 6,750,902
1,350 Brau und Brunnen * 121,628
319,966 Continental AG 7,687,294
2,936 Deutsche Babcock & Wilcox * 161,785
155,250 Douglas Holdings AG 5,492,244
5,890 Draegerwerk AG Preferred 121,386
37,828 FAG Kugelfischer 517,992
34,050 Fresenius Medical Care AG Preferred .82%
(Non Voting) 6,998,567
11,000 Friedrich Krupp AG 1,982,091
9,350 Gerresheimer Glas AG 132,927
4,187 Hamburgische Electricitaets-Werke AG 1,091,308
71,155 Heidelberg Port-Zement 5,242,278
165,350 Henkel KGAA Preferred 10,724,174
28,250 Hochtief AG 994,724
231,163 Klockner Humboldt Deutz * 1,872,487
2,614 Klockner-Werke AG * 178,324
1,072,500 Lufthansa AG * 20,625,568
13,100 MAN AG 3,933,429
7,172 Metallgesellschaft * 145,831
41,400 Phoenix AG 866,896
7,016 Porsche AG Preferred .12% (Non Voting) 12,255,528
11,050 Preussag AG 3,574,239
6,250 Puma AG Preferred 126,567
134,100 RWE Preferred 6,292,115
4,600 SAP AG Preferred 1,899,314
132,209 Schering AG 14,847,331
18,700 Schwarz Pharma AG 1,525,059
14,300 SGL Carbon AG 1,709,933
220,900 Siemens AG 13,657,518
212,542 SKW Trostberg AG 7,261,388
950 Strabag Bau AG * 65,960
1,950 Suedzucker AG 913,349
10,700 Thyssen AG 2,328,971
213,000 Veba AG 14,366,276
27,650 Viag AG 14,977,242
1,924 Villeroy and Boch AG * 285,194
-------------
231,371,262
-------------
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Hong Kong - 5.5%
15,484,000 Allied Properties Ltd 1,499,903
7,128,500 Amoy Properties Ltd 6,030,568
328,000 ASM Pacific Technology 258,418
10,243,000 Cathay Pacific Airways Ltd 8,731,521
3,552,500 Century City International 628,599
206,725 Century City International Warrants 12/31/98 * 4,619
206,725 Century City International Warrants 12/31/99 * 2,884
224,000 Champion Technology Holdings 25,749
1,241,600 Champion Technology Holdings Warrants 6/30/98 * 12,829
4,932,000 Cheung Kong Holdings 34,557,443
6,132,000 China Overseas Land & Investment Ltd 1,861,182
1,042,122 Chinese Estates Holdings Ltd 360,049
3,411,000 CLP Holdings Limited 17,578,160
2,982,000 CP Pokphand Co 577,720
52,400 Dah Sing Financial Services 143,478
868,300 Dao Heng Bank 2,489,669
225 Denway Investment Warrants 11/30/99 * 2
529,766 Dickson Concept International Ltd 916,870
3,501,300 Elec & Eltek International Holdings Ltd 1,006,186
293,200 Gold Peak Industries Ltd Warrants 8/6/00 * 20,828
909,000 Gold Peak Industry 363,952
2,402,509 Great Eagle Holdings Ltd 3,537,437
749,901 Great Eagle Holdings Ltd Warrants 11/30/98 * 63,924
1,452,700 Guoco Group 3,696,247
6,803,700 Hang Lung Development Co Ltd 9,973,780
193,200 Hang Seng Bank 1,827,820
75,000 Harbour Centre Development Ltd 61,995
11,846,000 Henderson Investment Ltd 9,944,979
1,804,000 Henderson Land Development Co Ltd 9,413,187
292,000 HKCB Bank Holding Co Ltd 162,170
1,753,608 HKR International Ltd 1,313,649
1,216,000 Hong Kong Aircraft Engineering Co Ltd 2,599,264
5,421,300 Hong Kong Electric Holdings Ltd 19,255,505
723,700 Hong Kong Ferry Co Ltd 747,769
354,000 Hong Kong & Shanghai Hotels 304,049
52,000 Hung Hing Printing Group Ltd 23,339
653,000 Hysan Development Co Ltd 1,244,010
2,600 Innovative International Holding Warrants
8/31/99 * 49
292,000 International Bank of Asia 121,627
166,857 International Bank of Asia Rights 3/20/98 * 29,094
299,000 K Wah International Holdings Ltd 45,183
47,600 Kowloon Motor Bus Co Ltd 94,370
3,277,622 Kumagai Gumi Ltd 2,222,475
642,700 Lai Sun Garment International Ltd 348,639
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Hong Kong - continued
585,855 Lai Sun Hotel International Warrants 4/30/99 * 3,254
431,322 Leading Spirit Conrowa Electric * 91,919
716,000 Liu Chong Hing Bank Ltd 1,077,352
1,242,000 Liu Chong Hing Investment Ltd 1,066,748
2,078,462 Mandarin Oriental 1,735,516
451,000 Mingly Corp 80,385
1,348,800 New Asia Realty & Trust A Shares 2,717,634
1,653,467 New World Development Co Ltd 6,086,382
559,000 Oriental Press Group 144,398
729,000 Oriental Press Group Warrants 10/2/98 * 1,695
3,372,000 Paul Y - ITC Construction Holdings Ltd 365,835
107,000 Realty Development Corp Ltd Class A 258,431
33,642,371 Regal Hotels International Ltd 5,257,639
334,000 Semi Tech (Global) Co Ltd 38,825
444,000 Shanghai Petrochemical Co Class H 73,403
274,000 Shangri La Asia 245,954
1,195,000 Shaw Brothers Ltd 744,705
75,000 Shell Co Manufacturing Warrants 11/3/99 * 746
450,000 Shell Electric Co Ltd 65,676
6,409,000 Shun Tak Holdings Ltd 1,597,594
8,031,000 South China Morning Post Ltd 5,808,666
1,245,000 Sun Hung Kai Properties Ltd 9,326,445
1,185,600 Sun Hung Kai Properties Warrants 2/18/00 * 26,644
621,000 Swire Pacific Ltd Class A 3,737,630
3,357,500 Swire Pacific Ltd Class B 3,382,435
628,907 Tai Cheung Holdings Ltd 215,254
392,000 Tem Fat Hing Fung 40,504
48,000 Texwinca Holdings Ltd 5,890
57,000 Union Bank of Hong Kong 79,877
32,000 VTech Holdings Ltd 111,592
2,057,000 Wharf Holdings Ltd 4,330,526
8,770,800 Wheelock & Co Ltd 10,138,671
145,304 Wing Lung Bank 639,957
81,550 Winsor Properties Holdings Ltd 78,996
1,699,000 Yizheng Chemical Fibre Co 318,185
1,136,200 Yue Yuen Industrial Holdings 2,186,552
-------------
206,183,105
-------------
Italy - 5.7%
210,315 Alitalia Linee Aeree * 1,821,723
197,000 Alleanza Assicurazioni SPA 2,438,487
859,500 Assicurazioni Generali SPA 24,544,106
855,250 Assicurazioni Generali SPA Rights 3/10/98 * 1,758,820
2,029,222 Autostrade Concessioni e Costruzioni SPA
Class B Preferred 6.39% 7,597,746
955,000 Banca Commerciale Italiana SPA 4,360,194
8 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Italy - continued
3,803,857 Banca di Roma * 5,250,511
729,263 Banca Fideuram SPA 4,631,632
149,000 Banca Intesa SPA 682,363
80,400 Banca Popolare di Bergamo Credit 1,702,847
448,000 Banca Popolare di Milano 3,842,969
199,200 Banca Toscana 667,358
1,448,650 Banco di Napoli di Risp * 2,112,927
495,000 Bulgari SPA 2,876,862
279,300 Cartiere Burgo SPA 1,897,170
715,500 Cementir SPA 839,671
880,843 COFIDE SPA * 558,695
209,000 Cogefar Impresit Costruzioni Generali SPA * 200,889
154,250 Comau Finanziaria SPA 555,988
1,547,500 Credito Italiano 5,941,113
1,517,000 Credito Italiano (Non Convertible) 4,637,173
2,151,700 Dalmine SPA * 646,911
94,000 Edison SPA 642,443
33,150 Ericsson SPA 1,769,161
313,600 Falck Acciaierie and Ferriere Lombarde 2,218,657
1,540,200 Fiat SPA 5,413,875
1,876,700 Fiat SPA Preferred 3,681,141
2,984,720 Fiat SPA (Non Convertible) 6,246,487
742,500 Finmeccanica SPA * 621,983
588,000 Grassetto SPA (c) * 3
3,564,570 HPI SPA * 2,671,261
285,400 IFI Istituto Finanziario Preferred 5,534,315
386,000 IFIL Finanziaria di Partecipazioni SPA 1,650,172
688,850 IFIL Finanziaria di Partecipazioni SPA
(Non Convertible) 1,782,322
1,017,000 Industriali Riunite SPA (Non Convertible) * 726,327
1,156,100 Industriali Riunite SPA * 1,469,797
3,600 Industrie Natuzzi SPA ADR 87,525
813,000 Istituto Bancario San Paolo 9,540,920
550,250 Istituto Mobilaire Italiano 7,672,043
4,474,792 Istituto Nazionale Delle Assicurazioni 12,153,169
450,650 Italcementi Fabbriche Riunite Cemento SPA
(Non Convertible) 2,090,248
38,200 Italmobiliare SPA 1,195,451
20,200 Luxottica Group Sponsored ADR 1,550,350
869,940 Magneti Marelli SPA 1,900,844
440,000 Mediobanca SPA 4,499,707
167,500 Mondadori Editore 1,806,561
8,284,798 Montedison SPA 8,551,243
1,901,400 Montedison SPA (Non Convertible) 1,433,395
987,067 Montefibre SPA 808,099
878,593 Parmalat Finanziaria SPA 1,443,496
591,975 Pirelli and Co 1,404,305
See accompanying notes to the financial statements. 9
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Italy - continued
195,500 RAS SPA 2,305,211
156,700 Reno de Medici SPA * 446,601
105,800 Rinascente per l'Esercizio di Grandi
Magazzini SPA Preferred 5.59% 416,826
96,300 Rinascente per l'Esercizio di Grandi
Magazzini SPA (Non Convertible) 478,957
2,000 SAFILO SPA 52,921
2,500 Saipem SPA 15,060
254,000 Sirti SPA 1,477,627
2,483,272 SMI (Societa Metallurgica Italy) * 1,783,232
5,000 Sopaf SPA * 4,429
187,536 Stefanel SPA * 487,324
4,272,500 Telecom Italia Mobile SPA 19,542,548
2,811,269 Telecom Italia Mobile SPA (Non Convertible) 8,247,883
1,348,263 Telecom Italia SPA (Non Convertible) 6,543,722
33,500 Toro Assicurazioni 605,619
-------------
212,539,415
-------------
Japan - 14.0%
4,000 Aiwa Co 113,354
299,000 Amada Co Ltd 1,401,156
31,000 Anritsu Corp 314,098
960,000 Aoki Corp * 889,100
43,900 Aoki International 316,575
66,600 Aoyama Trading 1,444,502
28,000 Arabian Oil Co Ltd 531,940
202,000 Asahi Breweries Ltd 2,702,288
34,000 Asahi Denka Kogyo 177,361
135,000 Asahi Glass Co Ltd 811,090
9,000 Asatsu Inc 187,366
148,000 Atsugi Nylon Industrial 281,168
77,000 Bandai Co 1,145,888
144,000 Banyu Pharmaceutical Co Ltd 1,880,788
78,000 Best Denki Co Ltd 472,334
68,000 Brother Industries Ltd 185,166
185,000 Canon Sales Co Inc 2,489,512
246,000 Casio Computer Co 2,025,172
217,000 Chubu Electric Power Co Inc 3,469,801
32,000 Chudenko Corp 871,369
334,000 Chugai Pharmaceutical Co Ltd 2,125,671
87,200 Chugoku Electric Power Co Inc 1,263,168
279,000 Citizen Watch Co 2,020,779
801,000 Cosmo Oil Co Ltd 1,838,756
224,200 CSK Corp 5,412,887
813,000 Daicel Chemical Industries Ltd 1,801,947
180,000 Daiichi Seiyaku Co Ltd 2,464,973
56,000 Daimaru Inc 175,097
10 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
245,000 Dainippon Pharmaceutical Co Ltd 1,111,256
293,000 Dainippon Printing Co Ltd 4,986,543
293,000 Dainippon Screen Manufacturing Co Ltd 1,704,702
50,000 Daio Paper Corp 315,839
71,000 Daishowa Paper Manufacturing * 414,771
184,800 Daito Trust Construction Co Ltd 1,638,376
120,000 Daiwa House Industry Co Ltd 938,494
426,000 Daiwa Securities Co Ltd 2,100,831
326,000 Denso Corp 6,657,801
1,070 East Japan Railway Co 5,056,519
181,000 Eisai Co Ltd 3,166,390
231,000 Ezaki Glico Co Ltd 1,444,550
35,300 Familymart 1,377,575
141,100 Fanuc Co 5,137,814
801,000 Fuji Heavy Industries Ltd 3,005,414
312,400 Fuji Photo Film Co Ltd 12,240,798
187,000 Fujisawa Pharmaceutical Co Ltd 1,879,918
177,000 Fukuyama Transporting Co Ltd 868,677
117,000 Furukawa Co Ltd 229,684
243,000 Gakken Co Ltd 605,913
279,000 General Sekiyu (KK) 1,382,522
87,000 Green Cross Corp 249,988
110,000 Gunze Ltd 311,723
512,000 Hankyu Corp 2,387,145
238,000 Haseko Corp * 218,539
107,000 Heiwa Corp 1,177,313
269,000 Hino Motors 849,608
31,000 Hitachi Chemical Co 192,876
1,956,300 Hitachi Ltd 14,680,380
92,000 Hitachi Maxell Ltd 1,704,108
455,000 Hitachi Metals Ltd 2,070,965
147,700 Hokkaido Electric Power 2,127,871
73,000 Hokuetsu Paper Mills 383,116
33,100 Hokuriku Electric Power 482,102
142,000 Honda Motor Co Ltd 4,912,056
220,000 House Foods Corp 3,082,403
33,000 Hoya Corp 875,089
6,000 Hyogo Bank (c) -
222,000 INAX Corp 931,370
149,000 Intec Inc 1,037,917
499,000 Itochu Corp 1,481,240
95,000 Itoham Foods Inc 425,631
180,000 Ito-Yokado 9,831,394
60,000 Japan Airport Terminal Co Ltd 403,230
27,000 Japan Aviation Electronics 125,885
See accompanying notes to the financial statements. 11
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
945,000 Japan Energy Co Ltd 1,309,071
116,000 Japan Radio Co 740,093
608,000 Japan Synthetic Rubber Co Ltd 3,162,004
2,440 Japan Tobacco Inc 17,943,165
242,000 JGC Corp 626,407
149,000 Joshin Denki Co Ltd 459,986
30,000 Kaken Pharmaceutical Co Ltd 109,950
333,000 Kamigumi Co Ltd 1,520,945
186,000 Kandenko Co 1,295,654
120,000 Kanebo Ltd * 136,785
355,000 Kaneka Corp 2,023,272
284,000 Kankaku Securities Co Ltd * 278,762
310,100 Kansai Electric Power 5,326,660
226,000 Kao Corp 3,059,131
67,000 Katokichi Co Ltd 891,000
186,000 Kawasaki Kisen * 298,884
554,000 Keio Teito Electric Railway Co Ltd 2,245,294
20,000 Keisei Electric Railway 78,999
346,000 Kikkoman Corp 2,188,348
126,000 Kinden Corp 1,685,585
552,000 Kirin Brewery Co Ltd 4,806,459
113,000 Kissei Pharmaceutical Co Ltd 1,771,076
27,000 Kokusai Denshin Denwa 1,132,748
173,000 Kokusai Electric 1,602,232
23,000 Kokusai Kogyo Co Ltd 111,605
19,000 Kokuyo Co Ltd 332,383
401,000 Konica Corp 2,098,164
180,000 Koyo Seiko Co Ltd 891,950
345,000 Kubota Corp 994,063
426,000 Kurabo Industries Ltd 738,494
140,000 Kyocera Corp 7,535,819
442,000 Kyowa Hakko Kogyo Co Ltd 2,165,741
262,800 Kyushu Electric Power Co Inc 3,827,689
120,000 Kyushu Matsushita Electric 1,234,861
96,000 Lion Corp 348,041
500 Long Term Credit Bank of Japan 1,354
31,900 Mabuchi Motor Co 1,704,465
278,000 Maeda Corp 981,461
133,000 Maeda Road Construction 787,493
27,000 Makino Milling Machine Co Ltd 190,216
113,000 Makita Corp 1,305,945
121,000 Marudai Food Co Ltd 335,233
26,000 Maruichi Steel Tube 345,761
103,000 Matsushita Communications 3,375,445
47,000 Meidensha Corp 146,956
12 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
71,000 Meiji Milk Products 213,568
322,000 Meiji Seika Kaisha Ltd 1,236,207
50,000 Mercian Corp 200,269
249,000 Minolta Co Ltd 1,497,981
1,178,000 Mitsubishi Electric Corp 3,580,717
408,000 Mitsubishi Gas Chemical Co Inc 1,337,070
900,000 Mitsubishi Oil Co Ltd 1,866,540
155,000 Mitsubishi Paper Mills Ltd 332,502
310,000 Mitsubishi Steel Manufacturing * 478,509
67,000 Mitsubishi Warehouse & Transportation Co Ltd 758,411
145,000 Mitsui Marine & Fire Insurance Co 808,042
1,000 Mitsui Mining Co Ltd * 1,211
545,000 Mitsui Petrochemical Industries Ltd 1,531,505
57,000 Mori Seiki Co Ltd 690,335
27,000 MOS Food Services 374,020
80,000 Murata Manufacturing Co Ltd 2,539,381
71,000 Nagase & Co 275,390
26,000 Nagoya Railroad Co Ltd 91,380
16,400 Namco Ltd 395,947
8,000 Nankai Electric Railway Co Ltd 36,096
126,000 National House Industrial 1,186,891
818,000 NEC Corp 9,129,898
470,000 New Japan Securities Co Ltd * 665,954
539,000 New Oji Paper Co Ltd 2,901,290
160,000 NGK Spark Plug Co 1,156,337
100,000 Nichicon Corp 1,052,798
249,000 Nichii Co Ltd 1,929,637
401,000 Nichirei 1,015,752
114,000 Nihon Cement Co Ltd 275,232
16,000 Nihon Unisys Ltd 85,617
899,000 Nikko Securities 3,551,025
40,000 Nikon Corp 389,456
137,400 Nintendo Co Ltd 12,616,481
74,000 Nippon Chemi-Con Corp 240,165
68,000 Nippon Flour Mills Co Ltd 169,556
60,000 Nippon Hodo Co 286,393
50,000 Nippon Kayaku Co Ltd 235,099
87,000 Nippon Light Metal 139,112
253,000 Nippon Meat Packers Inc 3,324,468
2,489,000 Nippon Oil Co Ltd 8,984,279
72,000 Nippon Paint Co 151,033
313,000 Nippon Paper Industries 1,593,121
53,000 Nippon Shokubai Corp 310,457
150,000 Nippon Suisan Kaisha Ltd * 248,160
See accompanying notes to the financial statements. 13
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
4,830 Nippon Telegraph & Telephone 44,350,511
11,400 Nippon Television Network 3,447,162
56,000 Nippon Zeon Ltd 161,798
259,000 Nishimatsu Construction 1,334,671
193,000 Nisshin Oil Mills Ltd 534,711
427,000 Nisshinbo Industries Inc 2,484,327
1,004,000 Nissho Iwai Corp 2,861,078
53,000 Nissin Food Products Co Ltd 1,103,380
30,000 Nitto Denko Corp 474,947
68,000 NOF Corp 162,020
258,000 Nomura Securities Co Ltd 3,553,550
501,000 Oki Electric Industry 1,292,852
124,000 Okumura Corp 550,653
180,000 Olympus Optical Co Ltd 1,416,291
388,000 Omron Corp 6,265,495
133,000 Ono Pharmaceutical Co Ltd 3,063,643
237,000 Onward Kashiyama Co Ltd 3,376,870
22,000 Orix Corp 1,602,153
213,000 Pioneer Electronics Corp 3,759,915
150,000 Q.P. Corp 986,702
850,000 Renown Inc * 888,150
73,800 Rinnai Corp 1,197,578
27,000 Rohm Co Ltd 2,671,574
140,000 Royal Co Ltd 2,116,679
54,000 Ryosan Co 897,649
247,000 Sagami Railway Co Ltd 703,871
144,000 Sanden Corp 770,553
133,000 Sankyo Co Ltd 3,568,986
113,000 Sanwa Shutter Corp 693,224
200,000 Sapporo Breweries Ltd 902,398
66,500 Secom Co Ltd 4,142,761
264,000 Seino Transportation Co Ltd 1,575,683
222,000 Sekisui House Ltd 1,748,516
212,300 Shikoku Electric Power 3,108,961
233,000 Shin-Etsu Chemical Co Ltd 5,127,365
543,000 Shionogi and Co Ltd 2,811,066
301,000 Shiseido Co Ltd 3,788,411
14,000 Shochiku Co 78,904
1,393,000 Showa Denko 1,874,535
377,000 Showa Shell Sekiyu 2,563,469
112,000 Skylark Co Ltd 1,250,059
386,000 Snow Brand Milk Products Co Ltd 1,341,360
308,000 Stanley Electric Co Ltd 1,065,432
90,000 Sumitomo Bakelite Co Ltd 575,635
1,813,000 Sumitomo Corp 12,600,443
14 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
369,000 Sumitomo Heavy Industries Ltd 1,314,415
148,000 Sumitomo Marine & Fire Insurance Co 931,370
188,000 Sumitomo Osaka Cement Co Ltd 322,932
151,000 Taisho Pharmaceutical Co Ltd 3,549,988
166,000 Taiyo Yuden Co Ltd 1,773,925
161,000 Takara Standard Co 1,033,571
449,000 Takeda Chemical Industries Ltd 12,439,642
172,000 Takuma Corp 1,511,280
340,000 Tanabe Seiyaku Co Ltd 1,937,782
68,000 TDK Corp 5,194,332
798,000 Teikoku Oil Co Ltd 2,646,735
71,000 Toei Co Ltd 316,417
270,100 Tohoku Electric Power Co Inc 3,934,014
348,000 Tokio Marine & Fire Insurance Co 3,939,207
93,000 Tokuyama Corp 293,731
41,000 Tokyo Broadcasting System Inc 529,011
352,000 Tokyo Construction Co Ltd 431,885
336,000 Tokyo Electric Co Ltd 1,103,776
70,000 Tokyo Electron 2,515,634
182,000 Tokyo Ink Manufacturing Co Ltd 466,777
348,000 Tokyo Steel Manufacturing Co 1,597,720
46,000 Tokyo Style Co Ltd 473,363
91,000 Tokyu Department Store Co Ltd 175,042
151,000 Tomen Corp 204,393
1,058,000 Toshiba Corp 4,740,188
166,000 Toyo Suisan Kaisha 1,222,038
930,000 Toyobo Co Ltd 1,560,674
269,000 Toyota Motor Corp 7,431,410
5,000 Trans Cosmos 105,676
120,000 Tsumura and Co 626,929
59,000 Uniden Corp 621,151
48,000 Ushio Inc 379,577
126,000 Victor Co of Japan Ltd 1,117,074
126,000 Wacoal Corp 1,316,552
249,000 Yakult Honsha Co Ltd 1,685,229
120,000 Yamaha Corp 1,329,850
142,000 Yamaha Motor Co 914,969
182,000 Yamanouchi Pharmaceutical Co Ltd 4,422,861
328,000 Yamato Transport Co Ltd 4,128,236
200,000 Yamazaki Baking Co Ltd 2,248,080
64,000 Yasuda Fire & Marine Insurance Co 364,252
88,000 Yodogawa Steel Works 452,782
179,000 Yoshitomi Pharmaceutical Industries Ltd 949,339
-------------
524,148,383
-------------
See accompanying notes to the financial statements. 15
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - 2.2%
287,000 Aluminum Co of Malaysia 93,714
958,000 Amalgamated Steel Mills Berhad 247,646
1,033,000 AMMB Holdings Berhad 1,276,142
11,000 Arab Malaysian Development Berhad 3,263
1,301,000 Arab Malaysian Finance (Foreign Registered) 626,604
8,000 Ayer Hitam Tin Dredging * 2,525
841,000 Berjaya Leisure Berhad 814,683
1,357,300 Berjaya Sports Toto 3,804,133
108,000 Carlsberg Brew Malaysia 423,184
862,000 Cement Industries of Malaysia Berhad 701,328
1,155,800 Edaran Otomobil Berhad 2,516,027
605,000 Ekran Berhad 242,000
312,200 Esso Berhad 378,888
71,400 Faber Group Berhad * 19,429
211,000 Genting Berhad 700,463
515,000 Golden Hope Plantations Berhad 686,667
60,000 Guinness Anchor Berhad 94,694
1,045,000 Highlands and Lowlands Berhad 1,154,476
314,400 Hong Leong Industries Berhad 354,181
2,957,000 Hong Leong Properties Berhad 1,037,967
95,600 IGB Corp Berhad 40,841
1,611,000 IOI Corporation Berhad 1,367,706
49,000 Jaya Tiasa Holdings Berhad 82,000
199,000 Johan Holdings Berhad 67,146
1,010,000 Kedah Cement Berhad 373,769
1,414,058 Kuala Lumpur Kepong Berhad 3,279,986
2,368,000 Kumpulan Guthrie Berhad 1,675,320
367,000 Magnum Corp Berhad 309,578
1,461,750 Malayan Cement Berhad 855,173
1,174,000 Malayan United Industries Berhad 319,456
439,500 Malayawata Steel 191,347
945,000 Malaysia Mining Corp Berhad 594,633
985,000 Malaysian Airline Systems 1,136,435
2,189,600 Malaysian International Ship 4,051,505
187,000 Malaysian Oxygen Berhad 539,374
493,000 Malaysian Pacific Industries 1,475,646
2,079,333 Malaysian Resources Corp 1,408,854
72,710 Matsushita Electric 251,270
5,398,000 MBF Capital Berhad 2,570,476
762,000 MBF Holdings Berhad 175,208
76,000 Nestle Malaysia 409,469
431,000 New Straits Times 668,490
2,099,600 Oriental Holdings Berhad 4,284,898
46,000 OYL Industries Berhad 165,224
16 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
1,819,600 Pan Malaysia Cement 663,473
858,500 Perlis Plantations 1,424,993
4,000 Pernas International Hotel & Property 1,371
3,708,000 Perusahaan Otomobil 7,012,408
103,000 Petaling Garden Berhad 75,673
609,600 Petronas Dagangan Berhad 713,273
1,392,000 Petronas Gas Berhad 3,863,510
39 Public Bank Berhad 23
1,051,000 Rashid Hussain Berhad 1,658,721
3,101,000 Renong Berhad 1,468,229
285,000 Resorts World Berhad 620,408
3,438,000 RHB Capital Berhad 3,255,576
493,000 RJ Reynolds Berhad 959,170
303,000 Rothmans of Pall Mall Berhad 2,700,204
1,574,000 Sarawak Enterprises Corp 878,014
629,400 Shell Refinery Co 1,130,351
36,540 Silverstone * 9,943
204,000 Sime Darby 104,075
3,252,000 Sime Darby Berhad 4,247,510
48,000 Sime UEP Properties Berhad 45,714
1,691,000 TA Enterprise Berhad 644,190
4,337,000 Tan Chong Motor Holdings Berhad 3,080,155
566,000 Telekom Malaysia Berhad 1,925,170
1,462,000 UMW Holdings Berhad 1,909,551
104,000 Uniphone Telecommunications 30,563
234,000 Westmont Industries Berhad 56,669
998,500 YTL Corp 1,725,299
-------------
81,676,054
-------------
New Zealand - 0.0%
8,491 Trans Tasman Properties 3,487
-------------
Norway - 0.7%
3,874 Leif Hoegh and Co AS 60,908
625,490 Norsk Hydro AS 27,353,489
-------------
27,414,397
-------------
Portugal - 0.7%
109,888 Banco Commercial Portugues (Registered) 3,644,304
62,093 Banco Espirito Santo e Commercial de Lisboa
(Registered) 2,522,753
42,173 Banco Totta & Acores (Registered) 1,170,054
55,857 BPI-SGPS SA (Registered) 2,005,146
60,155 Cimpor Cimentos De Portugal SA (Registered) 1,741,793
254,490 Electricidade De Portugal * 5,396,467
19,903 Est Jeronimo Martins Filho Admin 687,374
64,713 Portucel Industrial Empresa 491,081
133,802 Portugal Telecom SA 7,021,175
28,028 Sonae Investimentos 1,261,829
-------------
25,941,976
-------------
See accompanying notes to the financial statements. 17
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments -- continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Singapore - 3.1%
101,959 Asia Food & Properties Ltd Warrants
7/12/02 * 14,274
924,461 Asia Food & Properties Ltd * 244,982
2,102,000 City Developments 9,530,969
111,000 Comfort Group 53,754
319,950 Creative Technology Ltd * 7,618,797
203,000 Cycle & Carriage Ltd 901,666
1,759,096 DBS Land Ltd 2,723,832
1,787,000 Development Bank of Singapore
(Foreign Registered) 14,000,555
1,127,309 First Capital Corp Ltd 1,140,522
3,259,037 Hai Sun Hup Group Ltd 1,326,937
1,065,203 Haw Paw Brothers International Ltd 1,222,256
139,475 Haw Paw Brothers International Ltd Warrants
7/18/2001 * 42,161
781,000 Highlands and Lowlands Berhad 843,152
1,273,104 Hotel Properties Ltd 824,651
2,756,221 Jardine Matheson Holdings Ltd 12,899,114
5,491,911 Jardine Strategic Holdings Ltd 15,651,946
403,324 Jardine Strategic Holdings Ltd Warrants
5/02/98 * 16,133
115,000 Keppel Bank Ltd 162,461
1,405,200 Lum Chang Holdings Ltd 524,458
288,000 Marco Polo Developments Ltd 394,423
477,600 Metro Holdings Ltd 654,085
1,620,000 Natsteel Ltd 2,238,618
2,950,556 Neptune Orient Lines Ltd 1,383,358
211,000 Overseas Chinese Banking (Foreign Registered) 1,256,107
575,000 Overseas Union Bank Ltd (Foreign Registered) 2,163,788
333,000 Parkway Holdings Ltd 714,892
341,508 Prima Ltd 648,886
527,308 Robinson and Co Ltd 1,902,993
247,699 Shangri-La Hotel Ltd 409,521
2,440,000 Singapore Airlines Ltd (Foreign Registered) 18,062,924
492,000 Singapore Press Holdings
(Foreign Registered) 7,041,579
996,000 Singapore Telecom 2,039,926
2,199,168 Straits Trading Co Ltd 2,414,879
423,000 Times Publishing Ltd 835,040
226,000 United Engineers 179,852
6,493,960 United Industrial Corp Ltd 2,624,025
546,900 Wearne Brothers Ltd 671,395
-------------
115,378,911
-------------
Spain - 3.5%
21,430 Acerinox SA 3,218,361
3,100 Azucarera de Espana SA 175,113
658,637 Banco Bilbao Vizcaya SA 30,063,423
216,808 Banco Central Hispano (Registered) 6,735,878
170,000 Banco Popular Espanol 15,088,790
18 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Spain - continued
3,320 Cristaleria Espanola SA 266,221
156,300 Dragados & Construcciones SA 4,262,312
1,508,856 FENOSA SA 18,711,911
62,600 Fomento de Construcciones y Contratas SA 2,682,596
658,660 Repsol SA 29,337,452
587,943 Telefonica de Espana SA 20,194,257
-------------
130,736,314
-------------
Sweden - 3.8%
177,392 Assi Doman 4,364,786
552,600 Avesta Sheffield AB 3,450,989
58,000 Bilspedition AB Class B * 296,288
107,005 Celsius Industrier AB Class B 1,978,010
257,020 Electrolux AB Class B 19,582,109
92,288 Esselte AB Class A 1,740,544
5,800 Esselte AB Class B 118,443
2,200 Euroc Industri AB Class A 87,930
27,782 Industrivarden AB Class A 1,773,157
11,524 Industrivarden AB Class C (Bearer) 713,917
141,100 Kinnevik Investment Class B 2,669,945
153,170 Marieberg Tidnings AB Class A 3,539,225
652,400 Mo Och Domsjo AB Class B 18,985,961
2,300 Modern Times Group AB * 17,523
542,246 Skanska AB Class B 24,517,018
43,600 SKF AB Class B 901,254
235,500 Ssab Swedish Steel Class A 4,412,095
48,800 Ssab Swedish Steel Class B 914,269
404,542 Stena Line AB Class B * 1,379,396
1,216,500 Stora Kopparberg Bergslags Class A 17,701,120
297,850 Stora Kopparberg Bergslags Class B 4,296,772
751,072 Svenska Cellulosa Class B 17,073,229
12,000 Svenska Kullagerfabriken AB 235,312
336,500 Trelleborg AB Class B 4,749,263
107,750 Volvo AB Class A 2,866,551
210,800 Volvo AB Class B 5,700,215
-------------
144,065,321
-------------
Switzerland - 5.3%
194,200 CS Holdings (Registered) 35,066,094
320 Jelmoli (Bearer) 313,546
200 Jelmoli (Registered) 39,248
43,515 Nestle AG (Registered) 76,201,656
26,607 Novartis AG (Registered) 48,532,937
1,155 Roche Holdings (Participating Certificate) 13,520,646
1,600 Saurer Group Holdings (Registered) * 1,611,338
2,110 Swiss Reinsurance (Bearer) 4,446,872
33,200 Zurich Reinsurance 18,097,574
-------------
197,829,911
-------------
See accompanying notes to the financial statements. 19
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - 24.5%
1,060,100 Abbey National 21,730,910
885,780 AMEC 2,023,581
197,256 Amstrad Plc 123,417
778,600 Anglian Water Plc 10,768,505
240,130 Arcadia Group * 1,950,179
1,239,200 Arjo Wiggins Appleton Plc 3,346,162
1,036,162 ASDA Group 3,433,390
285,246 Associated British Foods 2,977,629
320,000 Bank of Scotland 3,648,644
1,059,880 Barclays Plc 31,551,271
985,030 Barratt Development 4,557,404
938,482 Bass Plc * 15,730,244
1,851,500 BAT Industries 18,473,878
1,077,400 Beazer Holmes Plc 3,734,142
3,546,592 BG Plc * 17,795,766
765,600 Blue Circle Industries 4,478,128
2,267,903 British Airways Plc 21,284,383
350,500 British Energy Plc * 2,585,400
2,281,200 British Steel Plc 5,474,364
1,177,600 British Telecom Plc 11,866,181
988,469 BTR 2,624,367
264,400 Cable & Wireless 2,890,622
3,387,293 Coats Viyella 4,629,058
270,000 Dalgety Plc 1,511,487
1,498,353 Dawson International 1,282,860
480,260 Debenhams Plc * 3,305,327
478,200 Electrocomponents Plc 3,661,207
1,380,294 Elementis Plc 2,886,271
1,547,382 English China Clays Plc 6,216,545
812,300 Enterprise Oil 7,509,793
2,311,000 Eurotunnel SA Units (Registered) * 2,244,986
2,311,000 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 304,405
83,620 GKN Plc * 2,022,524
354,400 Great Portland Estates Plc 1,709,712
822,035 Greenalls Group Plc 5,610,177
217,900 Hammerson Plc 1,804,625
1,905,423 Hillsdown Holdings 4,988,274
276,485 Hyder Plc 4,270,081
210,670 Imperial Chemical Industries Plc 3,845,034
162,700 Kingfisher 2,806,101
215,273 Kwik Save Group 1,219,298
6,160,950 Ladbroke Group 31,040,653
74,946 Laing (John) 387,472
265,900 Land Securities 4,980,024
4,574,650 Lasmo 20,807,520
20 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
423,125 Legal & General Group 4,744,359
3,880,448 Lloyds TSB Group 58,396,901
4,533,642 Lonrho 7,016,763
294,260 Meggitt 760,664
541,500 MEPC Ord 5,331,647
433,600 Meyer International 2,705,766
1,834,180 Mirror Group Plc 5,133,962
4,016,490 National Power 41,629,784
366,300 Next 4,996,791
1,768,500 Northern Foods Plc 7,891,074
1,281,100 Orange Plc * 7,271,919
1,607,500 Peninsular & Oriental Steam Navigation Co 20,710,809
4,847,532 Pilkington 9,098,866
1,450,374 Powergen 20,262,526
89,930 Provident Financial Plc * 1,458,487
332,500 Prudential Corp 4,987,372
591,400 Railtrack Group Plc 9,007,096
1,619,900 Rentokil Plc 7,994,828
1,709,500 Reuters Group Plc * 17,211,840
402,810 RMC Group 6,141,479
182,700 Royal Bank of Scotland Group * 2,827,666
652,700 Sainsbury (J) 5,032,134
97,080 Schroders 3,668,379
1,396,200 Scottish Hydro-Electric Plc 12,522,949
2,609,398 Scottish Power Plc 22,255,216
7,203,600 Sears 6,226,882
842,600 Sedgwick Group 2,054,236
849,982 Severn Trent Plc 13,085,282
2,828,224 Signet Group Plc * 1,816,102
41,903,056 Signet Group * 69
963,867 Simon Engineering 785,568
231,800 Slough Estates 1,536,176
4,630,638 Smithkline Beecham Plc 57,945,026
712,200 Smiths Industries Plc 10,659,273
2,089,845 Southern Electric Plc 17,634,765
1,532,847 Storehouse Plc 6,536,726
3,709,375 T & N 15,451,939
7,599,880 Tarmac 12,575,768
2,396,200 Taylor Woodrow Plc 7,969,593
679,500 Thames Water 9,890,163
1,345,800 TI Group Plc 11,633,263
2,964,740 Unilever Plc 26,847,944
2,083,775 United Biscuits 9,194,907
2,473,750 United Utilities 33,235,920
See accompanying notes to the financial statements. 21
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
449,010 Viglen Technology Plc * 251,360
723,310 Viglen Technology Plc Entitlement Letters* -
2,984,170 Vodafone Group Plc 26,532,554
738,100 Waste Management International * 2,187,507
700,979 Wessex Water Plc 5,597,685
966,510 Whitbread Plc Class A 15,595,315
2,885,100 Wimpey (George) 5,842,890
1,332,432 Yorkshire Water 11,254,447
---------------
913,492,638
---------------
TOTAL STOCK AND EQUIVALENTS
(Cost $3,409,853,876) 3,592,648,619
---------------
INVESTMENT FUNDS - 0.0%
Australia - 0.0%
1,078,000 Advance Property Fund 1,255,803
47,400 Franked Income Fund 164,685
---------------
1,420,488
---------------
Netherlands - 0.0%
30,300 Schroders International Property Fund 55,733
---------------
TOTAL INVESTMENT FUNDS (Cost $1,359,880) 1,476,221
---------------
Shares/
Par Value DEBT OBLIGATIONS - 0.1%
United Kingdom - 0.1%
GBP 1,178,995 Viglen Technology Plc Floating Rate Note,
6.75% due 9/1/2000 1,941,215
GBP 311,023 Viglen Technology Plc Floating Rate Note,
6.99% due 1/1/2001 512,099
---------------
2,453,314
---------------
TOTAL DEBT OBLIGATIONS (Cost $1,334,817) 2,453,314
---------------
SHORT-TERM INVESTMENTS - 8.1%
Cash Equivalents - 6.1%
$ 89,300,000 Republic Bank of New York Time Deposit,
5.63% due 3/2/98 89,300,000
140,604,073 The Boston Global Investment Trust (b) 140,604,073
---------------
229,904,073
-------------
U.S. Government - 2.0%
$ 76,500,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 73,109,711
---------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $303,078,319) 303,013,784
---------------
22 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 104.2%
(Cost $3,715,626,892) 3,899,591,938
Other Assets and Liabilities (net) - (4.2%) (157,629,676)
---------------
TOTAL NET ASSETS - 100.0% $ 3,741,962,262
===============
Notes to the Schedule of Investments:
ADR American Depositary Receipt
(a) All or a portion of this security is held as collateral
for open futures contracts.
(b) Represents investment of security lending collateral (Note
1).
(c) Bankrupt issuer.
* Non-income producing security. A dividend has not been
declared for the twelve months ended February 28, 1998.
See accompanying notes to the financial statements. 23
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector diversification of the
Fund's equity investments was as follows:
Industry Sector (Unaudited)
Banking 13.0%
Utilities 7.9
Consumer Goods 7.7
Services 6.4
Conglomerates 5.1
Construction 4.9
Telecommunications 4.8
Oil and Gas 4.6
Health Care 4.5
Chemicals 4.4
Transportation 3.8
Real Estate 3.6
Electronic Equipment 3.4
Insurance 3.0
Paper and Allied Products 2.7
Food and Beverage 2.6
Retail Trade 2.6
Machinery 2.5
Automotive 2.5
Metals and Mining 2.1
Communications 1.9
Financial Services 0.9
Textiles 0.5
Aerospace 0.4
Computers 0.1
Miscellaneous 4.1
-------
100.0%
=======
24 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 28, 1998
- -----------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $3,715,626,892) (Note 1) $ 3,899,591,938
Foreign currency, at value (cost $10,709,447) (Note 1) 10,742,505
Cash 94,724
Receivable for Fund shares sold 264,666
Receivable for investments sold 49,802
Dividends and interest receivable 4,307,818
Foreign withholding taxes receivable 4,397,359
Receivable for open swap contracts (Notes 1 and 5) 38,660,933
Receivable for open forward foreign currency contracts (Notes 1 and 5) 45,150,762
Receivable for expenses waived or borne by Manager (Note 2) 435,216
--------------
Total assets 4,003,695,723
--------------
Liabilities:
Payable upon return of securities loaned (Note 1) 140,604,073
Payable for investments purchased 151,889
Payable for variation margin on open futures contracts (Notes 1 and 5) 1,519,527
Payable for open forward foreign currency contracts (Notes 1 and 5) 95,692,374
Payable for Fund shares repurchased 20,071,223
Payable to affiliate for (Note 2):
Management fee 2,133,200
Shareholder service fee 395,181
Accrued expenses 1,165,994
--------------
Total liabilities 261,733,461
--------------
Net assets $ 3,741,962,262
==============
Net assets consist of:
Paid-in capital $ 3,503,831,089
Distributions in excess of net investment income (13,664,487)
Accumulated undistributed net realized gain 64,940,672
Net unrealized appreciation 186,854,988
--------------
$ 3,741,962,262
==============
Net assets attributable to:
Class II Shares $ 12,500,387
==============
Class III Shares $ 3,046,509,668
==============
Class IV Shares $ 682,952,207
==============
Shares outstanding:
Class II 539,724
==============
Class III 131,331,157
==============
Class IV 29,449,788
==============
Net asset value per share:
Class II $ 23.16
==============
Class III $ 23.20
==============
Class IV $ 23.19
==============
</TABLE>
See accompanying notes to the financial statements. 25
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------------------------
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $11,084,792) $ 104,434,383
Interest (including securities lending income of $1,904,825) 11,578,563
--------------------
Total income 116,012,946
--------------------
Expenses:
Management fee (Note 2) 30,572,502
Custodian fees 3,224,655
Legal fees 81,307
Audit fees 74,159
Transfer agent fees 63,554
Trustees fee (Note 2) 37,252
Registration fees 17,000
Stamp duties and transfer taxes 5,523
Miscellaneous 34,983
Fees waived or borne by Manager (Note 2) (12,093,211)
--------------------
22,017,724
Shareholder service fee (Note 2)
Class I 7,600
Class II 74,548
Class III 5,925,551
Class IV 80,453
--------------------
Net expenses 28,105,876
--------------------
Net investment income 87,907,070
--------------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 369,594,289
Closed futures contracts 64,189,567
Closed swap contracts 55,168,217
Foreign currency, forward contracts and foreign
currency related transactions (46,206,918)
--------------------
Net realized gain 442,745,155
--------------------
Change in net unrealized appreciation (depreciation) on:
Investments (110,021,917)
Open futures contracts 18,232,787
Open swap contracts 16,068,733
Foreign currency, forward contracts and foreign
currency related transactions (22,245,129)
--------------------
Net unrealized loss (97,965,526)
--------------------
Net realized and unrealized gain 344,779,629
--------------------
Net increase in net assets resulting from operations $ 432,686,699
====================
</TABLE>
26 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 87,907,070 $ 103,049,778
Net realized gain 442,745,155 231,885,655
Change in net unrealized appreciation (depreciation) (97,965,526) (42,361,514)
--------------- ---------------
Net increase in net assets resulting from
operations 432,686,699 292,573,919
--------------- ---------------
Distributions to shareholders from:
Net investment income
Class I (104,457) (2,078)
Class II (1,185,156) (231,954)
Class III (115,540,157) (56,618,907)
--------------- ---------------
Total distributions from net investment income (116,829,770) (56,852,939)
--------------- ---------------
Net realized gains
Class I (411,274) (8,575)
Class II (4,695,006) (932,158)
Class III (446,289,351) (264,270,135)
--------------- ---------------
Total distributions from net realized gains (451,395,631) (265,210,868)
--------------- ---------------
Net share transactions: (Note 4)
Class I 261,289 206,837
Class II (8,131,121) 25,522,151
Class III (974,400,627) (275,828,032)
Class IV 601,324,132 -
--------------- ---------------
Decrease in net assets from net fund share transactions (380,946,327) (250,099,044)
--------------- ---------------
Total decrease in net assets (516,485,029) (279,588,932)
Net assets:
Beginning of period 4,258,447,291 4,538,036,223
--------------- ---------------
End of period (including distributions in excess of
net investment income of $13,664,487 and
accumulated undistributed net investment
income of $9,222,649, respectively) $ 3,741,962,262 $ 4,258,447,291
=============== ===============
</TABLE>
See accompanying notes to the financial statements. 27
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from September 10, 1996
Period from March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
-------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 24.36 $ 24.17
-------------------- --------------------
Income (loss) from investment operations:
Net investment income 0.47(d) 0.14
Net realized and unrealized gain (loss) (0.58) 1.38
-------------------- --------------------
Total from investment operations (0.11) 1.52
-------------------- --------------------
Less distributions to shareholders:
From net investment income (0.74) (0.26)
From net realized gains (2.92) (1.07)
-------------------- --------------------
Total distributions (3.66) (1.33)
-------------------- --------------------
Net asset value, end of period $ 20.59(e) $ 24.36
==================== ====================
Total Return (a) (0.83%) 6.38%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ 208
Net expenses to average
daily net assets 0.82% * 0.85 *(b)
Net investment income to average
daily net assets 2.22% * 1.12% *
Portfolio turnover rate 68% 97%
Average broker commission rate (c) $ 0.0077 $ 0.0062
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.06 $ 0.04
</TABLE>
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .03% of average daily net assets.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
(d) Computed using average shares outstanding throughout the period.
(e) All Class I shares of the fund were exchanged for Class II shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
28 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from September 26, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 24.36 $ 24.60
---------------- ----------------
Income (loss) from investment operations:
Net investment income 0.52 (d) 0.14
Net realized and unrealized gain 1.94 0.96
---------------- ----------------
Total from investment operations 2.46 1.10
---------------- ----------------
Less distributions to shareholders:
From net investment income (0.74) (0.27)
From net realized gains (2.92) (1.07)
---------------- ----------------
Total distributions (3.66) (1.34)
---------------- ----------------
Net asset value, end of period $ 23.16 $ 24.36
================ ================
Total Return (a) 11.60% 4.51%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 12,500 $ 25,302
Net expenses to average
daily net assets 0.76% 0.80% *(b)
Net investment income to average
daily net assets 2.14% 0.98% *
Portfolio turnover rate 68% 97%
Average broker commission rate (c) $ 0.0077 $ 0.0062
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.07 $ 0.05
</TABLE>
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .04% of average daily net assets.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
(d) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 29
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 24.37 $ 24.62 $ 22.32 $ 25.56 $ 18.51
------------ ----------- ------------ ------------ -----------
Income (loss) from investment operations:
Net investment income 0.54 (d) 0.59 0.36 0.27 0.29
Net realized and unrealized gain (loss) 1.96 1.02 3.09 (1.57) 7.44
------------ ----------- ------------ ------------ -----------
Total from investment operations 2.50 1.61 3.45 (1.30) 7.73
------------ ----------- ------------ ------------ -----------
Less distributions to shareholders:
From net investment income (0.75) (0.33) (0.39) (0.35) (0.27)
From net realized gains (2.92) (1.53) (0.76) (1.59) (0.41)
------------ ----------- ------------ ------------ -----------
Total distributions (3.67) (1.86) (1.15) (1.94) (0.68)
------------ ----------- ------------ ------------ -----------
Net asset value, end of period $ 23.20 $ 24.37 $ 24.62 $ 22.32 $ 25.56
============ =========== ============ ============ ===========
Total Return (a) 11.71% 6.72% 15.72% (5.31%) 42.10%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 3,046,510 $ 4,232,937 $ 4,538,036 $ 2,591,646 $ 2,286,431
Net expenses to average
daily net assets 0.69% 0.71% (b) 0.71% (b) 0.70% 0.71% (b)
Net investment income to average
daily net assets 2.19% 2.34% 1.93% 1.48% 1.48%
Portfolio turnover rate 68% 97% 14% 53% 23%
Average broker commission rate (c) $ 0.0077 $ 0.0062 N/A N/A N/A
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.07 $ 0.06 $ 0.03 $ 0.03 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .02% of average daily net assets.
(c) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. The average broker commission rate
will vary depending on the markets in which trades are executed.
(d) Computed using average shares outstanding throughout the period.
30 See accompanying notes to the financial statements.
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
- --------------------------------------------------------------------------------
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
----------------------
Net asset value, beginning of period $ 20.61
------------
Income from investment operations:
Net investment income 0.02 (c)
Net realized and unrealized gain 2.56
------------
Total from investment operations 2.58
------------
Net asset value, end of period $ 23.19
============
Total Return (a) 12.52%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 682,952
Net expenses to average
daily net assets 0.63% *
Net investment income to average
daily net assets 0.68% *
Portfolio turnover rate 68%
Average broker commission rate (b) $ 0.0077
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ 0.01
* Annualized
(a) Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
(b) The average broker commission rate will vary depending on the markets in
which trades are executed.
(c) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 31
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks maximum total return through investment in a portfolio of
common stocks of non-U.S. issuers.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class II shares. Additionally, Class IV shares commenced
operations on January 9, 1998.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
32
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a specified
price at a given date. The Fund may use futures contracts to manage its
exposure to the stock and currency markets. Buying futures tends to
increase the Fund's exposure to the underlying instrument. Selling futures
tends to decrease the Fund's exposure to the underlying instrument or hedge
other Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the name
of the futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 5 for all
open futures contracts as of February 28, 1998.
33
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 5 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1998.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. See Note 5 for a summary of the open swap agreement as of
February 28, 1998.
34
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $131,279,631 collateralized by cash in the amount of
$140,604,073, which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains, if any, at least annually. All distributions will be paid in
shares of the Fund, at net asset value, unless the shareholder elects to
receive cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and passive foreign investment
company transactions and redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $1,754,151.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
35
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions in Accumulated
Excess of Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
- ------------------------ ----------------------- -------------------
$6,035,564 ($7,751,716) $1,716,152
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. Prior to June 1, 1996, the premium on cash purchases was .75% of
the amount invested. All purchase premiums are paid to and are recorded by
the Fund as paid-in capital. These fees are allocated relative to each
class' net assets on the share transaction date. Purchase premiums are
included as part of each class' "shares sold" as summarized in Note 4. For
the year ended February 28, 1998, the Fund received $1,253,729 in purchase
premiums. There is no premium for cash redemptions or reinvested
distributions. Normally, no purchase premium is charged with respect to
in-kind purchases of Fund shares. A purchase premium of up to 0.10% may be
charged on certain in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and
36
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, .15%
for Class III shares, and .09% for Class IV shares.
GMO has agreed to waive a portion of its fee until further notice to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .54% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for fees exceeding .69%; thus the
net annual expense ratio after the waiver for a Class III shareholder is
unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $37,252. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchase and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998 aggregated
$2,648,648,497 and $3,425,987,739, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
------------------ ----------------- ---------------- ---------------
$3,747,223,350 $576,726,579 $424,357,991 $152,368,588
37
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
4. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from September 10, 1996
Period from March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
-------------------------------------------- -----------------------------------------
Class I: Shares Amount Shares Amount
------------------- ---------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 129,549 $ 3,082,734 8,196 $ 198,184
Shares issued to
shareholders in reinvestment
of distributions 23,945 515,731 440 10,653
Shares repurchased (162,048) (3,337,176) (82) (2,000)
------------------- ---------------------- ----------------- --------------------
Net increase (decrease) (8,554) $ 261,289 8,554 $ 206,837
=================== ====================== ================= ====================
<CAPTION>
Period from September 26,1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
-------------------------------------------- -----------------------------------------
Class II: Shares Amount Shares Amount
------------------- ---------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 763,855 $ 18,068,147 990,710 $ 24,358,040
Shares issued to
shareholders in reinvestment
of distributions 274,162 5,880,162 48,104 1,164,111
Shares repurchased (1,537,107) (32,079,430) - -
------------------- ---------------------- ----------------- --------------------
Net increase (decrease) (499,090) $ (8,131,121) 1,038,814 $ 25,522,151
=================== ====================== ================= ====================
</TABLE>
38
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Share transactions - continued
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
-------------------------------------------- -----------------------------------------
Class III: Shares Amount Shares Amount
------------------- ---------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 19,930,602 $ 489,010,908 26,694,331 $ 662,148,445
Shares issued to
shareholders in
reinvestment of
distributions 23,749,073 513,606,936 12,151,121 296,116,351
Shares repurchased (86,021,674) (1,977,018,471) (49,513,521) (1,234,092,828)
------------------- ---------------------- ----------------- --------------------
Net decrease (42,341,999) $ (974,400,627) (10,668,069) $ (275,828,032)
=================== ====================== ================= ====================
</TABLE>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
----------------------------------
Class IV: Shares Amount
--------------- ----------------
Shares sold 32,918,242 $ 678,472,578
Shares issued to shareholders in
reinvestment of distributions - -
Shares repurchased (3,468,454) (77,148,446)
--------------- ----------------
Net increase 29,449,788 $ 601,324,132
=============== ================
39
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
--------------- -------------------------- --------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Buys
3/6/98 ATS 1,109,395,622 $ 86,903,000 $ (3,257,106)
7/16/98 ATS 814,379,622 64,261,251 (48,284)
4/17/98 AUD 70,914,834 48,353,280 (1,093,895)
3/6/98 BEF 8,198,259,690 218,889,639 (7,768,501)
7/16/98 BEF 5,473,244,600 147,217,295 (188,024)
4/17/98 CAD 104,838,494 73,744,046 (893,275)
3/6/98 CHF 336,557,083 229,416,319 (1,816,875)
7/16/98 CHF 62,138,265 43,080,520 (179,202)
3/6/98 DEM 74,570,800 41,098,974 132,084
3/6/98 ESP 43,474,433,004 282,293,657 (10,732,995)
7/16/98 ESP 28,237,964,122 184,203,683 (583,792)
3/6/98 FIM 447,945,328 81,307,860 (3,824,649)
7/16/98 FIM 276,365,486 50,564,528 (166,291)
3/6/98 FRF 1,905,304,317 312,952,552 (3,059,920)
7/16/98 FRF 1,274,568,068 210,958,335 (966,088)
3/6/98 GBP 297,445,095 489,671,961 (990,794)
3/6/98 HKD 830,535,241 107,273,506 31,562
4/17/98 HKD 2,162,664,330 279,021,960 6,363,811
3/6/98 IEP 100,108,983 136,495,323 (10,773,255)
7/16/98 IEP 90,083,920 122,748,350 (394,337)
3/6/98 ITL 85,754,523,590 47,920,329 (1,384,908)
7/16/98 ITL 17,265,523,590 9,646,069 11,398
3/6/98 NLG 138,589,117 67,720,753 (2,917,191)
7/16/98 NLG 118,562,117 58,397,432 47,998
</TABLE>
40
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Buys - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
--------------- -------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
3/6/98 NOK 3,383,031,427 $ 447,028,865 $ (22,113,509)
7/16/98 NOK 1,637,773,351 217,718,800 227,398
3/6/98 SEK 2,110,650,263 263,645,084 (7,929,343)
7/16/98 SEK 279,372,222 35,034,294 58,783
-------------------
$ (74,209,200)
===================
Sales
3/6/98 ATS 1,109,395,622 86,903,000 495,487
4/17/98 AUD 357,462,351 243,735,704 5,452,754
3/6/98 BEF 8,198,259,690 218,889,639 2,645,206
7/16/98 BEF 2,424,591,090 65,215,748 206,866
4/17/98 CAD 25,179,800 17,711,627 (211,627)
3/6/98 CHF 336,557,083 229,416,319 5,631,178
7/16/98 CHF 182,522,091 126,542,744 (316,384)
3/6/98 DEM 74,570,800 41,098,974 1,211,608
7/16/98 DEM 101,647,300 56,457,784 (171,769)
3/6/98 ESP 43,474,433,004 282,293,657 3,731,513
7/16/98 ESP 5,924,089,600 38,644,398 356,314
3/6/98 FIM 447,945,328 81,307,860 968,014
3/6/98 FRF 1,905,304,317 312,952,552 3,447,546
7/16/98 FRF 26,761,500 4,429,392 42,037
3/6/98 GBP 297,445,095 489,671,961 (664,569)
7/16/98 GBP 146,066,073 238,876,091 (145,096)
3/6/98 HKD 830,535,241 107,273,506 (4,516,285)
4/17/98 HKD 3,486,389,077 449,805,871 (8,354,795)
3/6/98 IEP 100,108,983 136,495,323 1,708,074
7/16/98 IEP 10,025,063 13,660,150 174,436
3/6/98 ITL 85,754,523,590 47,920,329 (161,773)
4/17/98 JPY 4,883,874,760 38,918,438 1,613,562
3/6/98 NLG 138,589,117 67,720,753 61,942
</TABLE>
41
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Sales - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
--------------- -------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
3/6/98 NOK 3,383,031,427 $ 447,028,865 $ 8,228,088
7/16/98 NOK 535,097,917 71,133,699 292,381
3/6/98 SEK 2,110,650,263 263,645,084 2,010,722
7/16/98 SEK 285,445,484 35,795,904 (67,842)
-------------------
$ 23,667,588
===================
</TABLE>
Currency Abbreviations:
ATS Austrian Schilling GBP British Pound
AUD Australian Dollar HKD Hong Kong Dollar
BEF Belgian Franc IEP Irish Pound
CAD Canadian Dollar ITL Italian Lira
CHF Swiss Franc JPY Japanese Yen
DEM German Mark NLG Netherlands Guilder
ESP Spanish Peseta NOK Norwegian Kroner
FIM Finnish Markka SEK Swedish Krona
FRF French Franc
42
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
----------------- --------------------- ---------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Buys
691 DAX March 1998 $ 179,208,789 $ 19,458,500
1,449 MIB 30 March 1998 235,198,826 38,537,032
249 TSE 35 March 1998 33,496,856 2,229,389
---------------------
$ 60,224,921
=====================
Sales
2,934 ALL ORDS March 1998 $ 134,918,240 $ (7,046,524)
1,193 FTSE 100 ID March 1998 283,887,203 (25,208,008)
994 HANG SENG March 1998 74,140,781 (6,577,712)
174 IBEX March 1998 10,111,353 (831,876)
358 MATIF CAC 40 March 1998 40,354,921 (5,243,825)
143 TOPIX March 1998 14,443,758 (272,818)
79 OMX STOCK March 1998 2,711,481 (67,742)
---------------------
$ (45,248,505)
=====================
</TABLE>
At February 28, 1998 the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
43
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreement
<TABLE>
<CAPTION>
Notional Expiration Unrealized
Amount Date Description Appreciation
------------------------ --------------- ----------------------------------------------------- --------------------
<S> <C> <C> <C>
CHF 241,069,567 8/6/98 Agreement with Swiss Bank Corporation dated 8/6/97
to receive (pay) the notional amount multiplied by
the return on the Swiss Market Index (including
dividends) and to pay the notional amount
multiplied by 6 month CHF LIBOR adjusted by a
specified spread. $ 38,660,933
====================
</TABLE>
44
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
60.25% as net capital gain dividends.
45
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
fifteen years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO International Core Fund returned 11.7% for the
fiscal year ended February 28, 1998 as compared to 15.5% for EAFE and 18.9% for
the GMO EAFE-Lite Index. Consistent with the Fund's investment objective and
policies, the Fund was invested substantially in common stocks throughout the
period.
Effect of country weights (local currency terms)
Overseas markets were mixed during the fiscal year. Although a strong bull
market prevailed in Europe, the investment climate was difficult for investors
in the Far East. Poor economic conditions in Japan combined with the fallout
from the Asian currency crisis caused most stock markets in the Pacific Rim to
fall significantly. Hedging currency exposure back to the strong-performing U.S.
dollar added to the absolute performance of the Fund.
Within Europe, ten of the fourteen EAFE markets returned in excess of 30% for
the year, led by strong performance of the largest international blue chip
companies. On the other hand, small European stocks performed poorly throughout
the region.
Weakness in the Pacific Rim countries offset the strong performance of the
European markets. Many of the Pacific Rim countries represented in the index
(Japan, Malaysia, Hong Kong and Singapore) were significantly affected by the
debt crisis in the Asian markets. Weakening currencies further depressed returns
for dollar-based investors. In the crisis environment pervading these markets,
both large and small stocks performed poorly in absolute terms, however, smaller
stocks were more drastically affected by the turn of events.
Country selection contributed negatively to the Fund's performance for the year,
primarily in some of the Asian countries where the Fund had slight overweights
in the latter part of the year. In Europe, where the Fund was underweight in
many of the expensive markets, including the Netherlands, Switzerland, and the
United Kingdom, performance was also negatively affected. These decisions were
somewhat offset by the Fund's overweighting of the Italian market, which was one
of the best performing EAFE markets for the year, as well as by underweighting
Japan.
Relative to EAFE, country selection added value, primarily due to the Fund's
underweight in Japan.
<PAGE>
Effect of currency weights
The dollar strengthened versus every currency in the EAFE-Lite benchmark during
the year with the exception of the Swiss franc and the pound sterling. Currency
allocation contributed negatively to performance through the Fund's
underweighting of the strong-performing Swiss and British currencies and through
its modest overweights in some of the Asian currencies (Malaysia and Singapore).
The Fund benefited from underweighting the Dutch guilder and Australian dollar.
The Fund was modestly hedged back to the U.S. dollar during the year, which
added value as well.
Effect of stock selection
Stock selection was negative for the year as the Fund's value orientation was
not rewarded in a market environment that favored the largest, growth-oriented
international stocks. This trend was perhaps best exemplified by the remarkable
spread between large and small stocks in the U.K., where the largest 20% of the
market outperformed the smallest 20% by a margin of twenty-seven percentage
points (27%). As a group, the largest multinational stocks are very expensive
relative to their historical levels, and the Fund maintained a significant
underweight in these stocks during the year. Our bias in favor of smaller, less
expensive companies, was not rewarded.
Portfolio structure and outlook
Country selection. The International Core Fund remains underweight in Japan. The
Fund holds no weight in the Netherlands and we have increased our underweight in
the U.K. as the market (and the British pound) appear expensive on all of our
valuation measures. The Fund's largest overweight positions are in Italy and
Canada.
Currency Selection. Among currencies, the Fund is slightly underweight in the
European currencies and holds a larger underweight in the Asian/Pacific Rim
currencies. The Fund's largest underweights are the Dutch guilder, Swiss Franc,
Deutsche mark and pound sterling. The Fund continues to emphasize the Canadian
dollar, Norwegian krone, Spanish peseta and French franc.
Stock selection. Small stocks in EAFE are now cheaper than they have been in
more than twenty years. Value stocks are also very attractive in many European
markets, following the strong run over the last several years in multinational
companies. While small stocks also appear attractive in a number of the Pacific
Rim countries, we are somewhat more cautious about their outlook given their
higher risk of bankruptcy in what will likely be a difficult economic
environment. Overall, the Fund remains about 20% overweight in smaller stocks
and 20% underweight in large, multinational stocks.
The Fund is very well positioned to outperform the benchmark over the next three
years. Although the restructuring craze in Europe may well provide support for
large companies in the short term, we believe large cap companies (whose
valuations are historically high) are susceptible to earnings disappointments,
and eventually, shrinking profit margins. We expect value and small stocks to do
well in many countries over the next several years.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
International Core Fund
Comparison of Change in Value of a $10,000 Investment in
GMO International Core Fund Class III Shares and the MSCI EAFE Index
As of February 28, 1998
------------------------------------------
Average Annual Total Return
------------------------------------------
Since
1 Year 5 Year 10 Year Inception
------------------------------------------
Class 9/26/96
II 10.9% n/a n/a 11.0%
------------------------------------------
Class
III 11.0% 13.0% 11.7% n/a
------------------------------------------
Class 1/9/98
IV n/a n/a n/a 11.8%
------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO International Core Fund MSCI EAFE Index
2/29/88 $9,940 $10,000
2/28/89 $12,720 $12,083
2/28/90 $14,459 $11,695
2/28/91 $15,992 $11,426
2/29/92 $15,992 $10,578
2/28/93 $16,224 $10,141
2/28/94 $23,042 $14,114
2/28/95 $21,819 $13,488
2/29/96 $25,249 $15,760
2/28/97 $26,945 $16,271
2/28/98 $30,101 $18,788
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Performance for
Class IV and Class II shares may vary due to different shareholder service fees.
Past performance is not indicative of future performance. Information is
unaudited.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Japan Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Japan Fund at February 28,
1998, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
STOCK AND EQUIVALENTS - 97.6%
Automotive - 4.6%
2,000 Autobacs Seven 75,200
48,000 Denso Corp 980,290
142,000 Fuji Heavy Industries Ltd 532,795
20,000 Honda Motor Co Ltd 691,839
95,000 Isuzu Motors Ltd 205,296
14,600 Mabuchi Motor Co 780,100
200,000 Mazda Motor Corp * 638,012
46,000 NGK Spark Plug Co 332,447
87,000 Toyota Motor Corp 2,403,467
28,000 Yamaha Motor Co 180,416
---------------
6,819,862
---------------
Banking - 0.1%
14,000 Bandai Co 208,343
---------------
Chemicals - 3.5%
365,000 Daicel Chemical Industries Ltd 808,992
9,000 Hitachi Chemical Co 55,996
204,000 Japan Synthetic Rubber Co Ltd 1,060,936
39,000 Kureha Chemical Industry Co Ltd 105,272
208,000 Mitsubishi Gas Chemical Co Inc 681,639
72,000 Mitsui Petrochemical Industries Ltd 202,327
20,000 Nagase & Co 77,575
20,000 Nippon Paint Co 41,954
56,000 Nippon Soda Chemical Co Ltd 500,910
38,000 Shin-Etsu Chemical Co Ltd 836,223
411,000 Showa Denko 553,075
17,000 Sumitomo Bakelite Co Ltd 108,731
27,000 Tokuyama Corp 85,277
48,000 Tokyo Ink Manufacturing Co Ltd 123,106
---------------
5,242,013
---------------
Computers and Office Equipment - 0.5%
44,000 NCR Japan Ltd 171,012
8,000 Nihon Unisys Ltd 42,809
46,000 Ricoh Co Ltd 491,570
---------------
705,391
---------------
Conglomerates - 0.4%
77,000 Mitsubishi Corp 585,744
---------------
Construction - 3.5%
468,000 Aoki Corp * 433,436
15,000 Chudenko Corp 408,454
See accompanying notes to the financial statements. 1
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Construction - continued
29,000 Daiwa House Industry Co Ltd 226,803
212,000 Haseko Corp * 194,665
68,000 INAX Corp 285,285
106,000 Maeda Corp 374,226
501,000 Mitsui Engineering & Shipbuilding * 511,589
52,000 National House Industrial 489,828
57,000 Okumura Corp 253,123
91,000 Penta Ocean Construction 200,974
248,000 Sato Kogyo Co Ltd 296,430
40,000 Sekisui House Ltd 315,048
154,000 Shokusan Jutaku Sogo Co Ltd * 132,874
67,000 Takara Standard Co 430,120
25,000 Takuma Corp 219,663
152,000 Tokyo Construction Co Ltd 186,496
21,000 Toyo Exterior Co Ltd 192,828
---------------
5,151,842
---------------
Consumer Goods - 8.0%
50,000 Citizen Watch Co 362,147
8,000 Daikin Industries Ltd 40,212
55,000 Ezaki Glico Co Ltd 343,940
99,800 Fuji Photo Film Co Ltd 3,910,473
22,000 Hitachi Maxell Ltd 407,504
70,000 Kao Corp 947,518
53,000 Minolta Co Ltd 318,847
61,000 Nikon Corp 593,921
37,300 Nintendo Co Ltd 3,424,998
44,000 Olympus Optical Co Ltd 346,204
6,000 Ushio Inc 47,447
46,000 Victor Co of Japan Ltd 407,821
44,000 Yakult Honsha Co Ltd 297,792
49,000 Yamaha Corp 543,022
---------------
11,991,846
---------------
Electric - 2.2%
30,000 Kinden Corp 401,330
28,000 Kokusai Electric 259,321
63,000 Matsushita Electric Industrial Co Ltd 917,597
245,000 Mitsubishi Electric Corp 744,716
232,000 Oki Electric Industry 598,686
65,000 Showa Electric Wire & Cable 158,474
58,000 Stanley Electric Co Ltd 200,633
---------------
3,280,757
---------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Electronics - 5.4%
6,000 Aiwa Co 170,031
12,000 Brother Industries Ltd 32,676
20,000 Fanuc Co 728,251
71,000 Hosiden Corp * 668,804
57,000 Japan Aviation Electronics 265,756
36,000 Kyocera Corp 1,937,782
26,000 Nichicon Corp 273,728
5,000 Pioneer Electronics Corp 88,261
18,000 Ryosan Co 299,216
72,000 Sharp Corp 563,097
46,000 Tokyo Electron 1,653,131
311,000 Toshiba Corp 1,393,382
---------------
8,074,115
---------------
Financial Services - 1.1%
173,000 Nikko Securities 683,345
52,000 Nomura Securities Co Ltd 716,219
3,900 Orix Corp 284,018
---------------
1,683,582
---------------
Food and Beverage - 5.7%
67,000 Asahi Breweries Ltd 896,303
4,000 Denny's Japan Co Ltd 101,005
91,000 House Foods Corp 1,274,994
39,000 Itoham Foods Inc 174,733
7,000 Ito-Yokado 382,332
20,000 Katokichi Co Ltd 265,970
82,000 Kikkoman Corp 518,626
155,000 Kirin Brewery Co Ltd 1,349,640
10,000 Marudai Food Co Ltd 27,705
34,000 Meiji Seika Kaisha Ltd 130,531
42,000 Mercian Corp 168,226
35,000 Nichirei 88,657
84,000 Nippon Meat Packers Inc 1,103,776
116,000 Nippon Suisan Kaisha Ltd * 191,910
37,000 Nisshin Oil Mills Ltd 102,509
16,000 Nissin Food Products Co Ltd 333,096
69,700 Q.P. Corp 458,487
94,000 Snow Brand Milk Products Co Ltd 326,652
39,000 Takara Shuzo Co Ltd 182,142
24,000 Toyo Suisan Kaisha 176,680
23,000 Yamazaki Baking Co Ltd 258,529
---------------
8,512,503
---------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Health Care - 4.2%
48,000 Eisai Co Ltd 839,706
46,000 Hoya Corp 1,219,821
84,000 Kyowa Hakko Kogyo Co Ltd 411,589
81,000 Lion Corp 293,659
58,000 Sankyo Co Ltd 1,556,400
59,000 Shionogi and Co Ltd 305,438
126,000 Shiseido Co Ltd 1,585,847
---------------
6,212,460
---------------
Leisure - 0.2%
19,000 Heiwa Corp 209,056
24,000 Tokyotokeiba Co Ltd 43,315
---------------
252,371
---------------
Machinery - 1.3%
3,000 Aida Engineering Ltd 12,420
113,000 Amada Co Ltd 529,534
18,000 Furukawa Co Ltd 35,336
24,000 Kubota Corp 69,152
13,000 Mori Seiki Co Ltd 157,445
32,000 Okuma Corp 133,745
15,000 Rinnai Corp 243,410
51,000 Sanden Corp 272,904
94,000 Toshiba Tungaloy Co Ltd 290,936
65,000 Tsubakimoto Chain 227,935
---------------
1,972,817
---------------
Metals and Mining - 2.1%
114,000 Fujikara Ltd 802,232
35,000 Hitachi Metals Ltd 159,305
150,000 Japan Metals & Chemicals * 249,347
7,000 Maruichi Steel Tube 93,090
108,000 Nachi Fujikoshi Co 241,083
82,000 Nippon Sheet Glass Co Ltd 179,150
65,000 Nitto Denko Corp 1,029,051
67,000 NTN Corp 212,673
25,000 Yodogawa Steel Works 128,631
---------------
3,094,562
---------------
Oil and Gas - 5.0%
256,000 Cosmo Oil Co Ltd 587,667
20,000 General Sekiyu (KK) 99,106
238,000 Mitsubishi Oil Co Ltd 493,596
1,423,000 Nippon Oil Co Ltd 5,136,452
108,600 Showa Shell Sekiyu 738,442
126,000 Teikoku Oil Co Ltd 417,905
---------------
7,473,168
---------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Paper and Allied Products - 0.9%
19,000 Daio Paper Corp 120,019
69,000 Hokuetsu Paper Mills 362,123
108,000 Nippon Paper Industries 549,703
46,000 Sumitomo Forestry Co Ltd 268,725
---------------
1,300,570
---------------
Pharmaceuticals - 7.0%
226,000 Chugai Pharmaceutical Co Ltd 1,438,328
44,000 Dainippon Pharmaceutical Co Ltd 199,573
170,000 Fujisawa Pharmaceutical Co Ltd 1,709,016
105,000 Kaken Pharmaceutical Co Ltd 384,825
28,000 Kissei Pharmaceutical Co Ltd 438,851
13,000 Nippon Kayaku Co Ltd 61,126
115,000 Takeda Chemical Industries Ltd 3,186,100
66,000 Tanabe Seiyaku Co Ltd 376,158
93,000 Yamanouchi Pharmaceutical Co Ltd 2,260,033
78,000 Yoshitomi Pharmaceutical Industries Ltd 413,678
---------------
10,467,688
---------------
Retail Trade - 2.0%
7,000 Aoki International 50,479
21,000 Aoyama Trading 455,474
24,000 Best Denki Co Ltd 145,334
6,200 Familymart 241,954
34,000 Hankyu Department Stores Inc 228,766
58,000 Joshin Denki Co Ltd 179,055
59,000 Nichii Co Ltd 457,223
68,000 Sanrio Co Ltd * 516,204
9,000 Seven-Eleven Japan 628,354
4,000 UNY Co Ltd 61,110
---------------
2,963,953
---------------
Services - 6.5%
27,000 Canon Sales Co Inc 363,334
74,000 CSK Corp 1,786,591
96,000 Dainippon Printing Co Ltd 1,633,816
108,000 Kamigumi Co Ltd 493,280
12,000 Kyodo Printing Co Ltd 64,118
353,000 Nissho Iwai Corp 1,005,937
28,000 Secom Co Ltd 1,744,320
24,600 Sega Enterprises 471,242
276,000 Sumitomo Corp 1,918,214
42,000 Sumitomo Warehouse Co Ltd 184,184
---------------
9,665,036
---------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Technology - 9.3%
42,000 Dainippon Screen Manufacturing Co Ltd 244,360
152,000 Fujitsu Ltd 1,708,541
720,000 Hitachi Ltd 5,402,992
17,300 Murata Manufacturing Co Ltd 549,141
218,000 NEC Corp 2,433,151
39,000 Omron Corp 629,779
2,000 Rohm Co Ltd 197,894
61,000 Taiyo Yuden Co Ltd 651,864
27,700 TDK Corp 2,115,927
---------------
13,933,649
---------------
Telecommunications - 2.8%
102,000 Gakken Co Ltd 254,334
40,000 Japan Radio Co 255,205
59,000 Matsushita Communications 1,933,507
3,600 Nippon Television Network 1,088,578
64,000 Nitsuko Corp 243,173
26,000 Tokyo Broadcasting System Inc 335,471
---------------
4,110,268
---------------
Textiles - 2.2%
18,000 Gunze Ltd 51,009
124,000 Kurabo Industries Ltd 214,961
186,000 Nisshinbo Industries Inc 1,082,166
52,000 Onward Kashiyama Co Ltd 740,917
329,000 Renown Inc * 343,766
13,000 Tokyo Style Co Ltd 133,777
73,000 Toyobo Co Ltd 122,505
59,000 Wacoal Corp 616,481
---------------
3,305,582
---------------
Tobacco - 2.4%
491 Japan Tobacco Inc 3,610,694
---------------
Transportation - 4.6%
257 East Japan Railway Co 1,214,510
25,000 Fujita Kanko Inc 261,221
55,000 Fukuyama Transporting Co Ltd 269,928
111,000 Hankyu Corp 517,526
19,000 Japan Airport Terminal Co Ltd 127,689
197,000 Kawasaki Kisen * 316,560
69,000 Keio Teito Electric Railway Co Ltd 279,649
104,000 Keisei Electric Railway 410,797
84,000 Nagoya Railroad Co Ltd 295,227
33,000 Nankai Electric Railway Co Ltd 148,896
6 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Transportation - continued
48,000 Royal Co Ltd 725,718
92,000 Sagami Railway Co Ltd 262,171
53,000 Seino Transportation Co Ltd 316,330
40,000 Skylark Co Ltd 446,450
50,000 Toei Co Ltd 222,829
79,000 Yamato Transport Co Ltd 994,301
---------------
6,809,802
---------------
Utilities - 12.1%
35,200 Chubu Electric Power Co Inc 562,843
32,900 Chugoku Electric Power Co Inc 476,585
45,500 Hokkaido Electric Power 655,505
16,200 Hokuriku Electric Power 235,953
72,500 Kansai Electric Power 1,245,349
7,000 Kokusai Denshin Denwa 293,675
89,400 Kyushu Electric Power Co Inc 1,302,114
1,184 Nippon Telegraph & Telephone 10,871,844
72,600 Shikoku Electric Power 1,063,168
51,400 Tohoku Electric Power Co Inc 748,642
37,800 Tokyo Electric Power 712,135
---------------
18,167,813
---------------
TOTAL STOCK AND EQUIVALENTS (Cost $171,705,786) 145,596,431
---------------
TOTAL INVESTMENTS - 97.6%
(Cost $171,705,786) 145,596,431
Other Assets and Liabilities (net) - 2.4% 3,556,062
---------------
TOTAL NET ASSETS - 100.0% $ 149,152,493
===============
Notes to the Schedule of Investments:
* Non-income producing security. A dividend has not been
declared for the twelve months ended February 28, 1998.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $171,705,786) (Note 1) $ 145,596,431
Foreign currency, at value (cost $3,922,370) (Note 1) 3,807,377
Cash 85,565
Cash held on demand deposit (Notes 1 and 6) 55,000
Dividends and interest receivable 72,441
Receivable for expenses waived or borne by Manager (Note 2) 56,955
---------------
Total assets 149,673,769
---------------
Liabilities:
Payable for Fund shares repurchased 100,000
Payable for variation margin on open futures contracts (Notes 1 and 6) 191,802
Payable to affiliate for (Note 2):
Management fee 87,219
Shareholder service fee 17,518
Accrued expenses 124,737
---------------
Total liabilities 521,276
---------------
Net assets $ 149,152,493
===============
Net assets consist of:
Paid-in capital $ 212,406,170
Distributions in excess of net investment income (444,014)
Accumulated net realized loss (36,569,557)
Net unrealized depreciation (26,240,106)
---------------
$ 149,152,493
===============
Net assets attributable to Class III Shares $ 149,152,493
===============
Shares outstanding - Class III 23,446,166
===============
Net asset value per share - Class III $ 6.36
===============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $224,903) $ 1,471,540
Interest (including securities lending income of $143,301) 388,818
-----------------
Total income 1,860,358
-----------------
Expenses:
Management fee (Note 2) 1,540,113
Custodian fees 279,470
Audit fees 52,114
Transfer agent fees 32,924
Legal fees 3,922
Registration fees 3,844
Trustees fee (Note 2) 1,918
Stamp duties and transfer taxes 921
Miscellaneous 1,830
Fees waived or borne by Manager (Note 2) (803,953)
-----------------
1,113,103
Shareholder service fee - Class III (Note 2) 308,029
-----------------
Net expenses 1,421,132
-----------------
Net investment income 439,226
-----------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (36,251,088)
Closed futures contracts 21,391
Foreign currency and foreign currency related
transactions (1,125,615)
-----------------
Net realized loss (37,355,312)
-----------------
Change in net unrealized appreciation (depreciation) on:
Investments 21,074,281
Open futures contracts 426,337
Foreign currency and foreign currency related transactions 520,303
-----------------
Net unrealized gain 22,020,921
-----------------
Net realized and unrealized loss (15,334,391)
-----------------
Net decrease in net assets resulting from operations $ (14,895,165)
=================
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
February 28, 1998 February 28, 1997
-------------------- --------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 439,226 $ 23,994
Net realized loss (37,355,312) (1,918,375)
Change in net unrealized appreciation (depreciation) 22,020,921 (46,708,941)
-------------------- --------------------
Net decrease in net assets resulting from operations (14,895,165) (48,603,322)
-------------------- --------------------
Distributions to shareholders:
In excess of net investment income - Class III - (36,409)
-------------------- --------------------
Net share transactions - Class III (Note 5) (54,749,266) 141,329,696
-------------------- --------------------
Total increase (decrease) in net assets (69,644,431) 92,689,965
Net assets:
Beginning of period 218,796,924 126,106,959
-------------------- --------------------
End of period (including distributions in excess of
net investment income of $444,014 and
$564,380, respectively) $ 149,152,493 $ 218,796,924
==================== ====================
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.02 $ 8.52 $ 9.12 $ 11.13 $ 7.37
--------- ---------- ---------- ---------- ---------
Income (loss) from investment operations:
Net investment income (loss) 0.01 -(d) (0.01)(d) -(d) --
Net realized and unrealized gain (loss) (0.67) (1.50) 0.79 (1.08) 3.94
--------- ---------- ---------- ---------- ---------
Total from investment operations (0.66) (1.50) 0.78 (1.08) 3.94
--------- ---------- ---------- ---------- ---------
Less distributions to shareholders:
From net investment income -- -- -- -- --
In excess of net investment income -- (0.00) -- -- (0.01)
From net realized gains -- -- (1.38) (0.93) (0.17)
--------- ---------- ---------- ---------- ---------
Total distributions -- (0.00) (1.38) (0.93) (0.18)
--------- ---------- ---------- ---------- ---------
Net asset value, end of period $ 6.36 $ 7.02 $ 8.52 $ 9.12 $ 11.13
========= ========== ========== ========== =========
Total Return (a) (9.40%) (17.69%) 8.29% (10.62%) 53.95%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 149,152 $ 218,797 $ 126,107 $ 60,123 $ 450,351
Net expenses to average
daily net assets 0.69% 0.70%(e) 0.92% 0.83% 0.87%
Net investment income (loss) to average
daily net assets 0.21% 0.01% (0.13%) (0.02%) (0.01%)
Portfolio turnover rate 128% 4% 23% 60% 8%
Average broker commission rate per equity share (b) $ 0.0072 $ 0.0066 N/A N/A N/A
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.02 $ 0.03 $ 0.01 (c) $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The
total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for
security trades on which commissions are charged. The average broker
commission rate will vary depending on the markets in which trades
are executed.
(c) Fees and expenses waived or borne by the Manager were less than $.01 per
share.
(d) Based on average month end shares outstanding.
(e) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .01% of average daily net assets.
See accompanying notes to the financial statements.
11
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Japan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks maximum total return through investment in Japanese
securities, primarily in common stocks of Japanese companies.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully described in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, Class I and Class II shares
ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges. Those values are then translated into U.S. dollars at
the current exchange rate. Short-term investments with a remaining maturity
of sixty days or less are valued at amortized cost which approximates
market value. 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 other persons acting at their direction.
12
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may purchase and sell Japanese futures contracts. Japanese futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a specified price at a
given date. The Fund may use futures contracts to manage its exposure to
the stock and currency markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instruments or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required to
deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the accumulation in commitment value ("variation margin") is
recorded by the Fund. The payable or receivable is subsequently settled.
Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1998.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund had no securities out on loan.
13
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign interest and dividend income have been withheld
in accordance with the applicable country's tax treaty with the United
States.
Distributions to shareholders
The Fund's present policy is to declare and pay distributions from net
investment income, if any, semi-annually, and from net realized short-term
and long-term capital gains, if any, at least annually. All distributions
will be paid in shares of the Fund, at net asset value, unless the
shareholder elects to receive cash distributions. The Fund declares
separate dividends from net investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and passive foreign investment
company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Distributions in
Excess of Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------- ---------------------------- -------------------
$(318,860) $889,641 $(570,781)
14
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for accretion of discounts. In determining the net
gain or loss on securities sold, the cost of securities is determined on
the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the net assets of
each class. Shareholder service fees, which are directly attributable to a
class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .40% of the amount
invested. In the case of cash redemptions, the fee is .61% of the amount
redeemed. Prior to June 1, 1996, the redemption fee was .70% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in-capital. These fees are allocated relative
to each class' net assets on the share transaction date. Purchase premiums
are included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 28, 1998 the Fund
received $83,349 in purchase premiums and $180,864, in redemption fees.
There is no premium for reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
15
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including
management fee but excluding brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees and extraordinary expenses) exceed .54% of average daily net
assets. Prior to June 1, 1996, a similar waiver existed for annual expenses
exceeding .69%; thus, the net annual expense ratio after the waiver for a
Class III shareholder is unchanged. Additionally, effective March 14, 1996,
the waiver was adjusted to include custodian fees.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $1,918. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$234,309,079 and $267,149,166, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$172,219,003 $3,788,637 $30,411,209 $26,622,572
4. Principal shareholders
At February 28, 1998, 33% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
16
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums and redemption fees received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Class III: Year Ended Year Ended
February 28, 1998 February 28, 1997
---------------------------------------------- ---------------------------------------------
Shares Amount Shares Amount
---------------------- --------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Shares sold 4,316,975 $ 32,950,333 22,172,884 $ 188,630,734
Shares issued to
shareholders in
reinvestment of
distributions - - 3,661 28,076
Shares repurchased (12,050,534) (87,699,599) (5,789,470) (47,329,114)
---------------------- --------------------- -------------------- ----------------------
Net increase /
(decrease) (7,733,559) $ (54,749,266) 16,387,075 $ 141,329,696
====================== ===================== ==================== ======================
</TABLE>
6. Financial instruments
A summary of outstanding futures contracts purchased at February 28, 1998
is as follows:
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
-------------- -------------------------------- ---------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
9 TOPIX March 1998 $ 909,048 $ (20,206)
===================
</TABLE>
At February 28, 1998, the Fund had cash and/or securities to cover any
margin requirements on open futures contracts.
17
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
At February 28, 1998, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------- ------
2005 $ 43,013
2006 $ 22,345,866
The Fund has also elected to defer to March 1, 1998 post-October losses of
$14,111,475.
18
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Japan Fund underperformed the MSCI Japan index
for the fiscal year ended February 28, 1998, with a total return of -9.4% versus
- -8.4% for the MSCI Japan Index. Consistent with the Fund's investment objective
and policies, the Fund was invested substantially in common stocks throughout
the period.
The Japanese market returned -4.1% during the fiscal year in local currency.
However, because of the strengthening U.S. dollar relative to the yen, the
return for dollar-denominated investors was reduced significantly. During the
year, the two-tiered market structure continued with the multinational exporters
("the Japanese nifties") faring well. On the other hand, the stocks of smaller
companies, which are more dependent on the local economy, performed poorly. As
fears of a collapse of the financial system spread in the fourth quarter of
1997, small stock performance declined sharply.
The Fund's overweight in small stocks, which are at record levels of
attractiveness, had a negative impact on performance. With respect to sector
weights, the Fund's underweight in banks contributed positively to performance
while the overweight in value stocks detracted from performance.
The portfolio is currently positioned in favor of both value and small stocks,
which are the most attractive sectors of the Japanese market.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Japan Fund Class III Shares and the MSCI Japan Index
As of February 28, 1998
----------------------------
Average Annual Total Return
----------------------------
Since
Inception
1 Year 5 Year 6/8/90
Class ----------------------------
III -10.3% 1.9% -2.5%
----------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Japan MSCI Japan
Fund Index
6/8/90 $9,960 $10,000
2/28/91 $9,582 $9,615
2/29/92 $7,816 $7,904
2/28/93 $7,465 $7,387
2/28/94 $11,492 $10,826
2/28/95 $10,271 $9,701
2/29/96 $11,136 $10,565
2/28/97 $9,166 $8,401
2/28/98 $8,253 $7,697
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 40 bp on the purchase and 61 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Class III shares
are a redesignation of the single class of shares that has been offered by the
Fund since inception. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO International Small Companies Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Small Companies
Fund at February 28, 1998, the results of its operations for the year then
ended, the changes in its net assets and the financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND EQUIVALENTS - 94.6%
Austria - 2.0%
777 Allgemeine Baugesellschaft AG 63,349
20,272 Austrian Airlines* 509,650
1,600 Bank Austria AG Preferred* 105,011
6,305 Bank Austria AG (Participating Certificate) 371,835
1,781 Bau Holdings AG 104,894
63 Bau Holdings AG Preferred 2.42% (Non Voting) 3,000
17,355 Boehler Uddeholm (Bearer) 1,110,360
7,468 Brau Union AG 438,668
2,293 BWT AG 412,152
9 EA-Generali AG 2,948
8 EA-Generali AG Preferred 6.00% 1,516
3,199 Interunfall Versicherung AG 489,814
1,834 Jenbacher Werke AG 54,582
507 Mayr-Melnhof Karton AG (Bearer) 29,384
1,243 Oesterreichische Brau Beteiligungs AG 72,819
1,636 Oesterreichische Laenderbank AG Preferred 2.34% (Non Voting) 111,602
13,419 Radex-Heraklith AG 539,148
3,285 Universale Bau AG 114,490
226 Wiener Allianz Versicherungs AG 26,639
2,756 Wolford AG 197,286
------------------
4,759,147
------------------
Canada - 6.6%
36,600 Air Canada Inc* 335,615
14,200 Alberta Energy Ltd 347,230
28,700 Anderson Exploration Ltd* 338,798
24,700 BCE Mobile Communications* 659,523
24,400 CAE Industries Inc 188,596
16,700 Cameco Corp 492,264
8,900 Canadian Hotel Inc 552,830
16,800 Canadian Natural Resources* 336,437
18,800 Canadian Tire Corp Ltd Class A 449,805
12,100 Cominco Ltd 204,054
21,700 Dofasco Inc 380,434
41,000 Domtar Inc 312,581
23,900 Donohue Inc Class A 480,301
84,600 Echo Bay Mines Ltd* 172,392
3,500 Edperbrascan Corp Class A Ltd (Voting Shares) 66,156
47,800 Gulf Canada Resources Ltd* 362,425
11,300 International Comfort Products Corp* 96,870
5,700 IPL Energy Inc 256,934
27,750 Ipsco Inc 789,709
12,700 Loewen Group Inc 312,335
32,000 Macmillan Bloedel Ltd 403,612
35,900 Methanex Corp* 292,618
25,200 Mitel Corp* 324,042
15,700 Molson Co Ltd Class A 281,864
2,500 Molson Co Ltd Class B 45,146
20,300 Moore Corporation Ltd 316,664
39,800 National Bank of Canada Montreal 662,797
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Canada - continued
39,700 Noranda Forest Inc 244,089
13,800 Norcen Energy Resource 191,512
20,200 Nova Scotia Power Inc 269,683
120,800 Numac Energy Inc * 479,584
13,500 Oshawa Group Ltd Class A 237,624
12,600 Power Corp of Canada Ltd 467,470
7,100 Quebecor Inc Class B 137,695
23,356 Ranger Oil Ltd 150,165
13,700 Rio Algom Ltd 254,622
9,000 Rogers Communications Inc Class B * 39,209
15,500 Sears Canada Inc 239,065
31,100 Stelco Inc Class A 262,235
10,700 Suncor Energy Inc 392,843
8,500 Teck Corp Class B 122,141
23,900 Telus Corp 601,216
6,300 Torstar Corp Class B 233,735
26,800 Transalta Corp 451,014
100 TVA Group Inc Class B * 2,319
61,600 TVX Gold Inc * 177,465
7,800 United Dominion Industries Ltd 223,617
22,400 Westcoast Energy Inc 566,630
3,000 Weston (George) Ltd 252,960
------------
15,458,925
------------
Denmark - 0.0%
800 Hafnia Holdings (Registered) Class A (c) * 1
------------
France - 11.0%
1,750 Accor SA 404,073
8,390 BIC SA 664,945
10,470 Bouygues 1,468,388
15,000 Cap Gemini SA 1,724,350
5,990 Castorama Dubois Investment 811,553
7,390 Club Mediterranee SA Rights 3/11/98 * 10,740
7,390 Club Mediterranee SA * 548,554
1,730 Compagnie Generale d'Industrie et de Participations 744,077
3,610 Compagnie Parisienne de Reescompte 281,010
1,400 Comptoirs Modernes 761,013
13,300 Credit Commercial de France 983,098
9,040 Credit Local de France SA 1,153,521
15,830 Credit Lyonnais * 1,156,850
5,630 Credit National 342,095
2,220 Eridania Beghin-Say SA 395,931
2,460 Essilor International 755,059
9,255 Financiere de Paribas SA 880,017
420 Gaz Et Eaux 179,332
760 Groupe Andre * 83,623
2,790 Hermes International 218,554
4,780 Imetal 595,022
37,850 Lagardere Groupe 1,373,708
12,200 Moulinex * 305,538
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------
<S> <C> <C>
France - continued
1,260 Pathe SA 242,099
10,600 Pechiney SA Class A 470,009
6,190 Pernod-Ricard 404,585
3,090 Primagaz 264,890
299 Sagem Applic Gen D Electric 183,154
2,440 Seb SA 355,026
3,300 SEFIMEG 203,010
20,010 Seita 874,108
3,920 Simco Union Habit (Registered) 311,579
850 Societe Eurafrance 395,738
1,430 Sodexho Alliance 921,513
15,790 SPIE Batignolles 982,783
5,170 Synthelabo 721,682
5,620 Technip SA (Compagnie Francaise) 634,981
13,500 Thomson CSF 465,575
6,170 TV Francaise 668,752
1,909 Unibail (Bearer) 208,166
1,197 Union Immobiliere de France SA 86,297
28,400 Usinor Sacilor 426,052
4,320 Valeo 369,622
10,610 Worms et Compagnie SA 662,118
----------------
25,692,790
----------------
Germany - 10.9%
5,182 Aachener & Munchener Beteiligungs AG (Bearer) 577,380
8,950 Aachener & Munchener Beteiligungs AG (Registered) 1,001,157
6,700 Adidas Salomon AG 1,055,903
4,700 Altana AG 372,685
1,350 Ava Allgemeine Handelsgesellschaft der Verbraucher AG * 444,855
7,600 Axa Colonia Konzern AG 921,339
300 Axel Springer Verlag AG 247,968
25,050 Bankgesellschaft Berlin AG 532,127
8,450 Beiresdorf AG (Bearer) 396,716
17,750 Berliner Kraft & Licht AG Class A 782,477
25,800 BHF Bank AG 753,492
6,000 Bilfinger & Berger 157,708
1,050 Buderus AG 473,288
24,900 Continental AG 598,231
937 DBV-Winterthur Holding AG * 413,060
13,800 Degussa AG 709,486
4,800 Douglas Holdings AG 169,809
7,500 ERGO Versicherungs Gruppe AG * 1,388,621
10,150 FAG Kugelfischer 138,987
4,700 Fresenius Medical Care AG Preferred .82% (Non Voting) 966,028
2,750 Fresenius Medical Care AG * 193,208
650 Friedrich Grohe AG Preferred (Non Voting) 181,953
4,600 Friedrich Krupp AG 828,875
450 GEA AG Preferred 3.13% 143,140
8,700 Gehe AG 460,708
700 Hamburgische Electricitaets-Werke AG 182,449
7,755 Heidelberg Port-Zement 571,342
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- -------------------------------------------------------------------------------
Germany - continued
4,250 Henkel KGAA Preferred 275,644
7,750 Henkel KGAA (Bearer) 477,449
5,200 Hochtief AG 183,100
700 Holzmann (Philipp) * 165,863
300 ISAR Amperwerke AG 98,691
1,600 IWKA AG 362,364
950 Karstadt AG 329,797
10,800 Lahmeyer AG 443,367
650 Linde AG 431,602
15,600 Lufthansa AG * 300,008
1,900 MAN AG 570,497
800 MAN AG Preferred 186,692
4,700 Merck KGAA 174,558
14,100 Metallgesellschaft * 286,701
300 Porsche AG Preferred .12% (Non Voting) 524,039
1,950 Preussag AG 630,748
3,200 SAP AG Preferred 1,321,262
7,100 Schering AG 797,344
850 Schmalbach-Lubeca 167,213
3,900 Schwarz Pharma AG 318,060
2,450 SGL Carbon AG 292,960
15,100 SKW Trostberg AG 515,884
800 Suedzucker AG 374,707
800 Thyssen AG 174,129
850 Vereins Und Westbank 208,431
1,900 Volkswagen AG Preferred .79% 925,527
400 Wella AG 277,945
-------------
25,477,574
-------------
Hong Kong - 0.9%
1,000 Asia Financial Holdings 254
136,000 Associated International Hotels 56,209
68,000 Cross Harbour Tunnel Co Ltd 113,297
666 Dickson Concept International Ltd 1,153
6,000 Grand Hotel Holdings Ltd Class A 1,333
79,900 Hong Kong Aircraft Engineering Co Ltd 170,790
13,000 IMC Holdings 3,022
154,000 Lai Sun Garment International Ltd 83,539
212,000 Liu Chong Hing Investment Ltd 182,086
620 Mandarin Oriental 518
200 Mingly Corp 36
500 New Asia Realty & Trust A Shares 1,007
30,100 Realty Development Corp Ltd Class A 72,699
6,200 Semi Tech (Global) Co Ltd Warrants 7/31/98 * 8
776,000 South China Morning Post Ltd 561,266
309,101 Tsim Sha Tsui Properties Ltd 503,025
152,000 Wing On Co 106,994
18,000 Wing On International Holdings Ltd 21,388
130,500 Winsor Properties Holdings Ltd 126,413
-------------
2,005,037
-------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Italy - 1.5%
777,200 Banca Nazionale dell'Agricoltura SPA (Non Convertible) 560,277
334,500 Finmeccanica SPA (Non Convertible) * 301,890
102,000 Fornara SPA * 4,104
213,400 Grassetto SPA (c) * 1
3,500 Recordati Industria Chimica e Farmaceutica SPA 31,295
56,000 Recordati Industria Chimica e Farmaceutica SPA (Non Convertible) 272,888
47,000 Rinascente per l'Esercizio di Grandi Magazzini SPA Preferred 5.59% 185,169
335,000 Snia BPD SPA (Non Convertible) 328,551
371,274 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 1,883,913
------------------
3,568,088
------------------
Japan - 21.1%
22,000 Alps Electric Co Ltd 193,303
108,000 Amada Co Ltd 506,103
29,000 Amano Corp 293,834
3,000 Anritsu Corp 30,397
253,000 Aoki Corp * 234,315
10,000 Aoki International 72,113
25,800 Aoyama Trading 559,582
95,000 Atsugi Nylon Industrial 180,480
15,000 Bandai Co 223,225
6,000 Brother Industries Ltd 16,338
56,000 Canon Sales Co Inc 753,582
13,000 Casio Computer Co 107,021
2,000 Chudenko Corp 54,461
25,000 Chugai Pharmaceutical Co Ltd 159,107
117,000 Citizen Watch Co 847,423
243,000 Cosmo Oil Co Ltd 557,825
29,300 CSK Corp 707,393
50,000 Daicel Chemical Industries Ltd 110,821
110,000 Daido Steel Co Ltd 245,547
36,000 Dainippon Ink & Chemicals Inc 108,288
20,000 Dainippon Pharmaceutical Co Ltd 90,715
4,000 Dainippon Screen Manufacturing Co Ltd 23,272
25,000 Daio Paper Corp 157,920
57,400 Daito Trust Construction Co Ltd 508,889
114,000 Denki Kagaku Kogyo 218,380
3,000 Denny's Japan Co Ltd 75,754
47,000 Ezaki Glico Co Ltd 293,913
212,000 Fuji Heavy Industries Ltd 795,441
108,000 Fujisawa Pharmaceutical Co Ltd 1,085,728
28,000 Fujitec Co 170,664
49,000 Fujiya Co Ltd * 91,150
75,000 Fukuyama Transporting Co Ltd 368,084
52,000 Furukawa Co Ltd 102,082
44,000 Furukawa Electric Co Ltd 194,348
127,000 Gakken Co Ltd 316,671
107,000 General Sekiyu (KK) 530,215
32,000 Godo Shusei Co Ltd 65,859
30,000 Green Cross Corp 86,203
7,000 Gunze Ltd 19,837
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
54,000 Hankyu Department Stores Inc 363,334
211,000 Hanwa Co Ltd * 342,397
189,000 Haseko Corp * 173,545
1,000 Heiwa Corp 11,003
600 Hitachi Ltd 4,502
36,000 Hitachi Maxell Ltd 666,825
116,000 Hitachi Metals Ltd 527,982
31,000 Hokuetsu Paper Mills 162,693
19,000 House Foods Corp 266,208
25,000 Hyogo Bank Ltd (c) * 2
79,000 INAX Corp 331,434
43,000 Intec Inc 299,533
11,000 Ishihara Sangyo Kaisha * 19,504
13,000 Itoham Foods Inc 58,244
34,000 Izumiya Co Ltd 210,465
25,000 Japan Airport Terminal Co Ltd 168,012
3,000 Japan Radio Co 19,140
73,000 Japan Steel Works Ltd * 97,657
122,000 Japan Synthetic Rubber Co Ltd 634,481
53,000 JGC Corp 137,188
38,000 Joshin Denki Co Ltd 117,312
29,000 Kamigumi Co Ltd 132,455
42,000 Kandenko Co 292,567
111,000 Kaneka Corp 632,629
12,000 Katokichi Co Ltd 159,582
189,000 Keihin Electric Express Railway Co Ltd 673,237
245,000 Keio Teito Electric Railway Co Ltd 992,955
23,000 Kikkoman Corp 145,468
9,000 Kinden Corp 120,399
18,000 Kissei Pharmaceutical Co Ltd 282,118
6,000 Koito Manufacturing Co Ltd 26,692
48,000 Kokusai Kogyo Co Ltd 232,914
5,000 Kokuyo Co Ltd 87,469
27,000 Komori Corp 476,609
25,000 Konica Corp 130,808
59,000 Koyo Seiko Co Ltd 292,361
44,000 Kumagai Gumi Co Ltd 48,761
133,000 Kurabo Industries Ltd 230,563
116,000 Kuraray Co 1,019,235
253,000 Kureha Chemical Industry Co Ltd 682,918
11,000 Kyowa Exeo Corp 85,855
15,000 Kyowa Hakko Kogyo Co Ltd 73,498
7,000 Kyudenko Corp 44,938
84,000 Lion Corp 304,536
2,100 Mabuchi Motor Co 112,206
67,000 Maeda Corp 236,539
40,000 Maeda Road Construction 236,840
62,000 Makino Milling Machine Co Ltd 436,793
56,000 Makita Corp 647,194
2,000 Maruichi Steel Tube 26,597
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
29,000 Matsushita Refrigeration Co 117,304
58,000 Mitsubishi Belting Ltd 174,923
200 Mitsubishi Chemical Corp 374
186,000 Mitsubishi Gas Chemical Co Inc 609,546
87,000 Mitsubishi Oil Co Ltd 180,432
10,000 Mitsubishi Paper Mills Ltd 21,452
8,000 Mitsubishi Warehouse & Transportation Co Ltd 90,556
30,000 Mitsui Petrochemical Industries Ltd 84,303
3,000 Mizuno Corp 11,422
33,000 Mori Seiki Co Ltd 399,668
13,000 Nagase & Co 50,423
61,000 Nagoya Railroad Co Ltd 214,391
2,000 Namco Ltd 48,286
39,000 Nankai Electric Railway Co Ltd 175,968
25,000 NGK Spark Plug Co 180,678
11,000 NHK Spring Co Ltd 35,874
28,000 Nichicon Corp 294,784
118,000 Nichiei Co Ltd 150,384
7,000 Nichirei 17,731
83,000 Nihon Cement Co Ltd 200,388
3,000 Nihon Unisys Ltd 16,053
124,000 Nippon Chemi-Con Corp 402,438
7,000 Nippon Comsys 85,332
40,000 Nippon Hodo Co 190,929
13,000 Nippon Kayaku Co Ltd 61,126
76,000 Nippon Meat Packers Inc 998,654
25,000 Nippon Paint Co 52,442
141,000 Nippon Sheet Glass Co Ltd 308,050
27,000 Nippon Shokubai Corp 158,157
62,000 Nippon Suisan Kaisha Ltd * 102,573
22,000 Nippon Zeon Ltd 63,564
29,000 Nishimatsu Construction 149,442
56,000 Nissan Fire & Marine Insurance Co Ltd 202,137
35,000 Nisshin Oil Mills Ltd 96,968
316,000 Nisshin Steel Co Ltd 480,266
49,000 Nisshinbo Industries Inc 285,087
67,000 Nissho Iwai Corp 190,929
4,000 Nissin Food Products Co Ltd 83,274
63,000 Nitto Boseki Co Ltd 182,023
60,000 Nitto Denko Corp 949,893
38,000 NSK Ltd 148,896
40,000 Okamoto Industries Inc 115,570
8,000 Okumura Corp 35,526
93,000 Olympus Optical Co Ltd 731,750
192,000 Onoda Cement Co Ltd 416,433
62,000 Onward Kashiyama Co Ltd 883,401
2,000 Oyo Corp 31,030
6,000 Pioneer Electronics Corp 105,913
27,000 Q.P. Corp 177,606
333,000 Renown Inc * 347,946
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- ----------------------------------------------------------------------------
Japan - continued
5,000 Rinnai Corp 81,137
55,000 Royal Co Ltd 831,552
5,000 Ryosan Co 83,116
25,000 Sanden Corp 133,777
79,000 Sankyo Aluminum Industry Co Ltd 109,436
36,000 Sanrio Co Ltd * 273,284
11,000 Sanwa Shutter Corp 67,482
145,000 Sanyo Securities Co Ltd * 1,148
13,000 Sapporo Breweries Ltd 58,656
58,000 Seino Transportation Co Ltd 346,173
7,000 Shimachu Co 135,201
10,000 Shimadzu Corp 35,067
4,000 Shimano Inc 82,324
144,000 Shionogi and Co Ltd 745,476
394,000 Showa Denko 530,199
37,000 Showa Electric Wire & Cable 90,208
151,000 Showa Shell Sekiyu 1,026,747
5,000 Skylark Co Ltd 55,806
10,000 Snow Brand Milk Products Co Ltd 34,750
75,000 Stanley Electric Co Ltd 259,440
71,000 Sumitomo Bakelite Co Ltd 454,112
39,000 Sumitomo Osaka Cement Co Ltd 66,991
42,000 Taiyo Yuden Co Ltd 448,825
13,000 Takara Shuzo Co Ltd 60,714
33,895 Takara Standard Co 217,596
76,000 Tanabe Seiyaku Co Ltd 433,151
84,000 Teikoku Oil Co Ltd 278,604
65,000 Tobu Railway Co Ltd 229,478
115,000 Toda Corp 558,933
800 Toho Co Ltd 100,055
60,000 Tokai Carbon Co Ltd 146,758
49,000 Tokuyama Corp 154,761
18,000 Tokyo Broadcasting System Inc 232,249
122,000 Tokyo Construction Co Ltd 149,687
92,000 Tokyo Electric Co Ltd 302,224
106,000 Tokyo Ink Manufacturing Co Ltd 271,859
43,000 Tokyo Rope Manufacturing Co Ltd 74,202
8,000 Tokyo Steel Manufacturing Co 36,729
36,000 Tokyo Style Co Ltd 370,458
16,000 Tokyu Department Store Co Ltd 30,777
13,000 Toshiba Ceramics Co Ltd 58,244
28,000 Toshiba Tungaloy Co Ltd 86,662
19,000 Toyo Engineering Corp 31,434
11,000 Toyo Suisan Kaisha 80,978
41,000 Tsubakimoto Chain 143,774
4,000 Uniden Corp 42,112
197,000 Victor Co of Japan Ltd 1,746,537
59,000 Wacoal Corp 616,481
4,000 Yakult Honsha Co Ltd 27,072
9,000 Yamaha Corp 99,739
8 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------
<C> <S> <C>
Japan - continued
11,000 Yamatake Honeywell 147,154
6,000 Yamazaki Baking Co Ltd 67,442
75,000 Yodogawa Steel Works 385,894
21,000 Yokogawa Electric Corp 132,154
109,000 Yokohama Rubber Co 333,911
-----------
49,343,505
-----------
Malaysia - 0.0%
1,000 Aluminum Co of Malaysia 327
3,000 Berjaya Leisure Berhad 2,906
2,000 Boustead Holdings Berhad 1,912
11,000 Esso Berhad 13,350
8,000 Sime Darby 4,081
-----------
22,576
-----------
New Zealand - 0.0%
43,500 DB Group Ltd 74,006
-----------
Norway - 0.0%
1 SAS Norge ASA Class B 15
-----------
Singapore - 0.6%
2,103,000 Chuan Hup Holdings Ltd 642,187
1,650 Haw Paw Brothers International Ltd Warrants 7/18/2001 * 499
64,000 Inchcape Berhad 96,730
64,000 Inchcape Marketing Services * 16,188
89,000 Prima Ltd 169,105
191,000 Times Publishing Ltd 377,051
16,000 Wearne Brothers Ltd 19,642
-----------
1,321,402
-----------
Spain - 0.3%
565 Koipe SA 39,766
135,578 Sarrio SA 585,393
5,608 Tableros Defibras Class B 91,394
-----------
716,553
-----------
Sweden - 5.5%
15,300 AGA AB Class A 210,207
16,050 AGA AB Class B 202,469
11,300 Atlas Copco AB 314,736
6,600 Atlas Copco AB Class B 183,416
32,800 Avesta Sheffield AB 204,836
19,813 Celsius Industrier AB Class B 366,248
20,900 Enator AB * 430,718
200 Esselte AB Class A 3,772
15,000 Euroc Industri AB Class A 599,520
3,994 Incentive AB Class A 383,118
2,312 Incentive AB Class B 221,775
9,366 Industrivarden AB Class A 597,775
17,700 Kinnevik Investment Class B 334,926
19,860 Marieberg Tidnings AB Class A 458,895
28,200 Mo Och Domsjo AB Class B 820,668
2,100 Modern Times Group AB * 16,000
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------
<C> <S> <C>
Sweden - continued
6,600 Sandivik AB Class B 184,652
10,200 Scania AB Class A 220,399
8,800 Scania AB Class B 191,797
10,400 Securitas AB 314,998
8,500 Skandia Forsakrings AB 479,866
12,800 SKF AB Class B 264,588
18,800 Ssab Swedish Steel Class A 352,218
256,706 Stena Line AB Class B * 875,309
10,891 Svedala Industries 193,161
32,000 Svenska Handelsbanken Class B 1,282,974
14,825 Svenska Kullagerfabriken AB 290,708
56,976 Sydkraft AB Class A 1,494,424
44,413 Sydkraft AB Class C 1,065,060
8,398 Trygg Hansa Holdings AB Class B 255,934
---------------
12,815,167
---------------
Switzerland - 0.3%
440 Ascom Holding AG (Registered) * 155,901
45 Kuoni Reisen Holdings AG (Registered) 183,667
1,930 Swissair AG (Participating Certificate) * 460,275
---------------
799,843
---------------
United Kingdom - 33.9%
305,700 Allied Colloids 1,011,703
156,300 AMEC 357,070
38,366 Amstrad Plc 24,004
132,300 Anglian Water Plc 1,829,788
68,565 Arcadia Group * 556,840
119,680 Argos Plc 1,202,024
124,300 Arjo Wiggins Appleton Plc 335,642
1,120,000 ASDA Group 3,711,193
179,700 Associated British Ports 905,381
152,900 Astec (BSR) 318,464
122,390 Barratt Development 566,258
136,000 Beazer Holmes Plc 471,360
96,412 Berisford International 306,373
238,200 BICC Group 511,816
152,100 Blue Circle Industries 889,659
75,700 Bowthorpe Holdings * 498,560
144,200 BPB Industries Plc 781,129
141,800 British Land Co 1,716,032
200,700 British Steel Plc 481,635
219,535 Bunzl Co 880,166
224,200 Caradon Plc 732,753
24,885 Carlton Communications 174,955
313,800 Centrica Plc * 558,005
26,140 Charter Plc (Registered) 266,845
45,300 Christian Salvesen Plc 93,979
89,100 Coats Viyella 121,764
52,648 Cobham Group Plc 758,493
82,900 Cordiant Communications Group * 139,225
89,502 Costain Group Plc * 44,210
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- -------------------------------------------------------------------------------
United Kingdom - continued
118,300 Courtaulds 681,733
41,081 Dawson International 35,173
137,131 Debenhams Plc * 943,786
71,200 Delta Plc 332,935
198,600 Electrocomponents Plc 1,520,526
231,480 Elementis Plc 484,037
203,159 English China Clays Plc 816,183
89,400 First Leisure Plc 465,143
97,100 Glynwed International 406,083
87,800 Great Portland Estates Plc 423,569
122,920 Greenalls Group Plc 838,897
39,509 Greycoat Plc 147,017
140,436 Hammerson Plc 1,163,076
113,820 Hazlewood Foods 348,573
100,700 Hepworth Plc 374,714
413,976 Hillsdown Holdings 1,083,762
49,183 Hyder Plc 759,591
12,618 Hyder Plc Cumulative Redemption Preferred 24,827
191,444 Inchcape Plc 589,447
120,300 Johnson Matthey 1,047,316
48,700 Kwik Save Group 275,835
1,030,167 Ladbroke Group 5,190,280
32,734 Laing (John) 169,235
9,009 Laing (John) Class A (Non Voting) 46,280
50,400 Laird Group 360,979
6,200 Laporte Plc 67,553
891,817 Lasmo Plc 4,056,376
81,160 Lex Service 636,079
774,181 Lonrho Plc 1,198,208
154,634 Marley Plc 278,792
56,048 Meyer International 349,753
284,900 MFI Furniture Group 605,123
123,800 Mirror Group Plc 346,522
131,400 Morgan Crucible 956,267
395,800 NFC Plc 1,088,313
178,097 Norcros Plc 190,604
107,685 Northern Foods Plc 480,492
68,680 Ocean Group 774,609
21,900 Oxford Instruments 109,978
270,800 Pilkington 508,294
122,500 Premeir Farnell Plc 800,734
101,870 Provident Financial Plc * 1,652,130
158,800 Racal Electronics 755,971
63,200 Railtrack Group Plc 962,544
24,400 Rank Group Plc 133,781
209,300 Rexam Plc 956,300
240,700 Rugby Group 505,299
93,500 Saatchi & Saatchi Plc * 177,040
187,400 Scottish Hydro-Electric Plc 1,680,848
334,500 Sears Plc 289,146
See accompanying notes to the financial statements. 11
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom - continued
286,297 Securicor Plc 1,718,209
210,600 Sedgwick Group 513,437
30,840 Severn Trent Plc 474,775
388,740 Signet Group Plc * 249,637
7,828,760 Signet Group * -
83,125 Simon Engineering 67,748
64,800 Slough Estates 429,440
145,100 Smith (WH) Group 1,170,645
88,300 Southern Electric Plc 745,103
42,116 Southwest Water 624,616
202,300 St James's Place Capital * 676,167
229,842 Storehouse Plc 980,146
295,606 T & N 1,231,390
945,164 Tarmac 1,563,994
92,100 Tate & Lyle 796,124
718,280 Taylor Woodrow Plc 2,388,949
318,000 Telewest Communications Plc * 408,398
60,200 Thames Water 876,215
111,000 Transport Development Group 425,834
58,100 Unigate 624,671
240,863 United Biscuits 1,062,837
900 Vendome Luxury Group Plc Units 7,128
87,226 Viglen Technology Plc * 48,830
96,926 Viglen Technology Plc Entitlement Letters * -
80,000 Waste Management International * 237,096
100,700 Wessex Water Plc 804,142
213,900 Willis Corroon Group Plc 494,822
120,980 Wilson (Connolly) Holdings 323,690
442,935 Wimpey (George) 897,030
5,368 Wolseley 44,192
149,700 Yorkshire Water 1,264,448
---------------
79,484,792
---------------
United States - 0.0%
2,125 Ultramar Diamond Shamrock Corp 75,836
---------------
TOTAL STOCK AND EQUIVALENTS (Cost $223,702,677) 221,615,257
---------------
DEBT OBLIGATIONS - 0.1%
United Kingdom - 0.1%
GBP 157,989 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 260,129
GBP 41,678 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 68,623
---------------
328,752
---------------
TOTAL DEBT OBLIGATIONS (Cost $178,828) 328,752
---------------
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 6.2%
Cash Equivalents - 4.1%
3,500,760 The Boston Global Investment Trust (b) 3,500,760
$ 6,000,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 6,000,000
----------------
9,500,760
----------------
U.S. Government - 2.1%
$ 5,150,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 4,921,765
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $14,427,126) 14,422,525
----------------
TOTAL INVESTMENTS - 100.9%
(Cost $238,308,631) 236,366,534
Other Assets and Liabilities (net) - (0.9%) (2,211,977)
----------------
TOTAL NET ASSETS - 100.0% $ 234,154,557
================
</TABLE>
Notes to the Schedule of Investments:
ADR American Depositary Receipt
(a) This security is held as collateral for open futures
contracts (Note 5).
(b) Represents investment of security lending collateral
(Note 1).
(c) Bankrupt issuer.
* Non-income producing security. A dividend has not
been declared for the twelve months ended
February 28, 1998.
See accompanying notes to the financial statements. 13
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector diversification
of the Fund's equity investments was as follows:
Industry Sector (Unaudited)
Services 11.7%
Construction 9.6
Consumer Goods 7.5
Machinery 6.9
Retail Trade 6.4
Chemicals 4.2
Conglomerates 4.1
Oil and Gas 4.1
Banking 4.0
Health Care 4.0
Metals and Mining 3.8
Transportation 3.8
Utilities 3.8
Electronic Equipment 3.3
Insurance 3.0
Paper and Allied Products 2.4
Real Estate 2.2
Communications 2.1
Textiles 1.6
Financial Services 1.6
Food and Beverage 1.3
Automotive 1.2
Aerospace 0.9
Telecommunications 0.7
Computers 0.3
Miscellaneous 5.5
==========
100.0%
==========
14 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 28, 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $238,308,631) (Note 1) $ 236,366,534
Foreign currency, at value (cost $2,260,202) (Note 1) 2,259,164
Cash 64,359
Receivable for investments sold 43,689
Dividends and interest receivable 266,977
Receivable for open forward foreign currency contracts (Notes 1 and 6) 2,345,748
Receivable for open swap contracts (Notes 1 and 6) 1,437,500
Foreign withholding taxes receivable 115,409
Receivable for expenses waived or borne by Manager (Note 2) 168,551
-------------
Total assets 243,067,931
-------------
Liabilities:
Payable for open forward foreign currency contracts (Notes 1 and 6) 4,769,487
Payable upon return of securities loaned (Note 1) 3,500,760
Payable for variation margin on open futures contracts (Notes 1 and 6) 85,682
Payable for fund shares repurchased 172,084
Payable to affiliate for (Note 2):
Management fee 216,922
Shareholder service fee 26,029
Accrued expenses 142,410
-------------
Total liabilities 8,913,374
-------------
Net assets $ 234,154,557
=============
Net assets consist of:
Paid-in capital $ 236,274,501
Distributions in excess of net investment income (665,119)
Accumulated net realized loss (51,411)
Net unrealized depreciation (1,403,414)
-------------
$ 234,154,557
=============
Net assets attributable to Class III Shares $ 234,154,557
=============
Shares outstanding - Class III 19,163,810
=============
Net asset value per share - Class III $ 12.22
=============
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $614,487) $ 5,052,924
Interest (including securities lending income of $95,132) 1,203,813
------------
Total income 6,256,737
------------
Expenses:
Management fee (Note 2) 2,912,080
Custodian fees 395,883
Audit fees 52,473
Transfer agent fees 30,930
Registration fees 5,298
Legal fees 4,647
Trustees fee (Note 2) 2,190
Stamp duties and transfer taxes 200
Miscellaneous 3,015
Fees waived or borne by Manager (Note 2) (2,004,718)
------------
1,401,998
Shareholder service fee - Class III (Note 2) 349,448
------------
Net expenses 1,751,446
------------
Net investment income 4,505,291
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 27,585,697
Closed futures contracts 4,716,568
Foreign currency, forward contracts and foreign
currency related transactions (2,314,343)
------------
Net realized gain 29,987,922
------------
Change in net unrealized appreciation (depreciation) on:
Investments (19,556,569)
Open futures contracts (514,303)
Open swap contracts 1,437,500
Foreign currency, forward contracts and foreign
currency related transactions (2,197,239)
------------
Net unrealized loss (20,830,611)
------------
Net realized and unrealized gain 9,157,311
------------
Net increase in net assets resulting from operations $ 13,662,602
============
16 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------- -------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 4,505,291 $ 4,054,564
Net realized gain (loss) 29,987,922 (6,729,282)
Change in net unrealized appreciation (depreciation) (20,830,611) 15,655,726
----------------- ----------------
Net increase in net assets resulting from operations 13,662,602 12,981,008
----------------- ----------------
Distributions to shareholders from:
Net investment income - Class III (4,394,112) (1,160,606)
Net realized gains - Class III (28,025,043) (3,372,778)
In excess of net realized gains - Class III - (30,591)
----------------- ----------------
(32,419,155) (4,563,975)
----------------- ----------------
Net share transactions - Class III (Note 5) 17,258,306 8,272,041
----------------- ----------------
Total increase (decrease) in net assets (1,498,247) 16,689,074
Net assets:
Beginning of period 235,652,804 218,963,730
----------------- ----------------
End of period (including distributions in excess
of net investment income of $665,119 and
$655,418, respectively) $ 234,154,557 $ 235,652,804
================= ================
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended February 28/29,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.46 $ 12.95 $ 11.95 $ 14.45 $ 8.91
----------- ----------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income 0.27 0.23 0.18 0.18 0.15
Net realized and unrealized gain (loss) 0.42 0.55 1.16 (1.52) 5.59
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.69 0.78 1.34 (1.34) 5.74
----------- ----------- ----------- ----------- -----------
Less distributions to shareholders from:
Net investment income (0.26) (0.07) (0.17) (0.20) (0.12)
In excess of net investment income - - (0.02) - -
Net realized gains (1.67) (0.20) (0.15) (0.96) (0.08)
In excess of net realized gains - (0.00) - - -
----------- ----------- ----------- ----------- -----------
Total distributions (1.93) (0.27) (0.34) (1.16) (0.20)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 12.22 $ 13.46 $ 12.95 $ 11.95 $ 14.45
=========== =========== =========== =========== ===========
Total Return (a) 6.92% 5.99% 11.43% 9.66% 64.67%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 234,155 $ 235,653 $ 218,964 $ 186,185 $ 132,645
Net expenses to average
daily net assets 0.75% 0.76%(c) 0.76%(c) 0.76%(c) 0.75%
Net investment income to average
daily net assets 1.93% 1.75% 1.84% 1.45% 1.50%
Portfolio turnover rate 79% 13% 13% 58% 38%
Average broker commission rate per equity share (b) $ 0.0063 0.0015 N/A N/A N/A
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.12 $ 0.10 $ 0.07 $ 0.08 $ 0.09
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. The average broker commission rate
will vary depending on the markets in which trades are executed.
(c) Includes stamp duties and taxes not waived or borne by the Manager, which
approximate .01% of average daily net assets.
18 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Small Companies Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series into classes.
The Fund seeks maximum total return through investment primarily in equity
securities of small capitalization foreign companies traded on a major
stock exchange of a foreign country.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully described in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, the Fund ceased offering Class
I and Class II shares.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
19
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
planned purchases or sales of securities or to hedge the currency exposure
associated with some or all of the Fund's portfolio securities. A forward
currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The market value of a forward
currency contract fluctuates with changes in forward currency exchange
rates. Forward currency contracts are marked to market daily and the change
in value is recorded by the Fund as an unrealized gain or loss. Realized
gains or losses equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed are
recorded upon delivery or receipt of the currency or, if a forward currency
contract is offset by entering into another forward currency contract with
the same broker, upon settlement of the net gain or loss. These contracts
may involve market risk in excess of the unrealized gain or loss reflected
in the Fund's Statement of Assets and Liabilities. In addition, the Fund
could be exposed to risk if the counterparties are unable to meet the terms
of the contracts or if the value of the currency changes unfavorably to the
U.S. dollar. The U.S. dollar value of the currencies the Fund has committed
to buy and sell is shown under Note 6, and represents the currency exposure
the Fund has acquired or hedged through currency contracts as of February
28, 1998.
20
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Futures contracts
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a specified price at a
given date. The Fund may use futures contracts to manage its exposure to
the stock and currency markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required to
deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 1998.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. See Note 6 for the summary of all open swap agreements as of
February 28, 1998.
21
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $3,329,671 collateralized by cash in the amount of
$3,500,760, which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and passive foreign investment
company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Distributions in Excess of Accumulated Net Realized
Net Investment Income Gain/Loss Paid-in Capital
--------------------- --------- ---------------
($120,880) $121,263 ($383)
22
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis, and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.00% of the amount
invested. In the case of cash redemptions, the fee is .60% of the amount
redeemed. Prior to June 1, 1996, the premium on cash purchases and fee on
cash redemptions was 1.25% and .75% of the amount invested or redeemed,
respectively. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. These fees are allocated relative
to each class' net assets on the share transaction date. Purchase premiums
are included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 28, 1998, the Fund
received $328,967 in purchase premiums and $298,370 in redemption fees.
There is no premium for reinvested distributions. Normally, no purchase
premium is charged with respect to in-kind purchases of Fund shares. A
purchase premium of up to .10% may be charged on certain in-kind
transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
23
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 1.25% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees, and extraordinary expenses) exceed .60% of average daily net
assets. Prior to June 1, 1996, a similar waiver existed for annual expenses
exceeding .75%; thus, the net annual expense ratio after the waiver for a
Class III shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $2,190. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$169,063,402 and $173,116,323, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
--------------- ---------------- ----------------- --------------
$238,806,998 $29,040,678 $31,481,142 $2,440,464
4. Principal Shareholders
At February 28, 1998, 13.68% of the outstanding shares of the Fund were
held by one shareholder.
24
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares including purchase premiums and redemption fees received by the Fund
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
---------------------------------------------- ----------------------------------------------
Shares Amount Shares Amount
---------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Shares sold 2,671,927 $ 37,883,371 1,509,544 $ 20,156,083
Shares issued to
shareholders in
reinvestment of
distributions 2,808,143 30,552,594 302,311 4,040,065
Shares repurchased (3,825,152) (51,177,659) (1,205,784) (15,924,107)
---------------------- --------------------- -------------------- ---------------------
Net increase 1,654,918 $ 17,258,306 606,071 $ 8,272,041
====================== ===================== ==================== =====================
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
---------------- ----------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Buys
3/6/98 ATS 47,732,484 $ 3,739,059 $ (146,606)
7/16/98 ATS 47,732,484 3,766,486 (4,258)
3/6/98 BEF 393,029,095 10,493,690 (257,053)
7/16/98 BEF 301,061,320 8,097,835 (49,678)
3/6/98 CAD 7,763,351 5,455,606 (12,698)
4/17/98 CAD 7,632,260 5,368,579 (67,735)
3/6/98 CHF 4,455,836 3,037,350 (76,442)
</TABLE>
25
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Buys - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
---------------- ----------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
3/6/98 DEM 9,429,811 $ 5,197,148 $ (94,370)
7/16/98 DEM 4,729,813 2,627,072 (6,601)
3/6/98 ESP 1,974,956,718 12,824,037 (573,811)
7/16/98 ESP 1,665,756,718 10,866,170 (18,482)
3/6/98 FIM 11,593,387 2,104,349 (141,125)
7/16/98 FIM 11,593,387 2,121,156 (699)
3/6/98 FRF 131,038,379 21,523,488 (677,296)
7/16/98 FRF 67,257,717 11,132,066 (28,946)
3/6/98 GBP 30,500,618 50,211,948 102,778
4/17/98 HKD 3,317,718 428,044 13,044
3/6/98 IEP 3,621,912 4,938,358 (451,612)
7/16/98 IEP 3,621,912 4,935,217 (13,005)
3/6/98 ITL 3,204,093,500 1,790,474 (47,526)
7/16/98 ITL 3,204,093,500 1,790,094 (13,759)
4/17/98 JPY 200,864,000 1,600,638 638
3/6/98 NLG 2,842,678 1,389,058 (74,957)
7/16/98 NLG 2,842,678 1,400,153 2,298
3/6/98 NOK 131,449,676 17,369,569 (1,087,110)
7/16/98 NOK 116,608,503 15,501,451 (11,953)
3/6/98 SEK 173,966,681 21,730,488 (846,591)
7/16/98 SEK 105,016,001 13,169,389 48,160
--------------------
$ (4,535,395)
====================
</TABLE>
26
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
<TABLE>
<CAPTION>
Net unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
---------------- ----------------------- -------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Sales
3/6/98 ATS 47,732,484 $ 3,739,059 $ 3,773
3/6/98 BEF 393,029,095 10,493,690 178,770
7/16/98 BEF 91,967,774 2,473,715 (1,064)
3/6/98 CAD 7,763,351 5,455,606 117,910
8/20/98 CAD 7,763,351 5,471,811 11,943
3/6/98 CHF 4,455,836 3,037,350 42,650
3/6/98 DEM 9,429,811 5,197,148 144,525
7/16/98 DEM 4,699,998 2,610,512 (8,365)
3/6/98 ESP 1,974,956,718 12,824,037 14,794
3/6/98 FIM 11,593,387 2,104,349 96
3/6/98 FRF 131,038,379 21,523,488 331,507
7/16/98 FRF 31,621,093 5,233,721 68,718
3/6/98 GBP 30,500,618 50,211,948 297,168
7/16/98 GBP 22,776,371 37,248,420 (55,157)
3/6/98 IEP 3,621,912 4,938,358 12,463
3/6/98 ITL 3,204,093,500 1,790,474 14,650
4/17/98 JPY 1,288,543,335 10,268,096 307,666
3/6/98 NLG 2,842,678 1,389,058 (2,588)
3/6/98 NOK 131,449,676 17,369,569 136,697
7/16/98 NOK 14,841,173 1,972,924 17,657
3/6/98 SEK 173,966,681 21,730,488 469,974
7/16/98 SEK 68,950,680 8,646,666 7,869
------------------
$ 2,111,656
==================
</TABLE>
27
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Currency Abbreviations:
ATS Austrian Schilling GBP British Pound
BEF Belgian Franc HKD Hong Kong Dollar
CAD Canadian Dollar IEP Irish Punt
CHF Swiss Franc ITL Italian Lira
DEM German Mark JPY Japanese Yen
ESP Spanish Peseta NLG Netherlands Guilder
FIM Finnish Markka NOK Norwegian Kroner
FRF French Franc SEK Swedish Krona
Futures Contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
----------------- --------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Buys
164 AOH8 March 1998 $ 7,541,442 $ 427,668
3 IBEX March 1998 174,334 15,258
68 Hang Seng March 1998 5,072,005 391,064
116 MIB 30 March 1998 18,828,892 3,096,185
6 OMX INDEX March 1998 205,935 5,336
1 TSE 35 March 1998 134,526 8,461
--------------------
$ 3,943,972
====================
Sells
1 CAC - 40 March 1998 $ 112,723 $ (12,851)
92 FTSE 100 March 1998 21,892,391 (2,011,366)
1 GXZ7 March 1998 259,347 18,241
103 TOPIX March 1998 10,403,546 374,829
--------------------
$ 2,417,287
====================
</TABLE>
28
<PAGE>
GMO International Smalll Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreement
<TABLE>
<CAPTION>
Notional Expiration Unrealized
Amount Date Description Appreciation
------------------------ --------------- ------------------------------------------------ --------------------
<S> <C> <C> <C>
CHF 8,700,000 10/9/98 Agreement with Swiss Bank Corporation dated
10/10/97 to receive (pay) the notional amount
multiplied by the return on the Swiss Market
Index (including dividends) and to pay the
notional amount multiplied by 6 month CHF LIBOR
adjusted by a specified spread. $ 1,437,500
====================
</TABLE>
29
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 83.64% of distributions as net capital gain dividends.
The Fund has also elected to defer to March 1, 1998 post-October losses of
$744,063.
30
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
fifteen years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO International Small Companies Fund returned 6.9%
for the fiscal year ended February 28, 1998 as compared to 15.5% for EAFE and
18.9% for the GMO EAFE-Lite Index. Consistent with the Fund's investment
objective and policies, the Fund was invested substantially in common stocks
that ranked within the smallest 50% by market capitalization within each
country.
Overseas markets were mixed during the fiscal year. Although a strong bull
market prevailed in Europe, the investment climate was difficult for investors
in the Far East. Poor economic conditions in Japan combined with the fallout
from the Asian currency crisis caused most stock markets in the Pacific Rim to
fall significantly. Hedging currency exposure back to the strong-performing
U.S. dollar added to the absolute performance of the fund.
Within Europe, ten of the fourteen EAFE markets returned in excess of 30% for
the year, led by strong performance of the largest international blue chip
companies. On the other hand, small European stocks performed poorly throughout
the region.
Weakness in the Pacific Rim countries offset the strong performance of the
European markets. Many of the Pacific Rim countries represented in the index
(Japan, Malaysia, Hong Kong and Singapore) were significantly affected by the
debt crisis in the Asian markets. Weakening currencies further depressed returns
for dollar-based investors. In the crisis environment pervading these markets,
both large and small stocks performed poorly in absolute terms, however, smaller
stocks were more drastically affected by the turn of events.
Impact of country selection
Country selection detracted slightly from the Fund's performance for the year,
primarily in Europe where the Fund was underweight in many of the expensive
strong-performing European markets, including the Netherlands, Switzerland, and
the United Kingdom. The funds small (less than 2%) allocation to cash also
detracted from performance given the strong markets. These decisions were
partially offset by the Fund's underweighting of a number of Asian markets
affected by the turmoil. The Fund also added value through overweighting of the
Italian market, which was one the best performing EAFE market for the year, as
well as by underweighting Japan.
Relative to EAFE, country selection added value, primarily due to the Fund's
underweight in Japan.
Impact of currency selection
The Fund's currency weights detracted from performance, primarily from
overweighting the Norwegian krone and underweighting the strong performing pound
sterling and the Swiss franc, the only two currencies to outperform the U.S.
dollar. The underperformance was partially offset
<PAGE>
through the underweighting the Malaysian ringgit, Australian dollar and Dutch
guilder. The Fund was modestly hedged back to the U.S. dollar during the year,
which added value as well.
Impact of stock selection
Stock selection negatively impacted the Fund's performance for the year. Small
European stocks performed poorly throughout the region, as a few, very large
stocks were responsible for the strong performance of the overall market in a
number of countries, including the United Kingdom. In EAFE, the smallest 20% of
stocks as measured by market capitalization underperformed the index by over
13%.
Current portfolio structure and outlook
Country selection. The International Small Companies Fund remains underweight in
some of the expensive European countries, in particular the Netherlands and
Switzerland. The Fund remains slightly underweight in the Asia/Pacific Rim
countries. The Fund's largest overweight positions are in Italy and Canada.
Currency Selection. Among currencies, the Fund is slightly underweight in the
European currencies and holds a larger underweight in the Asian/Pacific Rim
currencies. The Fund's largest underweights are the Dutch guilder, Swiss Franc
and pound sterling. The Fund continues to emphasize the Canadian dollar,
Norwegian krone, Swedish krona and French franc.
Stock Selection. Small stocks in EAFE are now cheaper than they have been in
more than twenty years. Value stocks are also very attractive in many European
markets, following the strong run over the last several years in multinational
companies. While small stocks also appear attractive in a number of the Pacific
Rim countries, we are somewhat more cautious about their outlook given their
higher risk of bankruptcy in what will likely be a difficult economic
environment.
The Fund is very well positioned to outperform the benchmark over the next three
years. Although the restructuring craze in Europe may well provide support for
large companies in the short term, we believe large cap companies (whose
valuations are historically high) are susceptible to earnings disappointments,
and eventually, shrinking profit margins. We expect value and small stocks to do
well in many countries over the next several years.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co LLC Management. They are not meant as investment advice.
<PAGE>
International Small Companies Fund
Comparison of Change in Value of a $10,000 Investment in
GMO International Small Companies Fund Class III Shares and the MSCI EAFE Index
As of February 28, 1998
--------------------------------------
Average Annual Total Return
--------------------------------------
Since
Inception
1 Year 5 Year 10/14/91
--------------------------------------
Class
III 5.2% 13.1% 8.9%
--------------------------------------
[LINE GRAPH APPEARS HERE]
GMO International
Small Companies MSCI EAFE
Date Fund Class III Shares Index
- ----------- --------------------- ---------
10/14/91 $9,900 $10,000
2/29/92 $9,541 $9,591
2/28/93 $9,205 $9,195
2/28/94 $15,175 $12,798
2/28/95 $13,711 $12,230
2/29/96 $15,278 $14,291
2/28/97 $16,193 $14,754
2/28/98 $17,210 $17,036
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 100 bp on the purchase and 60 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Class III shares
are a redesignation of the single class of shares that has been offered by the
Fund since inception. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Markets Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Markets Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND EQUIVALENTS - 85.7%
Argentina - 2.4%
749,616 Atanor SA D Shares 809,990
485,440 Capex SA Class A (Voting) 2,816,960
2,082,454 Central Costanera Class B (Voting) 6,500,507
1,646,584 Central Puerto B Shares 4,942,223
2,819,415 Ciadea SA (Bearer) 4,597,945
1,559,939 Garovaglio Y Zorraquin 3,979,834
563,998 Nobelza Piccardo 2,539,261
45,970 Quimica Estrella Preferred 10% 45,993
1,069,000 Sociedad Comercial del Plata SA 1,550,825
3,543,000 Transportadora De Gas Del Sur Class B 8,383,387
53,653 YPF SA ADR 1,696,776
------------------
37,863,701
------------------
Brazil - 10.7%
6,531,000 Acos Villares SA Preferred 577,310
2,300,000 Alpargatas de Sao Paolo 109,897
35,870,000 Alpargatas de Sao Paolo Preferred 1,364,783
148,940,000 Banco Nacional Preferred (b) 1,318
25,040,000 Belgo Mineira Preferred (Registered) 1,154,346
4,400,000 Belgo Mineira (Registered) 221,917
20,525,003 Bombril SA Preferred 89,717
6,800,000 Brasmotor Preferred (Registered) 716,011
21,500,000 Caemi Mineracao e Metalurgica SA Preferred 932,177
385,100,000 Cemig Preferred 16,526,435
246,500,000 Ceval Participacoes * 1,505,632
34,000,000 Cia Energetica Perna Class A Preferred 231,651
162,100,000 Cia Energetica de Sao Paolo SA Preferred (Registered) 7,888,776
246,500,000 Cia Hering Preferred (Registered) 119,962
12,689,000 Copene-Petroquimica do Nordeste SA Class A Preferred 3,441,294
1,637,000 Cosipa PN Class B * 420,059
179,000,000 Electrobras 8,046,012
855,067,710 Electrobras Class B Preferred (Registered) 40,099,623
2,000,000 Ericsson Telecom 41,605
43,950,000 Ericsson Telecom Preferred 1,481,657
660,000,000 Fertilizantes Fosfatados Preferred 2,423,572
126,196,118 Gerdau SA Preferred 2,009,937
1,050,000 Industrias Klabin de Papel e Celulose SA Preferred 445,959
1,336,261 Iochpe Maxion Preferred 68,578
262,400,000 Iparanga Brasil De Petroleo Preferred 3,436,287
42,420,000 Mesbla Preferred (Registered) * 375
12,598,589 Metalurgica Gerdau SA 300,988
52,947,674 Metalurgica Gerdau SA Preferred 1,641,160
335,746,000 Olvebra Preferred * 23,766
134,600,000 Petrobras Distrib Preferred 2,358,165
85,880,000 Petroleo Brasileiro SA (Petrobras) Preferred 19,453,418
583,800,000 Siderurgica de Tubarao Preferred * 7,593,558
60,000 Telebras ADR 7,346,250
283,810,000 Telebras SA 28,123,596
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Brazil - continued
17,522,000 Telebras SA Preferred (Registered) 2,139,571
5,830,152 Unipar Preferred 1,341,273
600,740 Usiminas Preferred 4,066,417
673,000 Varig Preferred (Registered) * 1,625,705
------------------
169,368,757
------------------
Chile - 3.3%
1,000 Administradora de Fondos de Pensiones Provida ADR 16,500
173,600 Banco Santiago Sponsored ADR 3,613,050
112,600 Chilectra SA ADR 2,773,338
661,763 Chilgener ADR 15,882,312
46,500 Chilquinta Sponsored ADR 441,750
200 Chilquinta Sponsored ADR 144A 1,900
191,800 Compania de Telefonos de Chile ADR 5,250,525
23,700 Cristalerias de Chile SA ADR 355,500
11,900 Embotelladora Andina ADR Class A 249,900
566,200 Empresa Natl de Electricidad ADR 10,439,313
211,000 Enersis SA ADR 6,145,375
1,330,000 Five Arrows Chile Investment Trust Ltd 3,059,000
165,100 Maderas Y Sinteticos Soc ADR 1,423,988
101,390 Quimenco SA ADR * 1,089,943
33,500 Soc Quimica Y Minera de Chile Sponsored ADR 1,440,500
50,500 Telex Chile Sponsored ADR 119,938
6,800 Vina Concha Y Toro SA Sponsored ADR 197,200
------------------
52,500,032
------------------
Colombia - 0.1%
26,200 Banco Ganadero SA ADR 917,000
------------------
Czech Republic - 0.4%
21,000 Alpha Effect 497,867
34,360 Cez Z 781,254
21,397 IF Zivnobanka 247,346
84,249 IPS Praha 449,781
1,670 Leciva AS * 112,981
46,000 PF IKS KB Plus 257,731
31,300 Restitucni IF 820,317
32,362 Skoda Koncern Plzen * 467,387
367,188 SP Vseobecny * 704,307
27,366 Spif Cesky 285,758
212,476 Spif Vynosovy 1,237,469
8,470 SPT Telecom AS * 1,001,790
------------------
6,863,988
------------------
Egypt - 1.4%
67,000 Al Ahram Beverages Co GDR 2,167,450
23,000 Alexandria Cement 391,921
98,000 Ameriyah Cement Co 2,041,337
131,000 Commercial International Bank GDR 2,168,050
121,291 Eastern Tobacco Co 2,743,858
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Egypt - continued
14,800 Egyptian International Pharm Investment 1,034,859
117,800 Helwan Portland Cement Co 2,290,416
41,750 Middle Egypt Flour Mills 269,972
350 Miraco /Misr Aircond/ * 257,891
145,500 Misr International Bank Sae GDR * 1,800,563
200,000 Paints & Chemical Industries Co GDR 2,250,000
18,000 Suez Cement Co 362,512
65,000 Suez Cement Co GDR 1,280,500
37,881 Suez Cement Co GDR 144A 746,256
60,250 Torrah Portland Cement 1,168,093
65,935 Upper Egypt Flour Mills 1,152,591
------------------
22,126,269
------------------
Greece - 0.1%
47,000 Alpha Leasing (Registered) 800,542
13,900 Aluminum of Greece Preferred 10.41% 603,728
30 Aluminum of Greece (Registered) 1,314
8,940 Econ Viomihanies * 7,085
1,409 National Mortgage Bank of Greece 63,427
------------------
1,476,096
------------------
Hungary - 0.0%
28,151 Fotex (Registered) * 28,327
------------------
India - 7.7%
101,200 Aptech Ltd * 1,458,849
434 Arvind Mills Ltd 614
394,600 Ashok Leyland Ltd GDR 887,850
25,000 Ashok Leyland Ltd GDR 144A 56,250
35,000 Bajaj Auto 504,543
75,000 Bajaj Auto GDR 144A 1,443,750
544,800 Bank of India * 535,109
200 Bank of India * 198
183,900 Bharat Heavy Electricals Ltd 1,495,502
125,500 Bharat Petrol Corp 1,211,147
460,300 Bombay Dyeing & Manufacturing Co Ltd GDR 1,104,720
903,760 BSES Ltd 4,610,669
22,400 Ciba Speciality Chemicals 44,088
591,804 Core Healthcare Ltd GDR 59,180
1,002,000 Escorts 1,869,042
255,520 Garden Silk Mills Ltd GDR 191,640
572,814 Glaxo India Ltd 5,239,756
76,500 Grasim Industries 555,524
3,227,678 Great Eastern Shipping Co 3,412,234
56,000 Great Eastern Shipping Co GDR 376,600
45,000 Great Eastern Shipping Co GDR 302,625
114,300 Hindalco Industry GDR 2,257,425
494,000 Hindustan Development Corp GDR 144A 4,940
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
India - continued
721,500 Hindustan Petroleum 8,452,643
6,000 Housing Development Finance 460,521
469,770 India Cements GDR 563,724
17,900 Indian Hotels 254,740
270,100 Indian Petrochemical Co Ltd GDR 1,181,688
102,500 Indian Rayon & Industries GDR 376,688
250,000 Indo Gulf Fertilizers 214,422
1,265,000 Indo Gulf Fertilizers GDR 1,265,000
90,000 Indo Gulf Fertilizers GDR 144A 90,000
1,976,505 Industrial Credit & Investment Corp of India Ltd 4,470,367
95 Industrial Credit & Investment Corp of India Ltd 217
1,130 Industrial Credit & Investment GDR 144A 17,798
600 Industrial Development Bank of India 1,290
803,000 Industrial Development Bank of India * 1,726,399
593,000 Industrial Finance Corp of India 506,348
439,099 ITC Ltd 7,407,215
909 Jaiprakash Industries Ltd 231
350,000 Kirloskar Cummins Ltd 3,482,656
75,867 Larsen & Toubro 426,089
120 Larsen & Toubro 695
678,200 Larsen & Toubro GDR 8,901,375
1,870 Madras Cement Ltd 184,149
1,094,500 Mahanagar Telephone 7,259,581
95,000 Mahanagar Telephone GDR 144A * 1,615,000
226,993 Mahindra & Mahindra 1,424,835
2,162,000 National Aluminum 1,546,640
287,500 NIIT 5,443,504
44,800 Novartis India 378,551
117,600 Oil & Natural Gas Commission Ltd 800,935
1,634,000 Oriental Bank of Commerce 2,688,729
14,000 Parke Davis & Co Ltd 88,216
121,900 Pentafour Software 823,716
620,227 Reliance Industries 2,507,703
1,769,171 Reliance Industries 7,207,068
547,800 Reliance Industries GDR (Registered) 4,738,470
83,000 Sanghi Polyesters GDR (Registered) * 4,150
589,000 Satyam Computer Service 3,068,488
119,973 Siemens India 551,540
88,000 Smithkline Beecham Plc 892,300
225,000 Southern Petrochem GDR 866,250
346,000 Southern Petrochem Industry Corp 230,813
100 State Bank of India 651
762,350 State Bank of India 4,940,260
75,000 Steel Authority of India GDR 189,375
54,000 Steel Authority of India GDR 144A 136,350
312,828 Sterlite Industries Ltd 1,566,922
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
India - continued
46,000 Sterlite Industries Ltd GDR 115,000
894,586 Tata Iron & Steel 2,944,063
4,281 Tata Iron & Steel 14,426
5,115,000 Uti Masterplus 1991 Unit * 2,255,280
3,600 Videocon International 2,653
95,150 Zuari Argochemicals Ltd 240,595
------------------
122,148,574
------------------
Indonesia - 1.5%
7,635,000 Aneka Tambang * 1,358,771
851,000 Astra Agro Lestari * 331,746
4,080,500 Astra International 772,298
5,286,500 Barito Pacific Timber 1,194,689
171,000 Ciputra Development 6,280
18,766,500 Citra Marga Nusaphale Persada 1,219,292
1,875,000 Dynaplast 121,822
1,663,000 Gudang Garam 2,076,401
5,000 Gulf Resources Ltd ADR * 93,750
2,116,500 HM Sampoerna 1,219,678
226,076 Indah Kiat Pulp & Paper Warrants 4/13/01 * 25,545
140,000 Indosat ADR 2,100,000
3,072,000 International Nickel 3,471,186
3,097,500 Kalbe Farma 367,500
1,834,000 Pakuwon Jati 108,797
4,134,500 Semen Gresik 2,557,784
5,692,000 Tambang Timah Persero (Foreign Registered) 4,855,887
128,000 Telekomunikasi Indonesia ADR 1,088,000
810,000 Telekomunikasi Indonesia 320,339
100 Unggul Indah Corp 19
2,478,500 United Tractors 406,082
------------------
23,695,866
------------------
Israel - 2.8%
1,683,161 Bank Hapoalim 3,940,597
6,105,650 Bank Leumi Le Israel 10,358,811
86,500 Blue Square Chain Stores * 823,085
41,700 Blue Square Sponsored ADR 583,800
61,500 ECI Telecommunications Ltd 1,787,344
70,932 Elbit Medical Imaging Ltd 508,686
33,200 Elbit Medical Imaging Ltd * 240,700
137,101 Formula Systems Ltd * 4,173,878
1,780,000 Israel Chemical Ltd 2,284,821
27,610 Koor Industries 2,873,754
11,300 Koor Industries ADR 240,125
131,100 Makhteshim Chemicals Works Ltd * 1,009,686
317,739 Supersol Ltd 1,024,950
130,460 Supersol Ltd ADR 2,054,745
16,134 Tadiran Ltd 638,850
64,800 Tadiran Ltd ADR 2,592,000
28,260 Teva Pharmaceutical Industries Ltd 1,169,466
191,500 Teva Pharmaceutical Industries Ltd ADR 8,043,000
------------------
44,348,298
------------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Korea - 6.9%
286,730 Cheil Industries 890,215
47,431 Cheil Jedang Corp 882,978
84,300 Choongnam Spinning 142,479
70,280 Chosun Brewery Co Ltd 568,093
971,170 Daewoo Corp 3,734,812
55,900 Dongbu Construction Co Preferred 32,520
20,700 Dongbu Steel Co 82,268
102,340 Dongbu Steel Co Preferred 112,806
1,709 Hana Bank 9,733
840 Hanwha Chemical Corp * 2,227
174,406 Hanwha Corp 372,735
10,080 Hanwha Corp Preferred 8,642
226,113 Housing & Commercial Bank Korea 1,536,959
251,017 Housing & Commercial Bank Korea GDR 1,882,628
328,745 Hyundai Engineering & Construction GDR 144A 295,871
53,123 Hyundai Motor Service Co 289,525
63,700 Hyundai Motor Service Co Preferred 103,371
50 Jinro Ltd Preferred 27
19,000 Kang Won Industrial 38,977
71,930 Kang Won Industrial Preferred (Non Voting) 40,964
12,080 Kookmin Bank 76,933
188,280 Kookmin Bank GDR 1,204,992
9,670 Korea Container Terminal 197,190
213,840 Korean Air Lines * 1,220,446
177,500 Kumho Petrochemical Preferred 106,522
225,420 LG Electronics Co 3,395,794
63,150 LG Information & Communication 2,057,306
12,130 Lotte Chilsung Beverage 563,789
28,611 Oriental Brewing Co Ltd 387,203
37,400 Oriental Brewing Co Ltd Preferred 71,227
67,728 Oriental Chemical Preferred 141,014
26,840 Pang Rim Spinning 414,187
729,784 Pohang Iron & Steel 43,759,214
3,850 Pohang Iron & Steel ADR 89,031
573 Sam Yang 3,039
194,100 Samho International * 92,712
72,060 Samsung Display Devices 4,192,100
49,310 Samsung Display Devices Preferred 803,212
157,364 Samsung Electronics 9,106,490
184,544 Samsung Electronics GDS 144A (Non Voting) 2,560,548
534,763 Samsung Electronics Preferred (Non Voting) 9,180,699
41,922 Shin Sung Corp 34,914
5,212 Shinsegae Department Store 76,600
42,414 SK Telecom 19,272,007
11,944 SK Telecom ADR 103,017
1,170 Sunkyong Industries 6,018
------------------
110,144,034
------------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Lebanon - 0.5%
121,508 Banque Libanaise GDR Class B * 2,266,124
217,164 Banque Libanaise * 4,397,571
139,000 Solidere GDR (Registered) 1,740,975
------------------
8,404,670
------------------
Malaysia - 0.2%
243,666 Amsteel Corp Warrants 5/19/00 * 33,815
376,000 Esso Berhad 456,316
3,801,000 IGB Corp Berhad 1,623,829
727,000 Malaysian Tobacco Co Berhad 443,124
109,620 Silverstone * 29,829
375,000 Tractors Holdings Berhad 188,776
133,600 UMW Holding Berhad Warrants 1/26/00 * 38,171
4,009,000 Westmont Industries Berhad 970,887
------------------
3,784,747
------------------
Mexico - 12.7%
5,997,015 Altos Hornos De Mexico * 9,793,917
783,000 Cemex SA Class B 3,748,038
3,642,000 Cemex SA CPO 14,335,555
430,273 Cintra SA CPO Class A (Registered) * 412,933
2,137,915 Controladora Coml Mexicana Class B 2,458,094
4,191,480 Cydsa SA Class A 8,940,119
302,000 Dina (Consorcio Grupo Dina) 389,746
396,000 Empresas ICA Sociedad Controladora 787,958
324,100 Empresas ICA Sociedad Controladora ADR 3,868,944
75,000 Grupo Celanese Mexicana Class B 167,185
4,647,005 Grupo Financiero Banamex Class B 11,694,522
103,529 Grupo Financiero Banamex Class L 230,780
68,713,595 Grupo Financiero Bancomer SA Class B 39,824,621
328,963 Grupo Financiero Bancomer SA Class L 114,241
1,541,640 Grupo Financiero Probursa SA de CV * 343,652
95,181 Grupo Financiero Santander Class B * 87,995
225,755 Grupo Financiero Serfin SA de CV Class B * 35,756
31,106,320 Grupo Gigante SA Class B * 12,882,655
600 Grupo Iusacell Sponsored ADR * 11,550
4,503,818 Grupo Mexico Class B 15,534,962
38,886 Grupo Mexico Class B Warrants 8/9/01 * 123,180
80,200 Grupo Mexico Desarollo Class B ADR * 17,544
780,000 Grupo Mexico SA Class L 2,242,037
117,000 Grupo Posadas SA Class L * 79,615
9,500 Grupo Posadas SA GDR 144A * 127,506
660,000 Grupo Simec SA Class B * 99,889
6,310,000 Grupo Situr SA de CV Class B 74,031
32,000 Grupo Televisa SA PTG Certs (1A,L & D) 561,272
3,205,200 Grupo Tribasa SA ADR * 16,626,975
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Mexico - continued
506,000 Grupo Tribasa SA * 1,329,782
4,814,000 Herdez Class B 3,490,411
53,000 Hylsamex SA 253,699
973,340 International de Ceramic * 1,144,233
10,000 Ispat International NV Class A (Registered) * 246,250
353,000 Telefonos de Mexico ADR Class L 17,892,688
39,000 Tolmex SA Class B 150,994
448,000 Transportation Maritima Mexicana SA Class A 2,628,028
25,000 Transportation Maritima Mexicana SA Class L 168,651
94,100 Tubos de Acero de Mexico SA * 1,640,554
8,000 TV Azteca SA ADR * 164,500
2,637,370 Vitro SA 9,963,432
1,512,400 Vitro SA ADR 17,109,025
------------------
201,797,519
------------------
Pakistan - 3.2%
1,002,000 Fauji Fertilizer 1,865,971
804,710 Hub Power Co Ltd GDR 24,342,478
8,877,000 Hub Power Co Ltd * 11,104,823
910,000 Japan Power Generation Ltd * 159,228
961,000 Karachi Electric Supply * 540,489
864,000 Pakistan State Oil 5,791,937
2,314,000 Pakistan Telecom Corp Ltd Class A 1,722,117
6,600 Pakistan Telecom Corp Ltd GDR 481,800
1,395,000 Southern Electric Power Co * 496,108
5,910,425 Sui Northern Gas Pipelines * 3,095,835
2,619,010 Sui Southern Gas Pipelines Ltd * 1,172,442
------------------
50,773,228
------------------
Peru - 0.0%
100,218 Cervecerias 70,516
58 Milpo Minera T Shares 253
------------------
70,769
------------------
Phillippines - 0.1%
3,438,270 Metro Pacific Corp 143,046
5,170,000 Petron Corp 764,486
------------------
907,532
------------------
Poland - 0.0%
460,418 International UNP Holdings * 48,528
49,695 Polifarb Cieszyn SA Class D (Bearer) * 252,941
2,952 Polifarb Cieszyn SA (Bearer) 15,365
------------------
316,834
------------------
Portugal - 1.7%
18,999 Allantis Cristais de Alcobaca 427,415
12,853 Banco Commercial Portugues (Registered) 426,254
101,540 Banco Espirito Santo e Commercial de Lisboa (Registered) 4,125,430
214,800 Banco Totta & Acores (Registered) 5,959,441
128,400 BPI-SGPS SA (Registered) 4,609,284
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Portugal - continued
15,400 Cabos de Energia e Telecomunicacoes SA Rights 3/12/98 * 67,964
15,400 Cel-Cat Fabrica Nacional de Condutores Electricos SA 144,299
285,000 Empresa Fabril de Maquinas Electricas 2,510,939
44,500 Fisipe Fibra Sint 275,423
116,250 Inparsa Industrias Participacoes * 2,857,996
17,700 Lisnave Navais De Lisboa * 176,233
4,500 Portugal Telecom Sponsored ADR 236,813
124,000 Semapa Society Investment 3,270,095
148,750 Soares Da Costa 1,102,386
7,500 Telecel-Comunicacaoes Pessoais SA * 999,031
3,000 Unicer Uniao Cervjeira SA (Registered) 49,487
------------------
27,238,490
------------------
Russia - 5.9%
2,649,789 Chelabinsky Tube Work * 476,962
17,100 Dalmoreproduct * 51,300
88,800 Electrocila * 466,200
29,221 Elisb * 175,326
672,700 Irkutskelectrosviaz * 437,255
797,100 Irkutskenergo ADR 5,579,700
566 Irkutskenergo RDC * 17,319,600
4,931,400 Irkutskenergo (Registered) 754,504
2,000 Izhorskie Zavody Preferred * 24,000
53,506 Izhorskie Zavody * 2,728,806
89,030 Kirovsky Plant * 409,538
646,500 Komineft * 1,551,600
100,800 Krasny Red October Preferred 144A * 705,600
57,525 Lukoil Holding ADR 4,033,941
430,800 Lukoil Holding Preferred 4,824,960
144,500 Lukoil Holding Sponsored ADR Preferred (Foreign Registered) 3,106,750
600 Moscow City Telephone Network 480,000
2,339 Moscow City Telephone Network Preferred 893,498
2,710,587 Norilsk Nickel (Registered) * 14,366,111
220,000 Norlisk Nickel Preferred 974,600
25,000 Rostelecom ADR * 526,563
30 Rostelecom Preferred 60
135,000 Russia Petroleum * 1,080,000
19,700 Seversky Tube Works ADR * 542,774
3,411,000 St Petersburg Telephone 3,581,550
1,834,100 St Petersburg Telephone Preferred 1,008,755
67,000 Trade House Gum Sp ADR 301,500
98,500 Unified Energy Systems GDR * 2,696,438
17,200,000 Unified Energy Systems Preferred 2,958,400
35,394,250 Unified Energy Systems * 9,786,510
1,519,500 Uralmash Zavody * 11,396,250
6,000 Uralmash Zavody Preferred* 59,310
------------------
93,298,361
------------------
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
South Africa - 14.3%
2,386,581 AECI Ltd 7,968,954
106,383 Alpha Ltd 1,054,896
1,358,637 Amalgamated Bank of South Africa 10,447,881
96,890 Anglo American Coal Corp 4,352,844
631,080 Anglo American Corp of South Africa 26,436,013
357,417 Anglo American Industrial Ltd 8,404,706
430,100 Anglo American Platinum Corp 6,127,500
7,563,314 Consolidated African Mines * 2,081,576
1,891,800 De Beers Centenary Link Units 37,518,243
413,400 De Beers Consolidated Mines Ltd ADR 8,242,163
35,000 Driefontein Ltd Sponsored ADR 231,875
2,501,192 Engen Ltd 8,908,424
727,300 First National Bank Holdings 8,242,194
605,800 Free State Cons Gold Mines 2,880,967
177,218 Goldfields Ltd * 896,580
13,789,165 ISCOR 4,604,295
1,973,100 Joel (HJ) Mining Co Ltd 978,265
683,900 Liberty Life Association of Africa Ltd 20,759,891
3,314,800 Malbak Ltd 2,783,855
495,840 Murray & Roberts Holdings Ltd 767,616
328,100 Nedcor Ltd 9,561,145
78,637 Polifin Ltd 132,083
2,461 Randfontein Estates Warrants 7/01/02 * 946
600,500 Randfontein Estates * 1,142,305
164,000 Randgold Resources Ltd GDR 144A * 984,000
309,500 Randgold & Exploration Co * 375,797
650,600 Rembrandt Group Ltd 4,450,122
2,362,028 Sappi Ltd 10,492,060
2,245,000 Sasol Ltd 19,172,114
93,800 Standard Bank Investment Corp 5,201,093
10,908,400 Sun International Ltd 7,505,527
18,935 Western Areas Gold Mining Co Ltd 107,291
121,500 Western Deep Levels 2,360,417
------------------
225,173,638
------------------
Sri Lanka - 0.2%
131,500 Aitken Spence & Co 345,941
4,590,170 Blue Diamonds Jewelry Ltd 278,665
46,500 Development Finance Corp 159,592
115,599 Hayleys Ltd 411,717
285,305 John Keells Holdings Ltd 1,288,653
333,600 Lanka Walltile Ltd 83,711
404,200 Lion Brewery Ceylon Ltd * 327,181
304,000 National Development Bank 1,058,119
------------------
3,953,579
------------------
Thailand - 8.1%
2,703,900 Advanced Info Service Public Co Ltd (Foreign Registered) 20,577,244
315,000 Ban Pu Coal Public Co Ltd (Foreign Registered) 2,558,005
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Thailand - continued
2,851,500 Bangchak Petro (Foreign Registered) 678,141
8,899,200 Bangkok Expressway Plc (Foreign Registered) * 8,672,074
74,800 Bangkok Insurance (Foreign Registered) 610,896
5,633,400 Bangkok Rubber Public Co Ltd (Foreign Registered) * 1,176,348
77,000 BEC World Public Co Ltd (Foreign Registered) 450,209
11,918,500 Cogeneration Public Co (Foreign Registered) 12,443,910
393,700 CP Feedmill Public Co Ltd (Foreign Registered) 648,555
101,400 Delta Electronics Public Co Ltd (Foreign Registered) 1,675,100
4,150,760 Electricity Generating Public Co Ltd (Foreign Registered) 10,882,503
227,600 GFPT Public Co Ltd (Foreign Registered) 54,128
122,200 Grammy Entertainment Plc (Foreign Registered) 737,169
745,000 Hana Microelectronic Plc (Foreign Registered) 2,938,515
1,909,000 Industrial Finance (Foreign Registered) 1,284,478
1,324,850 International Broadcasting Plc (Foreign Registered) * 1,105,681
1,852,700 International Broadcasting Plc * 1,546,209
23,000 International Cosmetics Public Co Ltd (Foreign Registered) 31,218
1,100 Karat Sanitaryware Plc (Foreign Registered) * 281
129,700 KCE Electronics Plc (Foreign Registered) 962,970
573,000 KR Precision Plc (Foreign Registered) 1,994,200
1,559,100 Krisda Mahanakorn Public Co Ltd (Foreign Registered) * 94,052
5,548,236 Land & House Public Co Ltd (Foreign Registered) 3,443,511
203,000 Lanna Lignite Plc Ltd (Foreign Registered) 998,515
4,010,600 National Petrochemical (Foreign Registered) 3,582,555
512,700 NTS Steel Group Plc (Foreign Registered) * 35,687
5,985,750 Padaeng Industry Plc (Foreign Registered) * 1,249,925
1,111,000 Phatra Thanakit (Foreign Registered) * 1,417,749
75,000 Pranda Jewelry (Foreign Registered) * 25,232
87,200 Prasit Development Public Co Ltd (Foreign Registered) 12,827
1,752,600 Regional Container Lines Plc (Foreign Registered) 2,439,814
1,859,000 Ruang Khao Fund (Foreign Registered) * 301,926
32,400 Saha Pathana International Holdings Plc (Foreign Registered) 23,304
70,000 Saha Pathanapibul (Foreign Registered) 94,200
2,511,300 Saha Union Public Co Ltd (Foreign Registered) 2,214,139
1,292,596 Shinawatra Computer Public Co Ltd (Foreign Registered) 8,337,394
532,000 Siam City Cement (Foreign Registered) 1,542,923
513,000 Siam Pulp & Paper (Foreign Registered) 357,077
201,512 Singer Plc (Foreign Registered) 168,316
3,108,050 Star Block Co Ltd (Foreign Registered) * 36,056
24,000 Swedish Motor (Foreign Registered) 3,230
3,117,500 Thai Airways International (Foreign Registered) 3,833,585
6,143,100 Thai Farmers Bank Plc (Foreign Registered) 18,386,541
1,581,150 Thai German Ceramics Industry (Foreign Registered) * 359,519
10,757,880 Thai Petrochemical (Foreign Registered) 2,870,432
352,300 Thai Plastic & Chemical (Foreign Registered) 940,012
378,600 Thai Telephone & Telecommunications (Foreign Registered) * 109,803
70 Thailand International (Foreign Registered) 717,500
1,028,100 Tipco Asphalt Public Co (Foreign Registered) 2,230,333
1,343,000 Total Access Communication 1,947,350
------------------
128,801,341
------------------
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Turkey - 0.1%
870 Mardin Cimento 24
75,300 Sabanci Holding GDR (Registered) * 1,016,550
----------------
1,016,574
----------------
Venezuela - 1.4%
2,534,473 Banco Provincial 4,421,847
218,606 Ceramica Carabobo Class B ADR 1,230,752
162,800 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 5,769,225
6,654,350 Electricidad De Caracas 6,100,893
778 International Briquettes Holdings * 7,391
35,181 Mantex SA Class A Sponsored ADR 765,187
832,000 Siderurgica Venezolana (Sivensa) ADR 1,980,160
349,950 Siderurgica Venezolana (Sivensa) Class A 94,459
3,182 Siderurgica Venezolana (Sivensa) Registered ADR Class B 144A 7,160
689,454 Venepal SA Class A GDR 144A 620,509
75,490 Venezolana de Cementes 103,087
489,122 Venezolana de Cementes Tipo II 671,762
----------------
21,772,432
----------------
TOTAL STOCK AND EQUIVALENTS (Cost $0) 1,358,790,656
----------------
Par Value/ CONVERTIBLE SECURITIES - 2.0%
Shares India - 0.3%
$ 800,000 Mahindra & Mahindra CV, 5.00% due 7/9/01 736,000
$ 2,292,000 Mahindra & Mahindra CV, 5.00% due 7/9/01 144A 2,108,640
$ 1,500,000 Reliance Industries Convertible, 3.50% due 11/03/99 1,672,500
----------------
4,517,140
----------------
Indonesia - 0.4%
$ 28,000,000 APP Finance (VI) Convertible, 0.00% due 11/18/12 6,160,000
$ 2,470,000 Astra International Convertible, 6.75% due 5/30/2006 938,600
----------------
7,098,600
----------------
Korea - 0.1%
$ 2,000,000 Daewoo Corp Convertible, Zero Coupon, due 12/31/07 1,773,333
$ 108,350 Hanbo Steel & General Construction Convertible, 3.375% due 01/31/99 51,753
----------------
1,825,086
----------------
Portugal - 0.1%
20,100 Banco Commercial Portugues Preferred Class A 2,211,000
----------------
Russia - 0.8%
$ 7,050,000 Lukinter Fin Convertible, 3.50% due 5/6/02 144A 8,883,000
$ 2,000,000 Lukinter Fin Convertible, 3.50% due 5/6/02 2,520,000
----------------
11,403,000
----------------
South Africa - 0.0%
$ 1,100,000 Randgold Finance Convertible, 7.00% due 10/03/01 144A 517,000
----------------
Thailand - 0.2%
$ 5,730,000 Bangkok Bank Public Co Convertible, 3.25% due 3/3/04 2,578,500
$ 358,000 Bangkok Land Ltd Convertible, 4.50% due 10/13/03 17,900
$ 1,814,000 MDX Public Co Ltd Convertible, 4.75% due 9/17/03 181,400
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thailand - continued
CHF 2,800,000 NTS Steel Group Convertible, 1.00% due 12/17/03 228,945
$ 534,000 NTS Steel Group Convertible, 4.00% due 12/16/08 48,060
$ 2,724,000 Sahaviriya Steel Convertible, 3.50% due 7/26/05 272,400
$ 630,000 Somprasong Land Co Convertible, 3.88% due 1/21/04 31,500
----------------
3,358,705
----------------
Venezuela - 0.1%
$ 1,460,000 Global Investment Financial Corp, 11.00% due 3/19/01 1,460,000
----------------
TOTAL CONVERTIBLE SECURITIES (Cost $0) 32,390,531
----------------
EQUITY LINKED SECURITIES - 1.6%
Chile - 1.2%
$ 2,630,074 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/15/98 (d) (f) 2,227,936
$ 2,168,200 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/16/98 (d) (f) 1,764,915
$ 4,043,627 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/17/98 (d) (f) 3,137,451
$ 1,158,098 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/17/98 (d) (f) 918,256
$ 5,000,000 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 5/8/98 (d) (f) 3,985,500
$ 10,000,000 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 6/19/98 (d) (f) 7,235,000
----------------
19,269,058
----------------
Russia - 0.4%
32,787 Renaissance Sberbank Note (e) * 5,725,800
----------------
TOTAL EQUITY LINKED SECURITIES (Cost $0) 24,994,858
----------------
INVESTMENT FUNDS - 1.8%
Chile - 0.0%
22,000 Chile Fund Inc 365,750
----------------
Czech Republic - 0.0%
10,000 Sporitelni Privatizacni * 230,314
----------------
India - 0.0%
58,300 India Fund Inc * 426,319
----------------
Kazakhstan - 0.2%
450,000 Kazakhstan Investment Fund (f) * 1,710,000
----------------
Poland - 0.1%
2,060,116 Templeton Emerging European Fund L.P. (f) * 2,060,116
----------------
Romania - 0.3%
4,500 Romanian Investment Fund (f) 3,960,000
----------------
Russia - 1.0%
27,500 Morgan Stanley Russia & New Europe Fund 646,250
10,000,000 New Century Holdings LP (c) (f) 15,549,000
----------------
16,195,250
----------------
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Thailand - 0.0%
1,500,000 Ruam Pattana Fund (Registered) * 250,580
-----------------
Ukraine - 0.1%
25,000 Societe Generale Thalmann Ukraine Fund (f) * 2,050,000
-----------------
United States - 0.1%
71,400 Morgan Stanley Emerging Markets Fund 905,888
-----------------
TOTAL INVESTMENT FUNDS (Cost $0) 28,154,217
-----------------
SHORT-TERM INVESTMENTS - 16.0%
Cash Equivalents - 10.5%
$ 8,400,000 Republic Bank of New York Time Deposit, 5.63% due 3/2/98 8,400,000
82,662,900 The Boston Global Investment Trust (a) 82,662,900
$ 75,000,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 75,000,000
-----------------
166,062,900
-----------------
U.S. Government - 5.5%
$ 89,400,000 U.S. Treasury Bill, 5.35% due 7/23/98 87,567,598
-----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $253,689,535) 253,630,498
-----------------
TOTAL INVESTMENTS - 107.1%
(Cost $1,883,863,795) 1,697,960,760
Other Assets and Liabilities (net) - (7.1%) (112,325,136)
-----------------
TOTAL NET ASSETS - 100.0% $ 1,585,635,624
=================
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GDR Global Depository Receipt
GDS Global Depository Shares
RDC Russian Depositary Certificate
CHF Swiss Franc
IDR Indonesian Rupiah
INR Indian Rupee
KRW Korean Won
(a) Represents investment of security lending collateral (Note 1).
(b) Bankrupt issuer.
(c) Valued by management (Note 1).
(d) A derivative security whose price is linked to the return on a
basket of Chilean equities.
(e) A derivative security whose price is linked to the return on a
Russian basket of securities.
(f) Security is restricted as to public resale. The aggregate market
value of restricted securities is $44,598,174 or 2.81% of net
assets.
* Non-income producing security. A dividend has not been declared
for the year ended February 28, 1998.
144A Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
See accompanying notes to the financial statements. 15
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector diversification of the Fund's
equity investments was as follows:
Industry Sector (Unaudited)
Utilities 14.6%
Banking 11.0
Metals and Mining 9.1
Telecommunications 9.0
Conglomerates 8.9
Oil and Gas 7.6
Construction 6.4
Electronic Equipment 3.8
Chemicals 2.2
Machinery 2.0
Textiles 1.8
Transportation 1.7
Consumer Goods 1.5
Financial Services 1.5
Insurance 1.4
Food and Beverage 1.4
Paper and Allied Products 1.3
Automotive 0.9
Computers 0.7
Communications 0.6
Services 0.6
Health Care 0.6
Real Estate 0.3
Retail Trade 0.2
Miscellaneous 10.9
------------
100.0 %
============
16 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at value (cost $1,883,863,795) (Note 1) $ 1,697,960,760
Foreign currency, at value (cost $7,736,141) (Note 1) 7,657,249
Receivable for investments sold 11,839,197
Receivable for Fund shares sold 216,855
Receivable for open forward foreign currency contracts (Notes 1 and 5) 596,670
Foreign withholding taxes receivable 936,140
Dividends and interest receivable 4,229,344
Receivable for expenses waived or borne by Manager (Note 2) 323,465
----------------
Total assets 1,723,759,680
----------------
Liabilities:
Payable for investments purchased 31,719,960
Payable for Fund shares repurchased 10,408,149
Payable for open forward foreign currency contracts (Notes 1 and 5) 6,702,848
Payable for open swap agreements (Notes 1 and 5) 3,173,148
Due to custodian 909,064
Payable upon return of securities loaned (Note 1) 82,662,900
Payable to affiliate for (Note 2):
Management fee 1,179,899
Shareholder service fee 154,258
Accrued expenses 1,213,830
----------------
Total liabilities 138,124,056
----------------
Net assets $ 1,585,635,624
================
Net assets consist of:
Paid-in capital $ 1,844,862,815
Accumulated undistributed net investment income 22,378,753
Accumulated net realized loss (86,438,597)
Net unrealized depreciation (195,167,347)
----------------
$ 1,585,635,624
================
Net assets attributable to:
Class III Shares $ 913,615,199
================
Class IV Shares $ 672,020,425
================
Shares outstanding:
Class III 95,539,011
================
Class IV 70,302,469
================
Net asset value per share:
Class III $ 9.56
================
Class IV $ 9.56
================
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 28, 1998
- ---------------------------------------------------------------------------------------
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $2,797,206) $ 34,225,753
Interest (including security lending income of $1,199,507) 9,380,304
---------------
Total income 43,606,057
---------------
Expenses:
Management fee (Note 2) 17,396,168
Custodian fees 4,074,035
Stamp duties and transfer taxes 611,342
Brazil CPMF taxes (Note 1) 220,165
Legal fees 117,588
Audit fees 70,565
Transfer agent fees 53,060
Registration fee 47,657
Trustees fee (Note 2) 16,877
Miscellaneous 14,013
Fees waived or borne by Manager (Note 2) (3,619,369)
---------------
19,002,101
Shareholder service fee (Note 2)
Class I 10,272
Class II 6,557
Class III 2,477,394
Class IV 85,169
---------------
Net expenses 21,581,493
---------------
Net investment income 22,024,564
---------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 61,048,120
Written options 1,461,013
Closed swap contracts (5,475,068)
Foreign currency, forward contracts and foreign
currency related transactions 24,368,436
---------------
Net realized gain 81,402,501
---------------
Change in net unrealized appreciation (depreciation) on:
Investments (324,191,813)
Open swap contracts (5,559,088)
Foreign currency, forward contracts and foreign
currency related transactions (11,883,130)
---------------
Net unrealized loss (341,634,031)
---------------
Net realized and unrealized loss (260,231,530)
---------------
Net decrease in net assets resulting from operations $ (238,206,966)
===============
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------ -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 22,024,564 $ 17,549,883
Net realized gain 81,402,501 47,250,695
Change in net unrealized appreciation (depreciation) (341,634,031) 173,776,577
------------------ -----------------
Net increase (decrease) in net assets
resulting from operations (238,206,966) 238,577,155
------------------ -----------------
Distributions to shareholders from:
Net investment income
Class I (129,011) -
Class II (254,928) (178,659)
Class III (35,349,550) (15,814,130)
------------------ -----------------
Total distributions from net investment income (35,733,489) (15,992,789)
------------------ -----------------
Net realized gains
Class I (503,907) -
Class II (1,133,793) -
Class III (100,204,482) -
------------------ -----------------
Total distributions from net realized gains (101,842,182) -
------------------ -----------------
In excess of net realized gains
Class I (266,871) -
Class II (600,460) -
Class III (53,068,677) -
------------------ -----------------
Total distributions in excess of net realized gains (53,936,008) -
------------------ -----------------
(191,511,679) (15,992,789)
------------------ -----------------
Net share transactions: (Note 4)
Class I 1,328,062 1,542,386
Class II 4,693,314 (2,994,394)
Class III (324,321,493) 599,087,113
Class IV 606,255,395 -
------------------ -----------------
Increase in net assets resulting from net share transactions 287,955,278 597,635,105
------------------ -----------------
Total increase (decrease) in net assets (141,763,367) 820,219,471
Net assets:
Beginning of period 1,727,398,991 907,179,520
------------------ -----------------
End of period (including accumulated undistributed
net investment income of $22,378,753 and
$11,553,963, respectively.) $ 1,585,635,624 $ 1,727,398,991
================== =================
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 1, 1997 Period Ended
to January 9, 1998 February 28, 1997 *
---------------------- -----------------------
<S> <C> <C>
Net asset value, beginning of period $ 12.48 $ 10.86
---------------------- -----------------------
Income (loss) from investment operations:
Net investment income 0.14+ 0.01
Net realized and unrealized gain (loss) (2.69) 1.61
---------------------- -----------------------
Total from investment operations (2.55) 1.62
---------------------- -----------------------
Less distributions to shareholders from:
Net investment income (0.26) --
Net realized gains (0.71) --
In excess of net realized gains (0.37) --
---------------------- -----------------------
Total distributions (1.34) --
---------------------- -----------------------
Net asset value, end of period $ 8.59(e) $ 12.48
====================== =======================
Total Return (a) (21.66%) 14.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ 1,748
Net expenses to average
daily net assets 1.41%**(c) 1.45%**(c)
Net investment income to average
daily net assets 1.21%** 0.77%**
Portfolio turnover rate 88% 41%
Average broker commission rate per equity share (d) $ 0.0017 $ 0.0004
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ 0.02 (b)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Period from January 2, 1997 (commencement of operations) to February
28, 1997.
** Annualized
(a) Calculation excludes purchase premiums and redemption fees. The
total returns would have been lower had certain expenses not
been waived during the periods shown.
(b) Fees and expenses voluntarily waived or borne by the Manager were
less than $0.01 per share.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .20% and .04% of average daily net assets
for the periods ended February 28, 1997 and January 9, 1998,
respectively.
(d) The average broker commission rate will vary depending on the markets
in which trades are executed.
(e) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share
on January 9, 1998.
20 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from November 29, 1996
Period from October 31, 1997 (commencement of operations)
to January 9, 1998 to February 4, 1997
------------------ -------------------
<S> <C> <C>
Net asset value, beginning of period $ 11.40 $ 10.74
------------------ -------------------
Income (loss) from investment operations:
Net investment income 0.03 + 0.05
Net realized and unrealized gain (loss)
on investments (1.75) 1.10
------------------ -------------------
Total from investment operations (1.72) 1.15
------------------ -------------------
Less distributions to shareholders from:
Net investment income (0.14) (0.07)
Net realized gains (0.61) 0.00
In excess of net realized gains (0.32) --
------------------ -------------------
Total distributions (1.07) (0.07)
------------------ -------------------
Net asset value, end of period $ 8.61 (f) $ 11.82 (e)
================== ===================
Total Return (a) (15.72%) 10.73%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ --
Net expenses to average
daily net assets 1.38% *(b) 1.33% *(b)
Net investment income to average
daily net assets 1.58% * 6.14% *
Portfolio turnover rate 88% 41%
Average broker commission rate (d) $ 0.0017 $ 0.0004
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: (c) (c)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized
(a) Calculation excludes purchase premiums and redemption fees.
The total returns would have been lower had certain expenses
not been waived during the period shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .07% and .02% of average daily net assets for
the periods ended February 4, 1997 and January 9, 1998, respectively.
(c) Fees and expenses voluntarily waived or borne by the Manager were less than
$.01 per share.
(d) The average broker commission rate will vary depending on the markets in
which trades are executed.
(e) All Class II shares of the Fund were exchanged for Class III shares on
February 4, 1997. Amount represents ending net asset value per share on
February 4, 1997.
(f) All Class II shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
See accompanying notes to the financial statements. 21
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29
------------------------------------------------------------------
1998 1997 1996 1995 1994 *
--------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.49 $ 10.54 $ 9.52 $ 12.13 $ 10.00
--------- ---------- ----------- --------- ---------
Income (loss) from investment operations:
Net investment income 0.16 + 0.13 0.10 0.05 0.02
Net realized and unrealized gain (loss) (1.76) 1.96 1.06 (2.37) 2.11
--------- ---------- ----------- --------- ---------
Total from investment operations (1.60) 2.09 1.16 (2.32) 2.13
--------- ---------- ----------- --------- ---------
Less distributions to shareholders from:
Net investment income (0.25) (0.14) (0.01) (0.07) (0.00)(c)
Net realized gains (0.71) -- (0.13) (0.22) --
In excess of net realized gains (0.37) -- -- -- --
--------- ---------- ----------- --------- ---------
Total distributions (1.33) (0.14) (0.14) (0.29) (0.00)
--------- ---------- ----------- --------- ---------
Net asset value, end of period $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 12.13
========= ========== =========== ========= =========
Total Return (a) (12.94%) 19.98% 12.24% (19.51%) 21.35%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 913,615 $1,725,651 $ 907,180 $ 384,259 $ 114,409
Net expenses to average
daily net assets 1.24% (e) 1.24% (e) 1.35% 1.58% 1.64% **
Net investment income to average
daily net assets 1.30% 1.40% 1.31% 0.85% 0.87% **
Portfolio turnover rate 88% 41% 35% 50% 2%
Average broker commission rate per equity share (b) $ 0.0017 $ 0.0004 N/A N/A N/A
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.02 (d) -- (d)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Period from December 9, 1993 (commencement of operations) to February 28,
1994.
** Annualized.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for equity
trades on which commissions are charged. The average broker commission
rate will vary depending on the markets in which trades are executed.
(c) The per share income distribution was $ 0.004.
(d) Fees and expenses voluntarily waived or borne by the Manager were less
than $.01 per share.
(e) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .06% and .035% of average daily net assets for
the years ended February 28, 1997 and 1998, respectively.
22 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
----------------------
<S> <C>
Net asset value, beginning of period $ 8.62
----------------------
Income (loss) from investment operations:
Net investment income 0.01 +
Net realized and unrealized gain 0.93
----------------------
Total from investment operations 0.94
----------------------
Net asset value, end of period $ 9.56
======================
Total Return (a) 10.90%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 672,020
Net expenses to average
daily net assets 1.22% *(b)
Net investment income to average
daily net assets 0.65% *
Portfolio turnover rate 88%
Average broker commission rate (d) $ 0.0017
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: (c)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized
(a) Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximates .04% of average daily net assets.
(c) Fees and expenses voluntarily waived or borne by the Manager were less than
$.01 per share.
(d) The average broker commission rate will vary depending on the markets in
which trades are executed.
See accompanying notes to the financial statements. 23
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks long-term capital appreciation consistent with a prudent
level of risk through investment in equity and equity-related securities
traded in the securities markets of newly industrializing countries in
Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully described in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares.
Effective January 9, 1998, Class I and Class II shares ceased operations
and all shares were exchanged for Class III shares. Additionally, Class IV
shares commenced operations on January 9, 1998.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Other assets and securities for which no
quotations are readily
24
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
available are valued at fair value as determined in good faith by the
Trustees or other persons acting at their direction.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. These prices may differ
from the value that would have been used had a broader market for the
securities existed and the differences could be material to the financial
statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
When a forward currency contract is extinguished through delivery or offset
by entering into another forward currency contract, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value of the contract at the
time it was extinguished or offset. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to sell is shown
under Note 5, and represents the currency exposure the Fund has acquired or
hedged through currency contracts as of February 28, 1998.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into equity swap agreements which
involve a commitment by one party in the agreement to pay interest in
exchange
25
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
for a market linked return based on a notional amount. To the extent that
the total return of the security or index underlying the transaction
exceeds or falls short of the offsetting interest rate obligation, the Fund
will receive a payment from or make a payment to the counterparty,
respectively. Equity swaps are marked to market daily based upon quotations
from market makers and the change, if any, is recorded as unrealized gain
or loss in the Statement of Operations. Payments received or made at the
end of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or that there may be unfavorable changes in the price
of the security or index underlying these transactions. See Note 5 for a
summary of all open swap agreements as of February 28, 1998.
Options
The Fund may write call and put options on securities it owns or in which
it may invest. When the Fund writes a call or put option, an amount equal
to the premium received is recorded as a liability and subsequently marked
to market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
offset against the proceeds or amounts paid on the transaction to determine
the realized gain or loss. If a written put option is exercised, the
premium reduces the cost basis of the securities purchased by the Fund. The
Fund as a writer of an option has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the security
underlying the written option. There is the risk the Fund may not be able
to enter into a closing transaction because of an illiquid market. As of
February 28, 1998, there were no outstanding written options.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $76,978,599 collateralized by cash in the amount of
$82,662,900 which was invested in a short-term instrument.
26
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
The Fund is also subject to a .20% Contribuicao Provisoria sobre
Movimentacoes Financeiras (CPMF) tax which is applied to foreign exchange
transactions representing capital inflows or outflows to the Brazilian
market.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency and passive foreign investment
company transactions and redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $4,464,178.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
------------------- ---------------------------- --------------------
$24,533,715 $(28,886,241) $4,352,526
27
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.60% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. These fees may be reduced by 50% with respect to any portion of a
purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. These fees are allocated relative to each class' net assets on the
share transaction date. Purchase premiums are included as part of each
class' "shares sold" and redemption fees are included as part of each
class' "shares repurchased", respectively, as summarized in Note 4. For the
year ended February 28, 1998, the Fund received $7,298,651 in purchase
premiums and $778,355 in redemption fees. There is no premium for
reinvested distributions.
Investment risk
Investments in emerging countries present certain risks that are not
inherent in many other securities. Many emerging countries present elements
of political and/or economic instability. Investing in equity securities of
Indian and Russian companies includes the risk of loss from those countries
underdeveloped systems of share registration and transfer. Further,
countries may impose various types of foreign currency regulations or
controls which may impede the Fund's ability to repatriate amounts it
receives. The Fund may acquire interests in securities in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging countries are relatively illiquid. Accordingly, the Fund may not
be able to realize in an actual sale amounts approximating those used to
value its holdings.
28
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 1.00% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, .15%
for Class III shares, and .105% for Class IV shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding custody fees, brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceed .81% of average
daily net assets. Prior to June 1, 1996, a similar waiver existed for
annual expenses exceeding 1.20%.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $16,877. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$1,391,405,200 and $1,399,263,560, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
$1,892,596,551 $160,272,427 $(354,908,218) $(194,635,791)
</TABLE>
29
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
4. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption fees
received by the Fund were as follows:
<TABLE>
<CAPTION>
Period from January 2, 1997
Period from March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
----------------------------------- ----------------------------------------
Class I: Shares Amount Shares Amount
--------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Shares sold 654,767 $ 8,075,897 140,068 $ 1,542,386
Shares issued to
shareholders in
reinvestment
of distributions 94,886 892,506 - -
Shares repurchased (889,721) (7,640,341) - -
--------------- ---------------- ------------------ -----------------
Net increase/
(decrease) (140,068) $ 1,328,062 140,068 $ 1,542,386
=============== ================ ================== =================
<CAPTION>
Period from November 29, 1996
Period from October 31, 1997 to (commencement of operations)
January 9, 1998 to February 4, 1997
----------------------------------- ----------------------------------------
Class II: Shares Amount Shares Amount
--------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Shares sold 1,860,787 $ 20,571,162 5,586,262 $ 63,054,064
Shares issued to
shareholders in
reinvestment
of distributions 215,746 1,989,181 16,729 178,659
Shares repurchased (2,076,533) (17,867,029) (5,602,991) (66,227,117)
--------------- ---------------- ------------------ -----------------
Net increase/
(decrease) - $ 4,693,314 - $ (2,994,394)
=============== ================ ================== =================
</TABLE>
30
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Share transactions - continued
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------------------------ ----------------------------------------
Class III: Shares Amount Shares Amount
------------------ ------------- ------------------- ----------------
<S> <C> <C>
Shares sold 41,704,905 $ 476,637,263 54,549,584 $ 626,535,006
Shares issued to
shareholders in
reinvestment of
distributions 17,410,973 170,165,033 759,519 8,422,271
Shares repurchased (101,692,012) (971,123,789) (3,248,382) (35,870,164)
------------------ ------------- ------------------- ----------------
Net increase/
(decrease) (42,576,134) $(324,321,493) 520,670,721 $ 599,087,113
================== ============= =================== ================
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
----------------------------------------
Class IV: Shares Amount
-------------------- ----------------
<S> <C> <C>
Shares sold 73,482,774 $ 636,013,851
Shares issued to shareholders in
reinvestment of distributions - -
Shares repurchased (3,180,305) (29,758,456)
-------------------- ----------------
Net increase 70,302,469 $ 606,255,395
==================== ================
</TABLE>
31
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
----------------- -------------------- --------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Buys
07/08/98 IDR 210,984,900,000 $ 22,431,944 $ (2,568,056)
-----------------
Sales
07/08/98 IDR 210,984,900,000 $ 22,431,944 $ (3,471,185)
05/26/98 INR 2,012,000,000 49,403,330 596,670
06/17/98 KRW 17,580,000,000 10,387,342 (387,342)
06/18/98 KRW 17,400,000,000 10,276,265 (276,265)
-----------------
$ (3,538,122)
-----------------
</TABLE>
See Notes to Schedule of Investments for definitions of currency abbreviations.
32
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- -------------- ---------------------------------------------------------- --------------------
<S> <C> <C> <C>
$10,000,000 3/13/98 Agreement with Goldman Sachs International dated $ (330,794)
3/11/97 to receive (pay) the notional amount multiplied
by the return on the Taiwan Weighted Index and to pay
the notional amount multiplied by 12 month LIBOR
adjusted by a specified spread.
4,990,939 4/1/98 Agreement with Barclays Bank PLC dated 4/2/97 to receive (130,622)
(pay) the notional amount multiplied by the return on
the Taiwan Weighted Index and to pay the notional amount
multiplied by 6 month LIBOR adjusted by a specified
spread.
10,000,001 4/6/98 Agreement with Goldman Sachs International dated 4/2/97 (170,343)
to receive (pay) the notional amount multiplied by the
return on the Taiwan Weighted Index and to pay the
notional amount multiplied by 12 month LIBOR adjusted by
a specified spread.
5,184,028 4/28/98 Agreement with Robert Fleming & Co. Limited dated (575,117)
4/28/97 to receive (pay) the notional amount multiplied
by the return on a basket of selected Indian securities
(including dividends) and to pay the notional amount
multiplied by a fixed rate.
6,000,000 4/29/98 Agreement with Barclays Bank PLC dated 10/29/97 to (784,793)
receive (pay) the notional amount multiplied by the
return on the Chile IPSA Index and to pay the notional
amount multiplied by 6 month LIBOR adjusted by a
specified spread.
3,315,306 5/12/98 Agreement with Lehman Brothers Finance S.A. dated 323,626
11/12/97 to receive (pay) the notional amount multiplied
by the return on the Korea Stock Price Index and to pay
the notional amount multiplied by 3 month LIBOR adjusted
by a specified spread.
</TABLE>
33
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreements - continued
<TABLE>
<CAPTION>
Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
----------------- -------------- ---------------------------------------------------------- --------------------
<S> <C> <C> <C>
$5,000,000 6/11/98 Agreement with Goldman Sachs International dated $ (1,140,966)
11/12/97 to receive (pay) the notional amount
multiplied by the return on the Korea Stock Price Index
and to pay the notional amount multiplied by 7 month
LIBOR adjusted by a specified spread.
1,527,809 6/27/98 Agreement with Indosuez W. I. Carr Ltd. dated 6/27/97 to 1,094,293
receive the notional amount multiplied by the change in
market value of Pohang Iron & Steel common stock
(including dividends) and to pay the notional amount
multiplied by 6 month LIBOR adjusted by a specified
spread.
1,924,132 6/27/98 Agreement with Indosuez W. I. Carr Ltd. dated 6/27/97 to 809,550
receive the notional amount multiplied by the change in
market value of SK Telecom common stock (including
dividends) and to pay the notional amount multiplied by
6 month LIBOR adjusted by a specified spread.
10,000,000 11/3/98 Agreement with Barclays Bank PLC dated 11/4/97 to (3,369,027)
receive (pay) the notional amount multiplied by the
return on the International Finance Corporation "IFC"
Korea Investable Index and to pay the notional amount
multiplied by 6 month LIBOR adjusted by a specified
spread.
10,000,000 11/11/98 Agreement with Barclays Bank PLC dated 11/12/97 to 483,666
receive (pay) the notional amount multiplied by the
return on the International Finance Corporation "IFC"
Thailand Investable Index and to pay the notional amount
multiplied by 6 month LIBOR adjusted by a specified
spread.
</TABLE>
34
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreements - continued
<TABLE>
<CAPTION>
Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- -------------- ---------------------------------------------------------- --------------------
<S> <C> <C>
$1,271,446 1/18/99 Agreement with Robert Fleming & Co. Limited dated $ 41,546
1/16/98 to receive the notional amount multiplied by the
change in market value of State Bank of India common
stock (including dividends) and to pay the notional
amount multiplied by 12 month LIBOR adjusted by a
specified spread.
10,000,000 2/3/99 Agreement with Indosuez W.I. Carr Ltd. dated 2/3/98 to 575,833
receive (pay) the notional amount multiplied by the
return on the Thailand SET Index and to pay the notional
amount multiplied by 6 month LIBOR adjusted by a
specified spread.
--------------------
Net unrealized depreciation $ (3,173,148)
====================
</TABLE>
Written call option transactions
Number
of Contracts Premiums
-------------- ----------------
Outstanding, beginning of period - $ -
Options written 348,065 1,479,681
Options exercised (348,065) (1,479,681)
-------------- ----------------
Outstanding, end of period - $ -
============== ================
35
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated 53%
of distributions as net capital gain dividends.
The Fund has also elected to defer to March 1, 1998 post-October losses of
$83,354,330.
36
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO
since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant
Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an
exclusive consulting management agreement with GMO.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Emerging Markets Fund returned -12.9% for the
fiscal year ended February 28, 1998. The Fund's benchmark, the IFC Investable
Composite, returned -21.8% during the same period. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
equity securities throughout the period.
Most of the favorable performance relative to the benchmark during the year
resulted from the positive impact of the Fund's country bets. During the year,
the Fund held overweight positions in Mexico, Russia, Europe and India, which
all outperformed the benchmark. During the Asian crisis, the fund was heavily
underweight the Southeast Asian markets, greatly helping performance relative to
the benchmark. Our overweight positions in Korea and underweight bet in Taiwan
negatively impacted relative performance.
The Mexican market had a strong rebound on the back of strong economic growth.
The European markets, Greece and Portugal continued to do well on prospects of
convergence with other European Union countries. Russia, after a strong first
half, had a major correction as contagion from the Asian crisis spread.
While the Taiwanese market was expensive going into the Asia crisis, its strong
economic fundamentals protected it from the meltdown. As a result, it
outperformed the other Asian markets. Korea on the other hand was badly hit by
the contagion.
Outlook
The Asian crisis has had a positive impact on the behavior of other emerging
market policy makers, especially in Brazil and Russia. In these and other
emerging countries, policy makers have acted quickly to address macroeconomic
imbalances, lest global investors punish them. In the long run, this bodes well
for emerging markets as an asset class.
We have been gradually increasing our weights in Asia, reducing our exposure to
Latin America and continue to be overweight Russia.
The ASEAN markets have now fallen more than 70% from their peak in US$ terms
and are already discounting poor profitability and weaker economic conditions.
The principal factors that influenced a V shaped recovery in Mexico were a
strong bailout package, rapid change in the trade deficit and a strong
commitment by the government to implement tough IMF conditions. The first two
conditions are now present in Asia. However, hubris amongst Asian governments
helped cause the crisis and only when they begin to accept reality will they
make the appropriate structural changes that are so desperately needed. We think
Thailand and Korea are aggressively addressing these issues and are enthusiastic
about them.
<PAGE>
The new political coalition in Thailand has shown a strong willingness to accept
and implement tough policies. We continue to be underweight Malaysia,
Philippines and are neutral in Indonesia. While Indonesian political risk has
increased substantially with Mr. Suharto's recent stroke, the currency has
fallen from 2,300 to the dollar to over 8,000. Our currency model has the
Indonesian rupiah at the cheapest level we have ever seen in any currency. We
continue to be overweight India and Pakistan, and are hopeful that the new
coalition government in India will accelerate the pace of reforms.
In order to protect the real, the Brazilian government has made all the right
moves -- reducing government spending, increasing the pace of liberalization and
privatization. We are impressed by their actions, but all of Latin America
remains vulnerable to further contagion from Asia as well as a downdraft in the
U.S. equity market. As a result we remain close to neutral on Brazil. The
Mexican economy continues to surprise with strong economic growth. We have been
overweight for quite a while but valuations are starting to get stretched.
Accordingly, we are close to neutral but are gradually reducing our weight in
Mexico. We also like Chile, which is likely to be a safe harbor if the storm
comes to Latin America.
We have been underweight South Africa for the last 3 years, but are gradually
increasing our weight there. Valuations are starting to get attractive, while
inflation is at a 25 year low and interest rates are likely to fall. However,
the currency remains vulnerable.
Despite the risks, we continue to be overweight Russia. We think the biggest
risk to the Russian market will come from capital outflows caused by a volatile
external environment and domestic concerns (Mr. Yeltsin's health, etc.). Under
this scenario, economic recovery would be threatened by higher domestic interest
rates, which would have to be raised in order to defend the rouble. On the other
hand, key macroeconomic indicators point to an economic recovery in 1998. The
40% drop in the market during the last quarter led to the big blue chips
becoming cheap again. Our portfolio is well positioned to take advantage of the
anticipated industrial recovery.
We have continued to take profits in Turkey and Hungary. Both these markets had
strong moves in 1997, up 100% and 70% respectively, and our model has turned
quite negative. We remain positive on Israel; with growth slowing down, we
anticipate falling interest rates.
Overall, emerging markets in general and Asia in particular are staring to look
extremely cheap on a three- to five-year view.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo
& Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Emerging Markets Fund Class III Shares and the IFC Investable Composite
As of February 28, 1998
--------------------------------
Average Annual Total Return
--------------------------------
Since
1 Year Inception
--------------------------------
Class 12/9/93
III -14.7% 2.8%
--------------------------------
Class 1/9/98
IV n/a 8.7%
--------------------------------
[LINE GRAPH APPEARS HERE]
GMO EMERGING IFC INVESTABLE
DATE MARKETS FUND COMPOSITE
- ------- ------------ --------------
12/9/93 $9,840 $10,000
2/28/94 $11,941 $10,914
2/28/95 $9,612 $8,360
2/29/96 $10,746 $9,495
2/28/97 $12,893 $11,006
2/28/98 $11,224 $8,602
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 160 bp on the purchase and 40 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Class III shares
are a redesignation of the single class of shares that has been offered by the
Fund since inception. Performance for Class IV shares may be different due to
lower shareholder service fees. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
Pelican Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Pelican Fund at February 28, 1998,
the results of its operations for the year then ended, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 84.0%
Advertising - 0.1%
3,250 Cordiant Communications Group Plc Sponsored ADR 29,656
11,250 Saatchi & Saatchi Plc ADR* 106,875
-------------
136,531
-------------
Automotive - 1.3%
10,000 Chrysler Corp 389,375
15,000 General Motors Corp 1,034,063
85,000 Mascotech Industries Inc 1,763,750
-------------
3,187,188
-------------
Banking and Financial Services - 10.7%
35,000 American Express Co 3,152,188
12,500 Bank of Tokyo-Mitsubishi Ltd (The) ADR 178,125
100,000 Block (HR) Inc 4,706,250
35,000 Chase Manhattan Corp 4,342,188
40,000 Citicorp 5,300,000
20,000 First Chicago NBD Corp 1,643,750
10,000 Nationsbank Corp 685,000
10,000 PNC Bank Corp 555,000
57,500 Travelers Group Inc (The) 3,205,625
5,000 Wells Fargo Co 1,610,000
-------------
25,378,126
-------------
Chemicals - 0.5%
22,500 Albemarle Corp 548,438
10,000 Bayer A G 421,543
10,000 Georgia Gulf Corp 329,375
-------------
1,299,356
-------------
Computer and Office Equipment - 1.4%
80,002 Compaq Computer Corp 2,565,064
75,000 Intergraph Corp* 731,250
7,500 Silicon Graphics Inc* 112,969
-------------
3,409,283
-------------
Consumer Goods - 3.2%
15,000 Black & Decker Corp 755,625
50,000 Eastman Kodak 3,281,250
12,500 Groupe Danone ADR 498,438
25,000 Maytag Corp 1,125,000
62,500 Safety Kleen 1,675,781
7,500 Scotts Company Class A* 255,000
-------------
7,591,094
-------------
Electronic Equipment - 0.9%
50,000 International Rectifier Corp* 728,125
37,500 National Semiconductor Corp* 895,313
25,000 Stewart & Stevenson Services Corp 610,938
-------------
2,234,376
-------------
Environmental Control - 0.2%
35,000 Wheelabrator Technologies Inc 570,938
-------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
Food and Beverage - 3.7%
75,000 Anheuser-Busch Cos Inc 3,515,625
7,500 Archer Daniels Midland 168,281
10,000 Coors (Adolph) Co 312,500
40,000 Nestle SA ADR 3,502,320
12,500 Riviana Foods Inc 273,438
25,000 RJR Nabisco Holdings Corp 864,063
-------------
8,636,227
-------------
Health Care - 1.3%
25,000 Baxter International Inc 1,415,625
45,000 Beverly Enterprises Inc* 683,438
50,000 Owens and Minor Holdings Co 887,500
5,000 Quest Diagnostics Inc* 77,500
-------------
3,064,063
-------------
Insurance - 5.1%
5,000 Aetna Inc 436,875
25,000 Allstate Corp 2,331,250
20,000 Chartwell Re Corp 612,500
5,000 Cigna Corp 955,000
5,000 Gallagher (Arthur J) and Co 206,563
7,500 Oxford Health Plans Inc* 128,906
115,000 Reliance Group Holdings Inc 1,955,000
50,000 Sedgwick Group ADR 613,320
130,000 TIG Holdings Inc 3,453,125
25,000 USF & G Corp 610,938
60,000 Willis Corroon Group Plc ADR 705,000
-------------
12,008,477
-------------
Machinery - 1.1%
30,000 Cincinnati Milacron Inc 926,250
25,000 Coltec Industries Inc* 651,563
5,000 Cummins Engine Inc 289,375
10,000 FMC Corp* 723,750
-------------
2,590,938
-------------
Manufacturing - 8.8%
20,000 American Greetings Corp 912,500
12,500 Champion Enterprises Inc* 314,063
25,000 Clayton Homes Inc 496,875
95,000 Corning Inc 3,859,375
30,000 General Electric Co 2,332,500
50,000 Griffon Corp* 821,875
45,000 International Business Machines Corp 4,699,688
85,000 Owens Corning 2,624,375
25,000 Rockwell International Corp 1,512,500
15,000 Tenneco Inc 616,875
30,000 United Technologies Corp 2,679,375
-------------
20,870,001
-------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
Metals and Mining - 1.5%
5,000 Alcan Aluminum Ltd 155,313
35,000 Allegheny Teledyne Inc 949,375
50,000 Amcol International Corp 712,500
150,000 Philip Services Corp* 1,434,375
15,000 Placer Dome Inc 193,125
-------------
3,444,688
-------------
Oil and Gas - 6.5%
17,500 Amerada Hess Corp 1,037,969
15,000 Cabot Oil & Gas Corp, Class A 315,000
5,000 Dresser Industries Inc 223,438
50,000 EEX Corp* 428,125
40,000 Enron Oil & Gas Co 855,000
50,000 Gulf Canada Resources Ltd* 293,750
50,000 Lasmo Plc ADR 678,125
20,000 Mitchell Energy Class A 545,000
40,000 Mitchell Energy Class B 1,097,500
10,000 Mobil Corp 724,375
105,000 Occidental Petroleum Corp 2,684,063
5,206 Texaco Inc 290,560
35,000 Union Texas Petroleum Holdings Inc 706,563
40,000 Unocal Corp 1,507,500
75,000 USX - Marathon Group 2,592,188
50,000 Westcoast Energy Inc 1,262,500
-------------
15,241,656
-------------
Paper and Allied Products - 1.1%
10,000 Abitibi-Consolidated Inc 143,125
35,000 Fort James Corp 1,588,125
17,500 Weyerhaeuser Co 873,906
-------------
2,605,156
-------------
Pharmaceuticals - 2.1%
10,000 Allergan Inc 350,000
5,000 Glaxo Wellcome Plc ADR 271,563
35,000 Lilly (Eli) and Co 2,303,438
25,000 Medpartners Inc* 300,000
35,000 Mylan Laboratories Inc 713,125
22,755 PharMerica Inc* 295,815
10,000 Smithkline Beecham PLC 618,750
-------------
4,852,691
-------------
Primary Processing - 0.4%
10,000 Du Pont (E I) De Nemours & Co Inc 613,125
20,000 Intermet Corp 395,000
-------------
1,008,125
-------------
Real Estate - 2.6%
25,000 Boston Properties Inc 850,000
25,000 Crown American Realty Trust 231,250
5,000 Equity Residential Properties Trust 239,688
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
Real Estate - continued
100,000 JP Realty Inc 2,512,500
50,000 Summit Properties Inc 1,012,500
25,000 United Dominion Realty Trust Inc 350,000
35,000 Walden Residential Properties Inc 866,250
-------------
6,062,188
-------------
Refining - 0.2%
25,000 Quaker State Corp 378,125
-------------
Retail Trade - 5.6%
25,000 Costco Co Inc* 1,221,875
75,000 Federated Department Stores* 3,515,625
5,000 Saks Holdings Inc * 130,625
75,000 Sears Roebuck & Co 3,979,688
50,000 Toys R Us Inc* 1,312,500
65,000 Wal-Mart Stores Inc 3,010,313
-------------
13,170,626
-------------
Services - 3.6%
15,000 Hilton Hotels Corp 447,188
25,000 Manpower Inc 1,054,688
25,000 Ogden Corp 687,500
5,000 Time Warner Inc 337,500
230,000 Waste Management Inc 5,750,000
25,000 Waste Management International Plc* 151,563
-------------
8,428,439
-------------
Technology - 7.3%
32,500 Avnet Inc 2,071,875
50,000 Data General Corp* 1,031,250
72,500 Digital Equipment Corp* 4,127,969
55,000 Electronics for Imaging Inc* 1,213,438
62,500 Information Resources Inc* 875,000
20,000 Intel Corp 1,793,750
75,000 Storage Technology Corp* 5,118,750
12,500 Xerox Corp 1,108,594
-------------
17,340,626
-------------
Telecommunications - 6.4%
7,500 AT&T Corp 456,563
50,000 CBS Corporation 1,546,875
40,000 Cox Communications Inc* 1,542,500
85,000 GTE Corp 4,600,625
22,500 MCI Communications Corp 1,075,781
12,500 SBC Communications Inc 945,313
35,000 US West Inc* 1,822,188
100,000 US West Media Group 3,218,750
-------------
15,208,595
-------------
Tobacco - 0.3%
47,500 Imperial Tobacco Group Plc 650,156
-------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
Transportation - 2.8%
12,500 America West Holdings Corp, Class B* 310,156
10,000 AMR Corp* 1,265,625
50,000 Canadian Pacific Ltd 1,428,125
7,500 Delta Air Lines Inc 847,969
15,000 Ryder System Inc 550,313
35,000 Sabre Group Holdings Inc* 1,155,000
15,000 US Airways Group Inc* 949,688
-------------
6,506,876
-------------
Utilities - 5.3%
25,000 Calpine Corp* 396,875
40,000 Duke Energy Co 2,222,500
20,000 Energy Group Plc 1,028,750
35,000 Houston Industries Inc 905,625
100,000 Niagara Mohawk Power Corp* 1,281,250
5,000 Pacific Corp 120,938
90,000 Texas Utilities 3,639,375
25,000 TransCanada Pipeline Ltd 564,063
75,000 Unicom Corp 2,404,670
-------------
12,564,046
-------------
TOTAL COMMON STOCKS (Cost $121,343,480) 198,438,591
-------------
PREFERRED STOCKS - 0.6%
Metals and Mining - 0.2%
25,000 Freeport-McMoran Corp Preferred 556,250
-------------
Primary Processing - 0.0%
500 Armco Inc Convertible Preferred $3.625 24,000
-------------
Transportation - 0.4%
16,500 Navistar International Corp Preferred $6.00 836,344
-------------
TOTAL PREFERRED STOCKS (Cost $1,756,758) 1,416,594
-------------
Par Value DEBT OBLIGATIONS - 14.5%
Banking and Financial Services - 0.5%
$ 99,101 Citicorp, Variable Rate Note, 6.50% due 5/1/04 99,276
1,000,000 General Motors Acceptance Corp, 5.50% due 12/15/01 973,510
-------------
1,072,786
-------------
Food and Beverage - 0.6%
500,000 Anheuser-Busch Cos Inc, 7.10% due 6/15/07 519,970
130,000 Anheuser-Busch Cos Inc, 8.50% due 3/1/17 134,477
750,000 General Foods Corp, 7.00% due 6/15/11 748,493
-------------
1,402,940
-------------
Manufacturing - 0.5%
1,250,000 International Business Machines Corp, 6.50% due 1/15/28 1,220,588
-------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
Real Estate - 0.8%
$ 1,750,000 HMH Properties Inc, 9.50% due 5/15/05 1,859,375
-------------
Technology - 1.5%
2,500,000 Digital Equipment Corp, 7.125% due 10/15/02 2,546,708
1,000,000 VLSI Technology Inc, 8.25% due 10/01/05 1,013,750
-------------
3,560,458
-------------
Transportation - 1.0%
1,000,000 AMR Corp, 9.00% due 8/1/12 1,186,650
1,000,000 United Air Lines Inc, 9.13% due 1/15/12 1,174,720
-------------
2,361,370
-------------
U.S. Government - 9.6%
6,000,000 U.S. Treasury Bond, 11.13% due 8/15/03 7,524,360
1,250,000 U.S. Treasury Bond, 10.75% due 8/15/05 1,628,325
2,750,000 U.S. Treasury Bond, 7.25% due 5/15/16 3,137,998
7,500,000 U.S. Treasury Note, 4.75% due 8/31/98 7,471,875
1,250,000 U.S. Treasury Note, 7.75% due 2/15/01 1,323,236
1,500,000 U.S. Treasury Note, 6.625% due 5/15/07 1,597,965
-------------
22,683,759
-------------
TOTAL DEBT OBLIGATIONS (Cost $32,299,844) 34,161,276
-------------
SHORT-TERM INVESTMENT - 0.7%
1,760,000 State Street Bank and Trust Co Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value of
$1,760,587 and an effective yield of 4.00%,
collateralized by a U.S. Treasury Note, with a rate of
5.875% due 08/31/99
with an aggregate market value of $1,799,268 (Cost $1,760,000). 1,760,000
-------------
TOTAL INVESTMENTS - 99.8%
(Cost $157,160,082) 235,776,461
Other Assets and Liabilities (net) - 0.2% 509,349
-------------
TOTAL NET ASSETS - 100.0% $ 236,285,810
============
</TABLE>
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
Variable Rate Notes - The rates shown on variable
rate notes are the current interest rates at
February 28, 1998, which are subject to
change based on the terms of the security,
including varying reset dates.
* Non-income producing security.
6 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at value (cost $157,160,082) (Note 1) $ 235,776,461
Cash 11,578
Dividends and interest receivable 838,586
Receivable for investments sold 1,038,953
Receivable for Fund shares sold 22,300
------------------
Total assets 237,687,878
------------------
Liabilities:
Payable for investments purchased 525,731
Payable for Fund shares repurchased 650,145
Payable to affiliate for management fee (Note 2) 159,110
Accrued expenses and other liabilities 67,082
------------------
Total liabilities 1,402,068
------------------
Net Assets (equivalent to $17.78 per share based
on 13,286,924 shares outstanding, unlimited shares authorized) $ 236,285,810
==================
Net Assets consist of:
Paid-in capital $ 149,625,042
Accumulated undistributed net investment income 404,381
Accumulated undistributed net realized gain 7,640,008
Net unrealized appreciation 78,616,379
------------------
Net assets $ 236,285,810
==================
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of withholding taxes of $42,926) $ 3,678,075
Interest 2,271,970
--------------
Total income 5,950,045
--------------
Expenses:
Management fee (Note 2) 1,967,796
Custodian and transfer agent fees 143,247
Audit fees 34,838
Registration fees 19,772
Legal fees 6,007
Trustees fee (Note 2) 1,916
Miscellaneous 9,843
--------------
Total expenses 2,183,419
Less: expenses waived or borne by Manager (Note 2) (108,905)
--------------
Net expenses 2,074,514
--------------
Net investment income 3,875,531
--------------
Realized and unrealized gain (loss):
Net realized gain on investments 33,485,867
Change in net unrealized appreciation (depreciation)
on investments 18,746,336
--------------
Net realized and unrealized gain 52,232,203
--------------
Net increase in net assets resulting from operations $ 56,107,734
==============
8 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 3,875,531 $ 3,995,498
Net realized gain 33,485,867 9,036,632
Change in net unrealized appreciation (depreciation) 18,746,336 19,894,742
---------------- ----------------
Net increase in net assets resulting from operations 56,107,734 32,926,872
---------------- ----------------
Distributions to shareholders from:
Net investment income (4,850,393) (3,383,491)
Net realized gains (30,617,038) (6,758,143)
---------------- ----------------
(35,467,431) (10,141,634)
---------------- ----------------
Fund share transactions: (Note 5)
Proceeds from sale of shares 21,012,484 22,372,007
Net asset value of shares issued to shareholders
in payment of distributions declared 33,903,533 9,313,111
Cost of shares repurchased (46,639,378) (24,339,781)
---------------- ----------------
Net increase in net assets resulting
from Fund share transactions 8,276,639 7,345,337
---------------- ----------------
Total increase in net assets 28,916,942 30,130,575
Net assets:
Beginning of period 207,368,868 177,238,293
---------------- ----------------
End of period (including accumulated undistributed
net investment income of $404,381 and
$1,473,363, respectively) $ 236,285,810 $ 207,368,868
================ ================
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 16.31 $ 14.52 $ 11.99 $ 12.08 $ 11.37
----------- ----------- ----------- ------------ ------------
Income from investment operations:
Net investment income 0.32 0.33 0.31 0.37 0.29
Net realized and unrealized gain 4.13 2.27 3.04 0.46 1.40
----------- ----------- ----------- ------------ ------------
Total from investment operations 4.45 2.60 3.35 0.83 1.69
----------- ----------- ----------- ------------ ------------
Less distributions to shareholders:
From net investment income (0.40) (0.27) (0.29) (0.37) (0.37)
From net realized gains (2.58) (0.54) (0.53) (0.55) (0.61)
----------- ----------- ----------- ------------ ------------
Total distributions (2.98) (0.81) (0.82) (0.92) (0.98)
----------- ----------- ----------- ------------ ------------
Net asset value, end of period $ 17.78 $ 16.31 $ 14.52 $ 11.99 $ 12.08
=========== =========== =========== ============ ============
Total Return (a) 28.97% 18.40% 28.54% 7.38% 15.14%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 236,286 $ 207,369 $ 177,238 $ 117,920 $ 101,165
Net expenses to average
daily net assets 0.95% 0.95% 1.05% 1.10% 1.10%
Net investment income to average
daily net assets 1.77% 2.10% 2.42% 2.51% 2.42%
Portfolio turnover rate 28% 27% 32% 40% 49%
Average broker commission rate (b) $ 0.0662 $ 0.0556 N/A N/A N/A
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.01 $ 0.01 $ - $ - $ 0.01
</TABLE>
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for
security trades on which commissions are charged.
10 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC ("the Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which will issue a separate series of shares.
The Fund seeks long-term capital growth primarily through investment in
equity securities.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term debt obligations with a remaining maturity of sixty days or less
are valued at amortized cost which approximates market value. Other assets
and securities for which no quotations are readily available are valued at
fair value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. In connection with transactions in repurchase
agreements, if the seller defaults and the value of the collateral declines
or if the seller enters insolvency proceedings, realization of collateral
by the Fund may be delayed or limited.
11
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign interest and dividend income are withheld in
accordance with the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
return of capital dividends, and differing treatments for amortization of
discount on bonds and partnership interests.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
---------------------------- ------------------------ ---------------
$(94,120) $94,155 $(35)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
12
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds.
2. Management fee and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .90% of
average daily net assets. GMO has agreed to waive a portion of its fee and
bear other expenses until further notice to the extent that the Fund's
annual expenses (including the management fee but excluding brokerage
commissions and transfer taxes) exceed .95% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $1,916. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
-------------------- ---------------------
<S> <C> <C>
U.S. Government securities $ 5,587,383 $ 91,617
Investments (non-U.S. Government securities) 54,787,626 81,390,660
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
------------------------- --------------------------- ------------------------- ----------------------
<S> <C> <C> <C>
$157,895,749 $80,609,075 $2,728,363 $77,880,712
</TABLE>
13
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
4. Principal shareholder
At February 28, 1998, 39% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
---------------------------- ----------------------------
<S> <C> <C>
Shares sold 1,196,670 1,487,108
Shares issued to shareholders in reinvestment
of distributions 2,012,397 632,940
Shares repurchased (2,636,304) (1,610,011)
----------------- ------------------
Net increase 572,763 510,037
Fund shares:
Beginning of period 12,714,161 12,204,124
----------------- ------------------
End of period 13,286,924 12,714,161
================= ==================
</TABLE>
14
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For fiscal year ended February 28, 1998, all of the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 72.18% distributions as net capital gain dividends.
15
<PAGE>
GMO Pelican Fund
(A Series of the GMO Trust)
Portfolio Manager
- -----------------
Mr. Richard Mayo is responsible for the management of the GMO Pelican Fund. Mr.
Mayo has been a portfolio manager with GMO since its founding in 1977 and began
his career in the last 1960's.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The market's move the last year can only be described as awesome. As I write
-------
this and as we start the new fiscal year, the stock market is trying to reach
the 9000 level on the Dow Jones Average and now some forecasters are saying the
10000 goal will be reached before the year 2000. This has been one of the great
markets of the century. The conditions for this move in stocks (up 144% since
December 1994) have been an almost perfect investing environment. Inflation has
steadily declined and is now less than 2%; interest rates are now below 6% and
corporations have steadily improved profitability and now are earning record
returns on capital.
We have achieved good returns in this market phase but in hindsight we have not
fully exploited the opportunities in this environment. We are somewhat out of
sync with other investor's view of risk. In our view, risks have been rising.
The turmoil in Southeast Asia will certainly add to economic instability in the
world and depress economic growth in the future. This will limit the ability of
corporations to expand their profitability that has increased so robustly in
this cycle.
We have also been influenced by our belief that we may be near the end of the
rise in profit margins that have been dramatic in this cycle. After tax profit
margins have reached 6.4% up from the low of 3.9%. The dilemma is that the
present level of the stock market requires continued increases. According to our
valuation formula investors are expecting earnings to grow 8.0-9.0% annually for
the next ten years (assuming present interest rates). If revenues grow at the
present rate of 5.0%, profit margins must rise to 7.3%. We think this is
unlikely for a series of reasons. Restructuring and downsizing benefits may have
been fully exploited. The favorable cost environment, specifically labor
expenses, may be shifting unfavorably (see the graph below). The strength of the
dollar reduces the value of foreign profits, and the economic dislocations in
Southeast Asia, as well as the anemic growth in Japan, are beginning to impact
the profitability of more U.S. companies. IBM, Motorola, Intel and Compaq are
just a few of the companies that have discussed the negative impact. There will
be more.
<PAGE>
U.S. Employment Cost Index
(% Year-Over-Year)
[A LINE GRAPH DEPICTING THE PERCENTAGE GROWTH OF U.S. EMPLOYMENT COST INDEX FROM
1980 TO 1998 APPEARS HERE.]
We think profit growth this year will be less than 5.0%. Our skepticism seems
justified when you look at the chart below.
S&P 500 Bottom Up Operating EPS Estimates
[A LINE GRAPH DEPICTING THE S&P BOTTOM UP OPERATING EPS ESTIMATES FROM JUNE 1997
TO MARCH 1998 APPEARS HERE.]
Wall Street analysts have steadily reduced the expectations and now expect
corporate profits to be up only 2.0% in the first quarter. This has alarmed
investors because many expect the first half shortfall to be made up in the
second half.
<PAGE>
If this is not achieved this could be troublesome for the market. Presently, if
we used the Federal Reserve market model, stocks are approximately 18%
overvalued and any doubts about profitability may create reactions in the market
similar to the sell off in August and October of 1997.
FED'S S&P 500 VALUATION MODEL*
(percent)
[A LINE GRAPH DEPICTING THE FEDERAL RESERVE S&P 500 VALUATION MODEL FROM 1980 TO
1998 APPEARS HERE.]
We have tried to build a portfolio that does better in a difficult environment
and our experiences in August and October were encouraging. Our return of -1.64%
was a 3.96% gain over the S&P's 5.60% decline in August. This was due mainly to
the recovery in small stocks that started in August and continued to the first
of October. At that point we started reducing this segment due to the major
advances of some of the stocks, but also due to the fear that smaller companies
would be penalized in a more difficult market because of their lower liquidity.
<PAGE>
Pelican Fund
As of February 28, 1998
Pelican
Fund* S&P 500
----- -------
RISK
Beta 0.93 1.00
% of LT Debt to Capital 44% 42%
LIQUIDITY
Market Cap ($000) 25,288 61,300
PROFITABILITY
Return on Equity 14.4% 19.0%
Return on Capital 7.8% -
EBITDA Margin 16.6% 16.9%
Net Profit Margin 5.4% 6.5%
Earnings 5 Yr Hist Gr Rate 21% 15%
VALUATION
Price/Earnings Trailing 4 Qtrs 18.9 23.3
Price to Cashflow 9.8 13.7
Price to Book 2.7 4.0
Price to Sales 1.06 1.66
Dividend Yield 1.8% 1.5%
* Equally Weighted
Looking at the characteristics of the present portfolio you can see we have
maintained a risk profile (measured by beta) that is less than the market. In
addition we have gravitated to stocks with low expectations to avoid the penalty
of disappointments. We are expecting improvement in our selections but favorable
performance may require some patience - something investors don't have at the
moment. In other words, at this stage of the market we think there is more to
gain by investing in stocks that can still improve long term returns on capital
and possibly experience a positive valuation change, rather than invest in those
companies that have improved and the stock price reflects the change without a
discount for some cyclical erosion.
In the chart you can also see we own stocks with market caps significantly below
average. For the last year we have maintained our bias against the "Mega Fifty"
stocks. Very simply, we think their valuations are at extreme levels and are
unlikely to produce good returns going forward. Our view has not been shared by
the majority of investors and they have continued to do better than the market.
The fifty largest stocks exceeded the S&P by 5.5% in 1997, and in 1998 through
February they are 1.5% ahead. Our fears are expressed in the charts below. The
out-performance is demonstrated in the top chart and the valuation measures in
the charts below show the very high levels versus the past. These stocks are
perceived as safe havens but given their lofty valuations we don't think they
will give the protection expected in a market sell off. They didn't in August
and October of last year.
<PAGE>
Exhibit 3. The Biggest Have Outperformed For A Number Of Years
Biggest 50 Stocks/Large-Cap Universe--
Cumulative Relative Performance
[LINE GRAPH APPEARS HERE]
Source: Prudential Securities Inc.
Price/Sales
[LINE GRAPH APPEARS HERE]
Source: Compusheet; Prudential Securities Inc.
Price/Cash Flow
[LINE GRAPH APPEARS HERE]
Source: Compusheet; Prudential Securities Inc.
Return On Equity
(ROE)
[LINE GRAPH APPEARS HERE]
Source: Compusheet; Prudential Securities Inc.
We hope to make money with an eclectic portfolio that excludes very overvalued
areas (the Mega Fifty) and sectors that are experiencing profit declines -
segments of technology and major energy companies. We can't find any sectors
that are significantly undervalued comparable to last year. At the beginning of
1997 we were buying all the cable TV stocks thinking they were 30-40%
undervalued, adding to our small stock exposure, and accumulated electric
utilities and telephone companies into the second quarter. The cable TV stocks
have doubled in the last 12 months. Small stocks, the utilities and telephone
companies underperformed for the year but each had a quarter of major
outperformance; small stocks in the third quarter and telephone and utility
stocks were up 17% vs. the S&P gain of 2.87%. Due to these price moves we have
cut back in these areas and in technology as well. The technology sector
outperformed the group (i.e., Microsoft, Cisco and Dell Computer) and we took
profits aggressively as our concerns about deteriorating profitability were
reinforced by negative earnings estimate revisions caused by slowing final
demand aggravated by the major exposure to Southeast Asia.
<PAGE>
With the funds generated from these profits we have responded opportunistically.
We are waiting for good risk reward situations to present themselves to add to
good values presently in the portfolio. Waste Management Inc. was a major
frustration in the last year. We were too optimistic about its potential
profitability improvement and getting a new chief executive proved troublesome.
First they hired the former president of Sprint. Unfortunately he left after
three months so for five months the company has been led by an interim CEO, a
man with excellent capabilities, but the market required more certainty. We
stayed with the investment believing margins that were 40% below the top tier in
the industry, could be improved by a new and motivated management. The stock
sold off dramatically in October and January and each time we added to the
position. This poor performance cost the portfolio 1.5% relatively. Patience was
rewarded in March. USA Waste, the most profitable waste services company has
agreed to acquire Waste Management Inc. and the stock has rallied 25%,
recapturing half of last year's performance.
Another sector ignored last year was retail. For instance Federated Department
Stores was ignored in the first half providing an opportunity to buy the stock
at 14 times earnings (the market at the time was 20 times earnings) with no hint
of profit difficulties. A more controversial opportunity occurred in October
when Sears announced it was experiencing a dramatic increase in credit card
charge offs. The stock, which peaked at $65.00 per share in early summer dropped
as low as $40.00 per share in October. This allowed us the opportunity to buy
the stock at 15 times a worst case scenario, which now seems to be an
exaggerated fear. The stock has rebounded recently to $50.00 per share. More
recently Toys-R-Us declined precipitously and reduced earnings expectations. We
responded similarly to the Sears situation, encouraged by the company's
announced $1 billion stock buyback. The Toys-R-Us situation will probably not be
as good as Sears and Federated, but the risk-reward at its lows looked very
attractive.
Another success in the past year was Digital Equipment. We had bought the stock
earlier but were convinced to add significantly to the position when the stock
traded down to $25.00 per share. Our analysis suggested the company's assets
were worth at least $50.00 per share. In December Compaq confirmed our analysis
by announcing a merger worth $60.00 per share at the time.
I have mentioned these examples because they reflect the types of situations we
are trying to find today to put in the portfolio, which are low expectation
opportunities where perceptions are excessively negative. The chances of
improvement in profitability have risen (without paying for it) and the value of
the companies' assets may be worth more to a strategic buyer limiting the
downside risk.
Data General is an example like Digital Equipment, and Occidental Petroleum
could attract the attention of a larger oil company that is struggling to grow
revenues in an environment of declining oil prices. Listed below are the major
additions or increases in the last six months and they are opportunities created
by the rotational aspects of the market. That is, if it appears not to be a
short-term performer, sell it and go to where the action is.
<PAGE>
Federated Department Stores
Sears Roebuck
Corning
Occidental Petroleum
Unicom
Stewart & Stevenson
Our experience to date is that good investments are created and interest can
shift quickly. A great example is Electronics for Imaging. The stock in 1997
went from $52.00 to $14.00 (earnings were very disappointing but this was due to
an inventory adjustment by its customers). The inventory shift is almost over
and the stock has doubled in three months.
We will keep looking for opportunities but think they will be more limited so we
will concentrate the portfolio in few positions. This has and will create more
volatility in month to month relative performance particularly when the major
market cap stocks make a major move like January to mid February. We fear this
less going forward because the market has obviously broadened in March and good
values with potential catalysts or favorable news are clearly doing well in the
present market phase. However, risk must not be ignored. The concentration of
1997 may erode in 1998 giving us a better opportunity for picking stocks.
We will respond opportunistically and hope to deliver the best risk adjusted
performance. We feel that thinking about risk in the future will benefit
portfolio returns. We were encouraged recently by an analysis done by Business
Week which picked the Pelican Fund for the A team of risk adjusted results. We
hope to stay there.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Pelican Fund and the S&P 500 Index
As of February 28, 1998
- ------------------------------------------
Average Annual Total Return
- ------------------------------------------
Since
Inception
1 Year 5 Year 5/31/89
- ------------------------------------------
Class III 29.0% 19.7% 15.3%
- ------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Pelican Fund S&P 500 Index
- ---- ---------------- -------------
5/31/89 $10,000 $10,000
2/28/90 $9,931 $10,617
2/28/91 $10,743 $12,174
2/29/92 $12,380 $14,120
2/28/93 $14,098 $15,625
2/28/94 $16,232 $16,927
2/28/95 $17,430 $18,173
2/29/96 $22,618 $24,478
2/28/97 $26,824 $30,882
2/28/98 $34,595 $41,691
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders
of GMO Global Hedged Equity Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Hedged Equity Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUNDS - 93.3%
United States - 93.3%
2,945,382 GMO Core Fund 58,878,192
866,061 GMO Emerging Markets Fund 8,279,540
925,419 GMO Evolving Countries Fund * 7,967,862
2,457,043 GMO International Core Fund 57,003,401
324,966 GMO International Small Companies Fund 3,971,090
574,921 GMO REIT Fund 7,427,979
620,765 GMO Small Cap Growth Fund 7,622,992
440,959 GMO Small Cap Value Fund 8,060,732
-----------------
159,211,788
-----------------
TOTAL MUTUAL FUNDS (Cost $166,000,283) 159,211,788
-----------------
STOCK AND EQUIVALENTS - 0.1%
Hong Kong - 0.0%
11,703 Johnson Electric Holdings Ltd 41,618
-----------------
Italy - 0.0%
12,500 Grassetto SPA (b) -
-----------------
Malaysia - 0.0%
9,000 Malaysian Resources Corp 6,098
-----------------
United Kingdom - 0.0%
7,847 Amstrad Plc 4,910
8,000 Costain Group Plc * 3,954
1,115,129 Signet Group * -
17,870 Viglen Technology Plc * 10,004
17,870 Viglen Technology Plc Entitlement Letters -
-----------------
18,868
-----------------
United States - 0.1%
1,300 Pennzoil Co 87,019
-----------------
TOTAL STOCK AND EQUIVALENTS (Cost $155,218) 153,603
-----------------
DEBT OBLIGATIONS - 6.0%
United Kingdom - 0.0%
GBP 29,128 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 47,959
GBP 7,684 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 12,652
-----------------
60,611
-----------------
U.S. Government - 3.1%
$ 5,250,000 U.S. Treasury Note, 5.50% due 11/15/98 (a) 5,249,180
-----------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value ($) Description Value ($)
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
U.S. Government Agency - 2.9%
5,000,000 Student Loan Marketing Association, 6.05% due 10/26/09 4,979,688
----------------
TOTAL DEBT OBLIGATIONS (Cost $10,305,339) 10,289,479
----------------
SHORT-TERM INVESTMENTS - 2.2%
Cash Equivalents - 0.9%
1,500,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 1,500,000
----------------
U.S. Government - 1.3%
2,350,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 2,245,854
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,747,806) 3,745,854
----------------
TOTAL INVESTMENTS - 101.6%
(Cost $180,208,646) 173,400,724
Other Assets and Liabilities (net) - (1.6%) (2,695,055)
----------------
TOTAL NET ASSETS - 100.0% $ 170,705,669
================
</TABLE>
Notes to the Schedule of Investments:
GBP - British Pound
(a) This security is held as collateral for open futures
contracts.
(b) Bankrupt issuer.
* Non-income producing security. A dividend has not been
declared for the twelve months ended February 28, 1998.
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 28, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $180,208,646) (Note 1) $ 173,400,724
Foreign currency, at value (cost $406,404) (Note 1) 400,975
Cash 92,468
Dividends and interest receivable 113,672
Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,621,533
Receivable for variation margin on open futures contracts (Notes 1 and 6) 60,056
Foreign withholding taxes receivable 119,959
Receivable for expenses waived or borne by Manager (Note 2) 77,522
---------------
Total assets 175,886,909
---------------
Liabilities:
Payable for open swap contracts (Notes 1 and 6) 4,121,031
Payable for Fund shares repurchased 714,919
Payable for open forward foreign currency contracts (Notes 1 and 6) 178,780
Payable to affiliate for (Note 2):
Management fee 86,022
Shareholder service fee 2,210
Accrued expenses 78,278
---------------
Total liabilities 5,181,240
---------------
Net assets $ 170,705,669
===============
Net assets consist of:
Paid-in capital $ 190,539,226
Distributions in excess of net investment income (1,571,288)
Distributions in excess of net realized gain (876,658)
Net unrealized depreciation (17,385,611)
---------------
$ 170,705,669
===============
Net assets attributable to Class III Shares $ 170,705,669
===============
Shares outstanding - Class III 19,571,340
===============
Net asset value per share - Class III $ 8.72
===============
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 28, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $275,665) $ 3,277,634
Dividends from investment company shares 2,449,297
Interest (including security lending income of $26,087) 2,435,206
-----------------
Total income 8,162,137
-----------------
Expenses:
Management fee (Note 2) 1,509,937
Custodian fees 376,553
Audit fees 41,139
Transfer agent fees 28,203
Legal fees 13,598
Registration fees 6,500
Trustees fee (Note 2) 2,196
Stamp duties and transfer taxes 423
Miscellaneous 2,288
Fees waived or borne by Manager (Note 2) (850,401)
-----------------
1,130,436
Shareholder service fee - Class III (Note 2) 217,705
-----------------
Net expenses 1,348,141
-----------------
Net investment income 6,813,996
-----------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 39,032,089
Realized gain distributions from investment company shares 15,458,182
Closed futures contracts (25,202,111)
Closed swap contracts (8,619,045)
Foreign currency, forward contracts and foreign currency related
transactions (2,891,897)
-----------------
Net realized gain 17,777,218
-----------------
Change in net unrealized appreciation (depreciation) on:
Investments (25,158,057)
Open futures contracts (4,744,737)
Open swap contracts 232,859
Foreign currency, forward contracts and foreign currency related
transactions 1,995,454
-----------------
Net unrealized loss (27,674,481)
-----------------
Net realized and unrealized loss (9,897,263)
-----------------
Net decrease in net assets resulting from operations $ (3,083,267)
=================
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------- -------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 6,813,996 $ 6,639,580
Net realized gain 17,777,218 21,603,070
Change in net unrealized appreciation (depreciation) (27,674,481) (21,597,390)
------------------ ---------------
Net increase (decrease) in net assets resulting from operations (3,083,267) 6,645,260
------------------ ---------------
Distributions to shareholders from:
Net investment income - Class III (6,516,906) (5,664,462)
Net realized gains - Class III (19,721,985) -
In excess of net realized gains - Class III (7,564,405) -
------------------ ---------------
(33,803,296) (5,664,462)
------------------ ---------------
Net share transactions - Class III (Note 5) (89,109,720) (87,212,602)
------------------ ---------------
Total decrease in net assets (125,996,283) (86,231,804)
Net assets:
Beginning of period 296,701,952 382,933,756
------------------ ---------------
End of period (including distributions in excess of
net investment income of $1,571,288 and $927,940,
respectively) $ 170,705,669 $ 296,701,952
================== ===============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-------------------------------------------------------------
1998 1997 1996 1995*
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.69 $ 10.64 $ 10.12 $ 10.00
---------- ---------- ---------- ---------
Income from investment operations:
Net investment income 0.35 0.24 0.21 0.11
Net realized and unrealized gain (loss) (0.52) 0.01 0.55 0.08
---------- ---------- ---------- ---------
Total from investment operations (0.17) 0.25 0.76 0.19
---------- ---------- ---------- ---------
Less distributions to shareholders:
From net investment income (0.35) (0.20) (0.24) (0.07)
From net realized gains (1.05) - - -
In excess of net realized gains (0.40) - - -
---------- ---------- ---------- ---------
Total distributions (1.80) (0.20) (0.24) (0.07)
---------- ---------- ---------- ---------
Net asset value, end of period $ 8.72 $ 10.69 $ 10.64 $ 10.12
========== ========= ========== =========
Total Return (a) (1.63%) 2.34% 7.54% 1.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $170,706 $296,702 $ 382,934 $ 214,638
Net expenses to average
daily net assets 0.58% 0.91%(c) 0.78% 0.92%
Net investment income to average
daily net assets 2.93% 1.99% 2.44% 2.85%
Portfolio turnover rate 277% 463% 214% 194%
Average broker commission rate (b) $ 0.0104 $ 0.0084 N/A N/A
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.04 $ 0.02 $ 0.005 $ 0.006
</TABLE>
* Period from July 29, 1994 (commencement of operations) to February 28,
1995.
** Annualized
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived
during the periods shown.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. The average broker commission
rate will vary depending on the markets in which trades are executed.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .02% of average daily net assets.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks total return consistent with minimal exposure to general
equity market risk, either directly or through investment in other Funds of
the Trust ("underlying Funds"). On August 20, 1998, the Fund began to
invest a substantial portion of its assets in underlying Funds.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bore the same total operating expenses (after the voluntary expense waiver)
as those shares. On August 20, 1997, the Fund revised its voluntary expense
waiver to include certain expenses incurred indirectly by the Fund through
investment in underlying Funds (see Note 2). Effective January 9, 1998,
Class I and Class II shares ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying Funds are valued at their net asset value as reported
on each business day. 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. Unlisted securities for which market
quotations are readily available are valued at the most recent quoted bid
price. Securities which are primarily traded on foreign exchanges are
generally valued at the preceding closing values of such securities on
their respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
7
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings, other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may purchase index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a specified price at a
given date. The Fund may use futures contracts to manage its exposure to
the stock and currency markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required to
deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1998.
8
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1998.
Options
The Fund may write call and put options on securities it owns or in which
it may invest. When the Fund writes a call or put option, an amount equal
to the premium received is recorded as a liability and subsequently marked
to market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
offset against the proceeds or amounts paid on the transaction to determine
the realized gain or loss. If a written put option is exercised, the
premium reduces the cost basis of the securities purchased by the Fund. The
Fund as a writer of an option has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the security
underlying the written option. There is the risk the Fund may not be able
to enter into a closing transaction because of an illiquid market. At
February 28, 1998, there were no outstanding written options.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
9
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. See Note 6 for a summary of open swap agreements as of
February 28, 1998.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States.
10
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and passive foreign investment
company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Distributions in Accumulated
Excess of Net Undistributed
Investment Income Net Realized Gain Paid-in Capital
----------------------- ------------------------- -------------------
($940,438) $758,903 $181,535
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on
11
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
the relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations. In addition, the Fund will also incur fees and expenses
indirectly as a shareholder in the underlying funds. Because the underlying
funds have varied expense and fee levels and the Fund may own different
proportions of underlying funds at different times, the amount of fees and
expenses indirectly incurred by the Fund will vary. (See Note 2).
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .37% of the amount
invested. Prior to June 30, 1997, the premium on cash purchases was .50% of
the amount invested. In the case of cash redemptions, the fee is 1.40% of
the amount redeemed. The Manager may waive the fee on cash redemptions if
it is not necessary to incur costs relating to the early termination of
hedging transactions to meet redemption requests. All purchase premiums and
redemption fees are paid to and are recorded by the Fund as paid-in
capital. These fees are allocated relative to each class' net assets on the
share transaction date. Purchase premiums are included as part of each
class' "shares sold" and redemption fees are included as part of each
class' "shares repurchased", respectively, as summarized in Note 5. For the
year ended February 28, 1998, the Fund received $2,343 in purchase premiums
and no redemption fees. There is no premium for reinvested distributions.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares. A purchase premium of up to 0.10% may be charged on certain
in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .65% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares. The Fund will invest in Class III shares of each
underlying Fund being offered. Like the management fee (as described
below), the shareholder service fee of each class of the Fund's shares will
be waived (but not below zero) to the extent of the indirect shareholder
service fees paid in connection with the Fund's investment in shares of
underlying Funds.
GMO has agreed to waive a portion of its fee (but not below zero) and bear
other expenses until further notice to the extent that the Fund's annual
expenses (including the management fee but
12
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
excluding custody fees, brokerage commissions, certain other transaction
costs (including transfer taxes), shareholder service fees and
extraordinary expenses ("fund expenses")) plus the amount of fees and
expenses (excluding shareholder service fee and fund expenses (as defined
above) incurred indirectly by the Fund through investment in underlying
Funds) exceed .50% of average daily net assets. Because GMO will not waive
the management fees below zero, and because the amount of fees and expenses
incurred indirectly by the Fund will vary, the operating expenses
(excluding shareholder service fees and fund expenses) incurred indirectly
by the Fund through investment in underlying Funds may exceed .50% of the
Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $2,196. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
---------------------- ---------------------
<S> <C> <C>
U.S. Government securities $ 302,077,695 $ 313,850,234
Investments (non-U.S. Government securities) 266,435,906 355,676,538
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------------- ----------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
$182,567,708 $1,989,887 $11,156,871 $9,166,984
</TABLE>
4. Principal shareholders
At February 28, 1998, 42% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
13
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares, including purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
--------------------------------------------- ---------------------------------------------
Class III: Shares Amount Shares Amount
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 58,635 $ 595,622 2,716,101 $ 28,751,811
Shares issued to
shareholders in
reinvestment of
distributions 3,493,801 30,813,859 335,863 3,585,825
Shares repurchased (11,741,685) (120,519,201) (11,267,323) (119,550,238)
-------------------- --------------------- -------------------- --------------------
Net decrease (8,189,249) $ (89,109,720) (8,215,359) $ (87,212,602)
==================== ===================== ==================== ====================
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Short futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
----------------- --------------------- ---------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
341 S&P 500 March 1998 $ 89,555,125 $ (6,718,780)
6 MIB30 March 1998 973,908 (123,148)
8 DAX March 1998 2,074,776 (181,777)
32 TOPIX March 1998 3,232,170 (11,252)
9 HANG SENG March 1998 671,295 (59,273)
21 FT-SE 100 March 1998 4,997,176 (475,682)
13 ALL ORDS March 1998 597,797 (15,539)
17 OMX March 1998 583,483 (12,584)
16 MATIF CAC 40 March 1998 1,803,572 (235,264)
11 IBEX March 1998 639,223 (54,314)
---------------------
$ (7,887,613)
=====================
</TABLE>
At February 28, 1998, the Fund had cash and/or securities to cover any
margin requirements on open futures contracts.
14
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
Buys
<S> <C> <C> <C> <C>
4/17/98 ATS 1,752,850 $ 137,649 $ 149
4/17/98 AUD 1,571,426 1,071,477 54,977
4/17/98 BEF 12,792,375 342,369 (130)
3/6/98 CHF 2,014,320 1,373,074 (13,263)
4/17/98 CHF 3,956,761 2,712,456 (8,044)
3/6/98 DEM 2,841,280 1,565,944 (648)
4/17/98 DEM 6,496,856 3,589,869 (6,911)
4/17/98 DKK 2,036,356 295,028 28
3/6/98 ESP 69,409,400 450,698 (487)
4/17/98 ESP 139,068,000 904,107 (2,300)
4/17/98 FIM 1,121,192 204,065 (435)
3/6/98 FRF 7,731,100 1,269,859 (1,181)
4/17/98 FRF 18,111,701 2,982,479 (12,198)
3/6/98 GBP 1,745,955 2,874,296 14,823
4/17/98 GBP 4,937,196 8,109,851 76,544
4/17/98 HKD 7,828,943 1,010,072 13,072
4/17/98 IEP 46,996 64,030 (970)
3/6/98 ITL 1,422,181,550 794,727 1,608
4/17/98 ITL 2,471,765,950 1,380,518 (2,482)
4/17/98 JPY 528,827,500 4,214,101 (35,899)
4/17/98 MYR 2,605,440 706,872 116,872
3/6/98 NLG 1,851,388 904,670 (898)
4/17/98 NLG 4,108,600 2,013,016 (6,653)
4/17/98 NOK 1,459,809 193,316 (3,684)
4/17/98 NZD 278,024 162,462 5,462
3/6/98 SEK 3,155,589 394,170 4,591
4/17/98 SEK 8,703,750 1,088,659 1,616
</TABLE>
15
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
Buys - continued
<S> <C> <C> <C> <C>
4/17/98 SGD 700,916 432,210 39,210
-------------------
$ 232,769
===================
<CAPTION>
Sales
<S> <C> <C> <C> <C>
4/17/98 ATS 2,567,200 201,599 12,142
4/17/98 AUD 2,261,293 1,541,863 14,269
4/17/98 BEF 18,837,500 504,158 27,524
3/6/98 CHF 2,014,320 1,373,074 26,926
4/17/98 CHF 3,685,526 2,526,518 138,938
8/20/98 CHF 2,014,320 1,402,562 11,294
3/6/98 DEM 2,841,280 1,565,944 34,056
4/17/98 DEM 6,496,856 3,589,869 191,110
8/20/98 DEM 2,841,280 1,581,278 (726)
4/17/98 DKK 2,779,560 402,703 21,702
3/6/98 ESP 69,409,400 450,698 9,302
4/17/98 ESP 139,068,000 904,107 51,227
8/20/98 ESP 69,409,400 453,449 30
4/17/98 FIM 1,645,560 299,503 17,976
3/6/98 FRF 7,731,100 1,269,859 30,141
4/17/98 FRF 18,111,701 2,982,479 165,467
8/20/98 FRF 7,731,100 1,282,111 165
3/6/98 GBP 1,745,955 2,874,296 28,704
4/17/98 GBP 5,369,055 8,819,223 163,418
8/20/98 GBP 1,745,955 2,850,439 (14,746)
4/17/98 HKD 11,700,450 1,509,565 (30,555)
4/17/98 IEP 68,273 93,019 9,623
3/6/98 ITL 1,422,181,550 794,727 14,273
4/17/98 ITL 2,282,743,600 1,274,946 68,634
</TABLE>
16
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
Sales - continued
<S> <C> <C> <C> <C>
8/20/98 ITL 1,422,181,550 $ 794,955 $ (2,247)
4/17/98 JPY 856,180,000 6,822,695 (22,695)
4/17/98 MYR 3,258,200 883,969 28,436
3/6/98 NLG 1,851,388 904,670 20,330
4/17/98 NLG 4,108,600 2,013,016 108,976
8/20/98 NLG 1,851,388 913,720 94
4/17/98 NOK 1,511,600 200,174 15,895
4/17/98 NZD 318,016 185,831 11,402
3/6/98 SEK 3,155,589 394,170 6,830
4/17/98 SEK 8,703,750 1,088,659 63,697
8/20/98 SEK 3,155,589 396,122 (5,105)
4/17/98 SGD 928,690 572,664 (6,523)
-------------------
$ 1,209,984
===================
</TABLE>
Currency Abbreviations:
ATS Austrian Schilling HKD Hong Kong Dollar
AUD Australian Dollar IEP Irish Pound
BEF Belgian Franc ITL Italian Lira
CHF Swiss Franc JPY Japanese Yen
DEM German Mark MYR Malaysian Ringgit
DKK Danish Krona NLG Netherlands Guilder
ESP Spanish Peseta NOK Norwegian Kroner
FIM Finnish Markka NZD New Zealand Dollar
FRF French Franc SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
17
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------------- --------------- ------------------------------------------------------ -------------------
<S> <C> <C> <C>
$ 9,000,000 09/30/98 Agreement with Deutsche Bank AG dated 9/30/97 to pay $ (2,992)
(receive) the notional amount multiplied by the
return on the EAFE Index (including dividends) and
to receive the notional amount multiplied by 6 month
LIBOR adjusted by a specified spread.
15,500,000 05/29/98 Agreement with Swiss Bank Corporation dated 5/30/97 (390,729)
to pay (receive) the notional amount multiplied by
the return on the EAFE Index (including dividends)
and to receive the notional amount multiplied by 12
month LIBOR adjusted by a specified spread.
25,641,923 05/29/98 Agreement with Swiss Bank Corporation dated 5/30/97 (3,727,310)
to pay (receive) the notional amount multiplied by
the return on the EAFE x-Japan Index (including
dividends) and to receive the notional amount
multiplied by 12 month LIBOR adjusted by a specified
spread.
-------------------
Net unrealized depreciation $ (4,121,031)
===================
</TABLE>
18
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- -------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated 54%
of distributions as net capital gain dividends.
The Fund has elected to defer to March 1, 1998 post-October losses of
$5,813,966.
19
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham has been with GMO since its founding in 1977. Mr. Darnell has been with
GMO and involved in portfolio management for more than 16 years. Mr. Berkley has
been with GMO and involved in portfolio management for more than 10 years.
Management Discussion and Analysis of Fund Performances
- -------------------------------------------------------
The Class III shares of the Global Hedged Equity Fund returned -1.63% for the
fiscal year ending February 28, 1998. During that period the Fund's benchmark,
The Salomon 3 Month T-Bill, returned +5.27%.
The Fund's objective is to outperform the Salomon 3 Month T-Bill Index by adding
the alpha (value added) of our U.S. and international equity funds, as well as
the value added of our asset allocation strategy, to a short-term fixed income
return. As of February 28, 1998, the Fund held 44% of its assets in U.S.
equities, 35% in developed international equities and 12% in emerging markets
equities. The remaining 9% of the Fund was invested in U.S. Treasuries and cash
holdings. The equity exposure is fully hedged using EAFE futures and
international equity swaps combined to represent the GMo EAFE-Lite Index, as
well as S&P 500 futures.
In August, the GMO Global Hedged Equity Fund converted into a fund-of-funds by
exchanging its portfolio securities for GMO mutual fund shares of equivalent
value. The purpose of the conversion was to enable the Fund to implement more
effectively its investment strategies. The Fund currently invests in the GMO
Core Fund, GMO REIT Fund, GMO Small Cap Growth Fund, GMO Small Cap Value Fund,
GMO Evolving Countries Fund, GMO Emerging Markets Fund, GMO International Small
Companies Fund and GMO International Core Fund. The conversion does not
represent any change in the investment strategies of the Fund, but only in the
implementation of these strategies.
The GMO Global Hedged Equity Fund's performance for the fiscal year was
negatively impacted by the poor performance of the GMO International Core Fund
relative to EAFE-Lite. For the fiscal year, the GMO International Core Fund
returned 11.7%, trailing the GMO EAFE-Lite Index by 7.1%. Returns for the Fund
relative to the benchmark were negatively impacted by the Fund's value
orientation in a market that favored large, growth-oriented international
stocks.
The emerging markets position also negatively impacted the relative performance
of the GMO Global Hedged Equity Fund. The 12% weight in emerging markets was
hedged half with S&P 500 futures and half with EAFE futures and international
equity swaps. This position reflected the expectation that emerging markets
would outperform richly valued developed equity markets. However, during the
year, developed markets continued to trend upwards, while emerging markets fell
sharply in the wake of the financial collapse in Southeast Asia.
For the fiscal year, the U.S. equity funds as a group returned 34.4%, slightly
underperforming the S&P 500 return of 35.0%. The GMO Core Fund, which accounts
for 72% of the U.S. equity holdings, outperformed the S&P 500 Index by 1.7%.
However, diversification into the GMO Small Cap Value, Small Cap Growth and REIT
Funds was unsuccessful in adding value. The small cap funds did well against
their respective mandates, but lagged the S&P 500 Index, which continued its
record-breaking run.
The 9% Treasury position was enhanced with bond futures for most of the fiscal
year. As interest rate spreads narrowed, this exposure added value for the
period.
Outlook
- -------
We continue to believe that valuation levels of developed equity markets are
high. In the U.S., we are maintaining positions in the GMO Small Cap Value,
Small Cap Growth and REIT Funds which, in our view, have better return potential
than the S&P 500. In out GMO International Core portfolio we are emphasizing
small and value stocks. We are also maintaining a significant exposure to
emerging equity markets, which we expect to rebound from currently depressed
levels. We expect this positioning of our international portfolio to outperform
both GMO EAFE-Lite and the S&P 500 during the current fiscal year.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Global Hedged
Comparison of Change in Value of a $10,000 Investment in
GMO Global Hedged Equity Fund Class III Shares and
the Salomon Brothers 3 Month Treasury Bill Index
As of February 28, 1998
----------------------------------
Average Annual Total Return
----------------------------------
Since
Inception
1 Year 7/29/94
----------------------------------
Class
III -3.6% 2.2%
----------------------------------
[LINE GRAPH APPEARS HERE]
GMO Global Hedged Equity Salomon Brothers 3 Month
Date Fund Class III Shares Treasury Bill Index
- ---------- ------------------------ ------------------------
7/29/94 $9,963 $10,000
2/28/95 $10,155 $10,297
2/29/96 $10,769 $10,882
2/28/97 $11,021 $11,451
2/28/98 $10,811 $12,054
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 37 bp on the purchase and 140 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Class III shares
are a redesignation of the single class of shares that has been offered by the
Fund since inception. Past performance is not indicative of future performance
Information is unaudited.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Foreign Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Foreign Fund at February 28,
1998, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND EQUIVALENTS - 93.9%
Argentina - 0.2%
57,500 YPF SA ADR 1,818,438
------------------
Australia - 3.8%
346,591 Australia and New Zealand Banking Group Ltd 2,384,763
572,816 Broken Hill Proprietary Ltd 5,658,348
2,840,000 Burns Philp & Co Ltd 464,340
501,000 Burswood Ltd 361,785
229,100 Caltex Australia Ltd 733,550
323,232 Capral Aluminum Ltd 682,626
5,674,100 Crown Ltd * 2,705,836
237,472 Dominion Mining Ltd Warrants 12/31/98 * 3,236
494,945 Dominion Mining Ltd * 101,154
690,504 Email Ltd 1,552,339
465,510 Foodland Associated 3,504,272
1,462,358 Goodman Fielder Ltd 2,530,427
3,365,000 Menzies Gold NL * 378,247
3,072,793 MIM Holdings Ltd 1,716,539
296,888 Newcrest Mining Ltd * 398,442
390,000 Oil Search Ltd 757,209
54,000 Orogen Minerals Ltd GDR 144A 1,161,000
4,101,235 Pasminco Ltd 4,556,959
602,001 Pioneer International Ltd 1,742,981
326,990 Qantas Airways Ltd 559,132
616,496 Rothmans Holdings Ltd 3,729,493
661,499 Western Mining Corp Holdings Ltd 2,244,218
529,994 Westpac Banking Corp 3,675,575
511,706 Wills (WD & HO) Holdings Ltd 700,685
------------------
42,303,156
------------------
Austria - 0.4%
42,920 Bank Austria AG (Participating Certificate) 2,531,192
4,613 Oesterreichische Brau Beteiligungs AG 270,244
7,170 Radex-Heraklith AG 288,076
1,991 Universale Bau AG 69,391
4,107 VA Technologie AG (Bearer) 567,084
3,140 Wienerberger Baustoffindustrie AG 606,201
------------------
4,332,188
------------------
Belgium - 2.9%
28,925 Almanij NV 1,660,137
1,109 Bekaert SA 750,485
6,000 CBR Cimenteries NPV 526,962
25,192 Cie Francois De Enterprises 7,027,667
14,350 Credit Commercial Dexia 2,060,945
19,398 Electrabel SA 4,707,096
6,397 Generale Banque NPV 3,026,877
17,305 GIB Holdings Ltd 852,315
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Belgium - continued
5,032 Kredietbank NPV 2,323,908
2,713 Petrofina SA Bruxelles 925,216
1,510 Royale Belge NPV 478,677
24,780 Solvay Et Cie 1,554,538
33,775 Tractebel 3,466,761
715 UCB Cap NPV 2,872,597
------------------
32,234,181
------------------
Brazil - 0.0%
6,439,529 Gerdau SA Preferred 102,563
158,537 Metalurgica Gerdau SA 3,788
2,809,994 Metalurgica Gerdau SA Preferred 87,098
------------------
193,449
------------------
Canada - 0.9%
137,220 Abitibi Consolidated Inc 1,957,324
29,693 Alliance Forest Products Inc Preferred * 588,373
10,200 Alliance Forest Products Inc (c) * 202,115
10,500 Avenor Inc 222,447
12,000 Boliden Ltd Installment Receipt 144A * 30,777
283,000 Boliden Ltd * 725,819
50,000 Burcon Properties Ltd * 518,217
36,700 Burcon Properties Ltd * 380,371
99,149 Cambridge Shopping Centres Ltd 1,034,580
15,000 Cambridge Shopping Centres Ltd * 156,519
82,500 Canadian Hotel Income Properties 547,816
33,500 Canfor Corp 240,101
101,500 Iamgold (International African Mining Gold) * 349,471
116,600 KAP Resources Ltd Class A Warrants 8/5/2000 * 32,772
220,100 KAP Resources Ltd * 290,755
200,000 Meridian Gold Inc * 611,320
633,600 Semi-Tech Class A * 253,769
38,800 St Laurent Paperboard * 440,305
99,000 Tembec Inc Class A * 605,207
24,140 Trizec Hahn Corp (Sub-Voting) 595,379
------------------
9,783,437
------------------
Denmark - 0.0%
12,300 Alm Brand AS Class B 444,473
------------------
France - 8.5%
9,350 Accor SA 2,158,903
34,745 Alcatel Alsthom Cie Generale d'Electricite SA 4,519,118
31,136 Axa SA 3,011,718
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
France - continued
4,788 Axa UAP Certificates 7/1/99 1,494
31,516 Banque Nationale de Paris 1,904,650
46,500 BIC SA 3,685,331
21,046 Bouygues 2,951,642
4,080 Cap Gemini SA 469,023
5,278 Chargeurs International SA 311,952
5,943 Christian Dior 720,275
12,983 Club Mediterranee SA Rights 3/11/98 * 18,869
12,983 Club Mediterranee SA * 963,717
3,200 Colas SA 515,006
7,843 Compagnie Generale d'Industrie et de Participations 3,373,292
6,890 Credit Local de France SA 879,177
16,505 Credit Lyonnais * 1,206,179
7,679 Dollfus-Mieg and Cie * 158,895
108,305 Elf Aquitaine SA 12,325,880
2,871 Elf Gabon 490,346
10,339 Eridania Beghin-Say SA 1,843,931
18,576 Financiere de Paribas SA 1,766,310
45,550 France Telecom SA * 2,207,465
1,739 Gaz Et Eaux 742,522
6,474 Generale Des Eaux 1,018,531
11,021 Generale Des Eaux Warrants 5/2/2001 * 11,040
8,463 Groupe Andre * 931,184
3,038 Groupe Axime * 497,914
17,938 Groupe Danone 3,623,392
2,299 Guyenne Et Gascogne 755,101
5,500 Imetal 684,649
4,389 Labinal SA 1,226,765
12,000 Lafarge Coppee SA 885,429
36,617 Lagardere Groupe 1,328,958
62,365 Lyonnaise Des Eaux 8,224,181
23,310 Michelin SA Class B 1,443,178
4,318 Pathe SA 829,669
33,523 Pechiney SA Class A 1,486,424
23,970 Pernod-Ricard 1,566,705
18,953 Peugeot SA 2,698,567
52,112 Rhone Poulenc SA Class A 2,401,384
6,796 Saint-Gobain 952,004
60,594 Seita 2,646,960
16,483 Sidel (Bearer) 1,142,312
18,755 Societe Generale Paris 2,827,457
15,100 Sommer Allibert 588,700
35,350 SPIE Batignolles 2,200,213
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
France - continued
4,196 Strafor Facom 327,315
6,000 Sylea (Bearer) 708,462
54,656 Thomson CSF 1,884,922
30,344 Total SA 3,328,783
12,602 TV Francaise 1,365,902
9,260 Vallourec 638,091
6,835 Worms et Compagnie SA 426,539
------------------
94,876,426
------------------
Germany - 7.4%
128,500 Bankgesellschaft Berlin AG 2,729,674
61,990 Bayer AG 2,635,365
135,000 Bayerische Hypotheken und Wechsel-Bank AG 2,447,445
11,602 BHF Bank AG 338,838
27,200 Brau und Brunnen * 2,450,585
9,945 Cologne Reinsurance (Registered) 11,891,803
141,000 Commerzbank AG 5,104,670
178,010 Continental AG 4,276,752
26,500 Daimler-Benz 2,165,560
35,500 Deutsche Bank AG 2,437,416
227,000 Deutsche Telekom AG 4,509,354
169,940 Dresdner Bank 7,777,114
3,641 Dyckerhoff AG (Non Voting) 1,015,207
9,800 Holzmann (Philipp) * 2,322,083
3,331 Koelnische Rueckversicherungs-Gesellschaft AG * 3,955,534
161,500 Lufthansa AG * 3,105,855
26,772 Metro AG Class I Preferred 901,374
123,000 Pfeiffer Vacuum Tech Sponsored ADR * 4,182,000
55,000 Rheinmetall AG 1,091,059
16,144 Rheinmetall AG Preferred 284,672
131,860 RWE Preferred 6,187,011
29,000 Siemens AG 1,792,974
5,150 Villeroy and Boch AG * 763,383
2,400 Volkswagen AG 1,577,077
10,600 Volkswagen AG Preferred .79% 5,163,466
4,500 Volkswagen AG Warrants 10/27/98 * 1,537,402
------------------
82,643,673
------------------
Hong Kong - 4.9%
3,237,400 Amoy Properties Ltd 2,738,776
1,277,000 Cheung Kong Holdings 8,947,659
3,255,052 Dairy Farm International 3,906,062
243,000 Goldlion Holdings Ltd 72,971
1,296,327 Great Eagle Holdings Ltd 1,908,702
259,264 Great Eagle Holdings Ltd Warrants 11/30/98 * 22,101
1,894,800 Hang Lung Development Co Ltd 2,777,653
316,500 Henderson Land Development Co Ltd 1,651,482
945,000 HKR International Ltd 707,911
2,788,641 Hong Kong Land Holdings 4,991,667
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Hong Kong - continued
821,900 Hysan Development Co Ltd 1,565,777
28,345 Hysan Development Co Ltd Warrants 4/30/98 * 37
302,000 Jardine International Motor Holdings Ltd 168,699
729,000 Kumagai Gumi Ltd 494,317
83,200 Lai Fung Holdings Ltd * 14,292
4,220,000 Lai Sun Development 1,662,383
1,250,000 Lai Sun Garment International Ltd 678,076
1,050,266 Liu Chong Hing Bank Ltd 1,580,316
1,103,000 National Mutual Asia Ltd 982,977
639,000 New World Development Co Ltd 2,352,147
220,000 Orient Overseas International Ltd 93,768
7,204,073 Regal Hotels International Ltd 1,125,854
128 Sanwa International Ltd * 3,115,649
6,782,620 Semi Tech (Global) Co Ltd 788,422
160,248 Semi Tech (Global) Co Ltd Warrants 7/31/98 * 207
846,500 Swire Pacific Ltd Class A 5,094,853
1,844,500 Swire Pacific Ltd Class B 1,858,198
2,034,500 Wharf Holdings Ltd 4,283,158
638,000 Wheelock & Co Ltd 737,501
183,912 Wing On Co 129,457
758,486 Winsor Industrial Corp Ltd 151,844
429,243 Winsor Properties Holdings Ltd 415,799
------------------
55,018,715
------------------
India - 0.0%
59,007 Mahindra & Mahindra GDR 144A 500,084
------------------
Indonesia - 0.0%
775,720 Dharmala Intiland (Foreign Registered) 28,487
603,500 PT Daya Guna Samudera 419,381
------------------
447,868
------------------
Ireland - 0.5%
476,335 Allied Irish Banks Plc 6,156,642
------------------
Italy - 5.2%
141,409 Assicurazioni Generali SPA 4,038,112
535,792 Banca Commerciale Italiana SPA 2,446,238
59,948 Banca di Legano SPA 348,408
236,958 Banca Toscana 793,855
513,583 Banco Ambrosiano Veneto SPA (Non Convertible) 1,175,290
207,500 Comau Finanziaria SPA 747,925
1,246,464 Credito Italiano 4,785,385
163,232 Danieli and Co SPA (Non Convertible) 732,033
346,322 ENI SPA 2,022,445
30,472 Ericsson SPA 1,626,240
146,530 Falck Acciaierie and Ferriere Lombarde 1,036,670
236,490 Fiat SPA 831,273
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Italy - continued
345,502 Fiat SPA Preferred 677,701
29,074 Fiat SPA (Non Convertible) 60,847
39,570 IFI Istituto Finanziario Preferred 767,319
172,607 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 446,601
627,004 Industriali Riunite SPA * 797,135
237,693 Istituto Mobilaire Italiano 3,314,113
1,336,000 Istituto Nazionale Delle Assicurazioni 3,628,467
160,238 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 743,231
555,315 Italgas SPA 2,113,328
221,428 Magneti Marelli SPA 483,827
74,642 Mediaset SPA 420,251
42,000 Mediobanca SPA 429,517
1,383,702 Montedison SPA 1,428,203
975,630 Montedison SPA (Non Convertible) 735,491
210,955 Montefibre SPA 172,706
456,096 Olivetti and Co SPA * 449,609
46,000 Pagnossin SPA 238,168
194,430 RAS SPA 2,292,589
73,200 Rinascente per l'Esercizio di Grandi Magazzini SPA 674,547
117,157 SAI di Risp 763,719
719,880 Seat SPA di Risp * 187,065
713,947 Seat SPA * 286,066
127,537 Sirti SPA 741,938
1,361,241 Telecom Italia Mobile SPA (Non Convertible) 3,993,694
753,724 Telecom Italia SPA 5,126,056
833,884 Telecom Italia SPA (Non Convertible) 4,047,211
70,931 Toro Assicurazioni 1,282,303
68,306 Unione Cementi Marchino Emiliane e di Augusta-Casale 654,641
159,857 Unione Cementi Marchino Emiliane e di Augusta-Casale
(Non Convertible) 811,144
------------------
58,351,361
------------------
Japan - 19.0%
28,500 Advantest Corp 2,014,605
52,700 AJL Peps Trust Exchangeable Preferred 652,163
41,300 Akita Bank 178,172
117,000 Arisawa Manufacturing 1,333,650
286,000 Asahi Breweries Ltd 3,826,011
149,000 Asahi Glass Co Ltd 895,203
388,000 Bridgestone Corp 8,937,545
253,000 Canon Inc 5,787,778
31,800 Circle K Japan Co Ltd 1,565,709
43,300 Credit Saison Co 1,011,122
172,000 Daikin Industries Ltd 864,561
341,000 Dainippon Ink & Chemicals Inc 1,025,726
151,000 Dainippon Printing Co Ltd 2,569,857
281 East Japan Railway Co 1,327,927
30,100 Exedy Corp 203,716
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
190,000 Fuji Photo Film Co Ltd 7,444,787
89,000 Fujitec Co 542,468
496,000 Fujitsu Ltd 5,575,239
27,000 H I S Co Ltd 606,982
66,000 Hitachi Credit Corp 1,149,371
581,000 Hitachi Ltd 4,359,915
46,312 Hokkaido Electric Power 667,204
371,000 Honda Motor Co Ltd 12,833,610
221 Japan Tobacco Inc 1,625,180
86,350 Kansai Electric Power 1,483,254
281,000 Kao Corp 3,803,610
44,000 Kirin Beverage 832,423
50,400 Kurita Water Industries Ltd 734,077
472,000 Marubeni Corp 1,303,950
126,000 Marui Co Ltd 2,064,593
440,000 Matsushita Electric Industrial Co Ltd 6,408,612
255,000 Matsushita Electric Works Ltd 2,543,339
527,000 Minebea Co Ltd 5,840,260
397,000 Minolta Co Ltd 2,388,348
521,000 Mitsui & Co 3,344,661
26,600 Namco Ltd 642,207
35,350 Nichido Fire & Marine Insurance Co Ltd 215,743
113,000 Nichii Co Ltd 875,699
45,400 Nintendo Co Ltd 4,168,764
31,000 Nippon Broadcasting System 1,496,873
77,700 Nippon Electric Glass Co 990,240
262,000 Nippon Meat Packers Inc 3,442,729
234,000 Nippon Soda Chemical Co Ltd 2,093,090
545,000 Nissho Iwai Corp 1,553,075
20,000 Nitta Corp 204,227
214,000 Obayashi Corp 1,163,762
130,000 Onward Kashiyama Co Ltd 1,852,292
104,000 Orix Corp 7,573,815
34,080 Paris Miki Inc 504,469
326,000 Ricoh Co Ltd 3,483,733
40,000 Rinnai Corp 649,094
109,000 Rohm Co Ltd 10,785,245
304,000 Sanwa Bank Ltd 3,032,059
175,000 Shibusawa Warehouse 537,481
25,000 Shimachu Co 482,862
219,750 Shin-Etsu Chemical Co Ltd 4,835,787
143,000 Shiseido Co Ltd 1,799,810
33,000 Sho Bond Construction Co 707,908
64,000 Showa Corp 378,437
38,300 SMC 3,334,916
124,100 Sony Corp 11,198,765
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
117,000 Sumitomo Electric 1,704,108
357,000 Sumitomo Realty and Development Co Ltd 2,359,653
473,000 Suzuki Motor Corp 5,017,177
47,000 Tachi-S Co Ltd 293,913
92,000 Taisho Pharmaceutical Co Ltd 2,162,907
250,000 Takeda Chemical Industries Ltd 6,926,304
178,000 Tanabe Seiyaku Co Ltd 1,014,486
120,000 TDK Corp 9,166,469
277,000 Terumo Corp 3,902,953
40,000 Tokyo Broadcasting System Inc 516,109
200 Tokyo Electron 7,188
85,000 Tokyo Seimitsu Co Ltd 2,368,400
78,000 Toppan Printing Co Ltd 919,972
101,000 Tsubaki Nakashima Co Ltd 543,656
15,000 Unicharm Corp 534,315
112,000 UNY Co Ltd 1,711,074
230,000 Yamanouchi Pharmaceutical Co Ltd 5,589,330
106,000 Yamatake Honeywell 1,418,032
96,000 Yamato Kogyo Co 775,113
------------------
212,679,869
------------------
Korea - 0.7%
390 Daehan Flour Mill 16,718
114,350 Daewoo Corp 439,754
22,000 Daewoo Securities Ltd Preferred * 45,805
829 Daewoo Securities Ltd * 4,772
9,860 Dongkuk Steel Mill 64,606
67,310 Dongwon Securities Co Preferred 107,168
15,310 Halla Climate Control Corp 211,884
43,886 Hana Bank Sponsored GDR 144A 290,964
7,500 Hankook Tire Manufacturing Co Ltd 180,955
15,069 Hansol Paper Manufacturing Ltd 89,141
41,000 Hyundai Motor Service Co GDR 144A 172,200
68,540 Jinro Ltd Preferred 36,935
250,000 Korea Exchange Bank 474,587
68 Korea Trust * 119,000
126,230 Kyungnam Bank 320,793
10,000 LG Cable & Machinery Ltd 47,152
43,190 LG Electronics Co 650,627
30,000 LG Securities Co Preferred 44,274
12,290 Nhong Shim 438,767
2,580 Pohang Iron & Steel 154,677
121,500 Pusan Bank 241,810
122,300 Samsung Corp 483,808
35,550 Samsung Display Devices 2,068,126
51,036 Samsung Heavy Industries Co Ltd 340,657
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Korea - continued
104,905 Shinhan Bank 499,150
1,040 Shinyoung Securities Preferred 2,898
6,746 Sindoricom Co Ltd 274,715
133 SK Telecom 60,432
6,300 Ssangyong Investment Securities Co Preferred * 5,015
------------------
7,887,390
------------------
Malaysia - 0.2%
374,800 Genting Berhad 1,244,234
315,000 New Straits Times 488,571
257,000 Resorts World Berhad 559,456
------------------
2,292,261
------------------
Mexico - 0.1%
22,300 Desc S.A. de C.V. Sponsored ADR 649,488
8,868 Grupo Financiero Banamex Class L 19,768
569,562 Grupo Financiero Bancomer SA Class B 330,103
------------------
999,359
------------------
Netherlands - 6.1%
137,580 ABN Amro Holdings NV 3,051,583
49,192 Aegon NV 5,599,695
28,061 Akzo Nobel NV 5,693,496
586,358 ASM International NV * 7,146,238
13,661 Bam Groep 1,027,820
35,059 De Boer Unigro NV 1,394,241
65,426 Dordtsche Petroleum 3,426,566
92,660 Elsevier NV 1,742,878
25,000 Endemol Entertainment 574,053
25,939 Fugro NV 795,842
29,331 Gist Brocades NV 945,768
54,225 Hal Trust Class B 1,070,274
64,274 Hal Trust (Participating Units) 1,268,617
35,949 Heidemij Holdings NV 375,850
41,700 Hunter Douglas NV 1,802,990
24,644 ING Groep NV 1,303,928
42,250 Kon Bolswessanen 734,836
47,267 Koninklijke Numico NV 1,616,479
15,637 Koninklijke NV KNP BT 417,119
17,088 Koninklijke Pakhoed 569,363
94,181 Koninklijke PTT Nederland 4,739,303
77,537 Koninklijke Volker Wessels 2,708,501
82 Moeara Enim Petroleum 1,963,016
20,560 Nedlloyd 479,132
98,883 Philips Electronics 7,681,265
24,778 Philips NV ADR 1,929,587
13,917 Roto Smeets D Boer 569,775
52,608 Royal Dutch Petroleum 2,876,046
20,564 Unilever NV CVA 1,323,145
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Netherlands - continued
27,102 Van Ommeren (Koninklijke) (Participating Certificate) 1,089,721
16,543 Vendex International 1,041,792
28,111 Wereldhave NV 1,697,496
------------------
68,656,415
------------------
New Zealand - 1.4%
1,303,036 Brierley Investment Ltd 886,734
896,561 Carter Holt Harvey Ltd 1,372,775
38,750 DB Group Ltd 65,925
317,646 Fisher and Paykel Industries Ltd 1,034,226
316,475 Fletcher Challenge Buildings 755,636
323,511 Fletcher Challenge Energy 1,186,173
1,295,891 Fletcher Challenge Ltd 965,498
586,821 Fletcher Challenge Paper 791,795
362,307 Lion Nathan Ltd 896,950
1,731,203 Progressive Enterprise 1,777,318
2,586,505 Sovereign Assurance (c) 3,414,090
6,739,327 Trans Tasman Properties 2,767,538
485,082 Wrightson Ltd 227,659
------------------
16,142,317
------------------
Norway - 0.8%
7,907 Bolig OG Naeringsk 180,727
285,000 Christiania Bank OG Kreditkasse 1,216,219
139,700 Den Norske Bank AS Class A 769,656
23,100 Dyno Industrier AS 363,181
25,900 Elkem AS Class A 331,922
14,050 Kvaerner Industrier AS 510,474
15,395 Leif Hoegh and Co AS 242,042
30,000 Norsk Data AS Class B ADR (b) * 300
34,916 Norsk Hydro AS 1,526,922
5,400 Norske Skogindustrier AS Class A 164,805
17,700 Orkla-Borregaard AS Class A 1,714,122
8,300 Orkla-Borregaard AS Class B (Non Voting) 717,167
37,900 Schibsted AS 608,387
27,000 Unitor AS 337,101
------------------
8,683,025
------------------
Poland - 0.1%
40,000 Bank Handlowy W Warszawie * 632,638
------------------
Russia - 0.3%
8,715,000 Irkutskenergo (Registered) 1,333,395
47,128 Mosenergo Sponsored ADR 144A 1,832,101
------------------
3,165,496
------------------
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Singapore - 0.6%
268,000 Cycle & Carriage Ltd 1,190,376
407,400 Jardine Matheson Holdings Ltd 1,906,632
562,263 Jardine Strategic Holdings Ltd 1,602,450
135,133 Jardine Strategic Holdings Ltd Warrants 5/02/98 * 5,405
715,000 Singapore Land Ltd 2,002,529
------------------
6,707,392
------------------
South Africa - 0.1%
61,000 Barlow Ltd 570,313
185,197 Housewares Group * 11,993
907,152 NSA International Inc * 36,716
1,109,100 Sun International Ltd 763,116
------------------
1,382,138
------------------
Spain - 6.1%
4,560 Acerinox SA 684,822
16,000 Argentaria Corporacion Bancaria de Espana SA 1,190,533
268,822 Banco Bilbao Vizcaya SA 12,270,355
48,330 Banco Popular Espanol 4,289,654
166,723 Banco Santander SA (Registered) 7,707,481
38,406 Bankinter SA 2,458,742
48,007 Corporacion Mapfre (Registered) 1,399,548
16,000 Ebro Agricolas Compania de Alimentacion SA 324,644
216,548 Endesa 4,780,464
264,417 FENOSA SA 3,279,138
20,816 General Aguas de Barcelona SA 959,605
48,361 Hidroelec Cantabrico 2,062,992
529,243 Iberdrola SA 7,645,786
11,975 Inmobilana Metropolitan Vasco Central SA 578,476
49,000 Midesa 763,562
75,860 Repsol SA 3,378,889
93,767 Sevillana de Electricidad 901,050
356,988 Telefonica de Espana SA 12,261,575
34,058 Vallehermoso SA 1,079,135
------------------
68,016,451
------------------
Sweden - 0.1%
100,000 Castellum AB * 1,149,081
------------------
Switzerland - 4.3%
1,545 Ascom Holding AG (Bearer) * 2,737,122
760 Baloise Holdings * 1,654,538
1,586 Banque Cantonale Vaudoise (Bearer) 653,809
2,186 Belimo Automation AG 796,886
360 Bobst SA (Bearer) 603,434
50,116 CS Holdings (Registered) 9,049,291
3,500 Feldschloesschen Huerlimann (Participating Certificates) 584,287
365 Fischer (George) AG (Bearer) 614,302
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Switzerland - continued
280 Flughafen Immobilien 511,311
3,099 Forbo Holdings AG (Registered) 1,406,333
2,293 Hero AG (Bearer) 1,409,298
2,055 Hilti AG (Participating Certificate) 1,540,270
777 Holderbank Financiere Glarus AG (Bearer) 757,093
3,274 Jelmoli (Registered) 642,486
4,900 Kraftwerk Laufenberg (Bearer) 881,439
2,048 Merkur Holding AG (Registered) 469,578
3,456 Nestle AG (Registered) 6,052,003
2,808 Novartis AG (Registered) 5,121,979
4,500 Publigroupe Sa 981,194
154 Roche Holdings (Participating Certificate) 1,802,753
4,129 SMH AG (Bearer) 2,593,989
275 Stratec Holding AG Class B (Registered) 403,806
2,200 Sulzer Gebrueder AG (Registered) 1,708,913
2,305 Sulzer Medica AG * 593,684
161 Swiss Insurance Co 403,158
1,300 Swiss Reinsurance (Bearer) 2,739,779
3,599 Zurich Reinsurance 1,961,842
------------------
48,674,577
------------------
Thailand - 0.1%
301,300 Bank of Ayudhya Plc (Foreign Registered) 188,749
428,900 First Bangkok City (Foreign Registered) (b) 100
645,900 Jasmine International Public Co (Foreign Registered) 453,329
9,000 Telecomasia Sponsored GDR 144A * 53,298
462,200 Telecomasia (Foreign Registered) * 268,104
487,700 Thai Telephone & Telecommunications (Foreign Registered) * 141,444
204,800 Total Access Communication 296,960
122,800 United Communication Industries (Foreign Registered) 156,705
------------------
1,558,689
------------------
United Kingdom - 19.2%
161,272 Allied Domecq Plc 1,554,704
119,028 Amstrad Plc 74,472
317,976 Anglian Water Plc 4,397,799
1,915,281 ASDA Group 6,346,408
319,838 BAA 2,991,163
436,056 Bank of Scotland 4,971,916
145,536 Barclays Plc 4,332,420
66,964 Bass Plc * 1,122,408
552,643 BAT Industries 5,514,156
694,613 Berkley Group 8,120,130
826,347 BG Plc * 4,146,369
440,000 Billiton Plc * 1,079,445
100,000 BOC Group Plc * 1,564,175
419,953 BPB Industries Plc 2,274,879
411,421 British Airways Plc 3,861,207
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom - continued
298,100 British Energy Plc * 2,198,881
759,168 British Petroleum Co Plc 10,474,750
100,000 British Sky Broadcasting Plc 650,368
1,091,250 British Steel Plc 2,618,753
1,998,455 British Telecom Plc 20,137,592
787,000 BTR 2,089,470
175,000 Cable & Wireless 1,913,233
641,375 Capital Shopping Centres Plc 4,730,987
408,800 Caradon Plc 1,336,082
519,527 Centrica Plc * 923,833
176,780 Commercial Union Plc 3,195,930
345,000 Cookson Group 1,278,096
492,767 Costain Group Plc * 243,402
432,916 Diageo Plc 4,430,028
63,000 Elementis Plc 131,736
269,287 Energy Group Plc 3,449,505
68,927 Flextech Plc * 593,249
299,000 Gallaher Group Plc * 1,742,754
85,013 General Accident 1,907,844
350,000 General Electric Plc 2,287,812
211,598 Glaxo Wellcome Plc 5,922,734
100,000 Granada Group 1,562,529
360,586 Great Portland Estates Plc 1,739,555
223,079 Great Universal Stores Plc 2,846,572
209,598 Guardian Royal 1,575,396
166,008 Hanson Plc 839,130
873,094 Hillsdown Holdings 2,285,703
147,469 HSBC Holdings 4,530,792
79,909 Hyder Plc 1,234,128
157,839 Hyder Plc Cumulative Redemption Preferred 310,559
225,071 Imperial Chemical Industries Plc 4,107,873
132,816 Imperial Tobacco Group Plc 935,957
431,065 Ladbroke Group 2,171,830
150,000 Lasmo 682,266
170,000 Lucas Variety Plc 654,978
785,537 Marley 1,416,258
361,140 Mirror Group Plc 1,010,849
382,100 National Power 3,960,359
318,924 National Westminster Bank 5,886,465
240,000 Norwich Union Plc * 2,039,026
16,000 Nycomed Amersham Plc Class B * 581,322
151,504 Peninsular & Oriental Steam Navigation Co 1,951,957
166,792 Powergen 2,330,176
2,148,935 Raglan Property Plc 919,938
334,630 Railtrack Group Plc 5,096,457
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom - continued
130,000 Reckitt & Colman 2,293,492
576,824 Royal & Sun Alliance Insurance 7,346,244
282,799 Safeway Plc 1,666,950
500,000 Scottish Power Plc 4,264,435
1,174,447 Sears 1,015,207
292,593 Severn Trent Plc 4,504,403
100,000 Smithkline Beecham Plc 1,251,340
154,171 Standard Chartered 2,226,199
254,000 Sun Life & Province Holding 2,410,986
785,326 T & N 3,271,389
477,000 Tanjong 1,096,776
200,000 Tate & Lyle 1,728,825
203,196 Thames Water 2,957,530
92,904 United Utilities 1,248,206
271,030 Viglen Technology Plc * 151,725
271,030 Viglen Technology Plc Entitlement Letters -
303,076 Williams Plc * 1,771,502
------------------
214,483,974
------------------
United States - 0.0%
39,500 Koor Industries Ltd ADR * 192,563
------------------
TOTAL STOCK AND EQUIVALENTS (Cost $902,013,301) 1,052,407,726
------------------
INVESTMENT FUNDS - 0.5%
Chile - 0.0%
141,751 Five Arrows Chile Investment Trust Ltd 326,027
27,821 Five Arrows Chile Investment Trust Ltd Warrants 5/31/99 * 974
------------------
327,001
------------------
India - 0.1%
157,150 India Fund Class A 633,931
40,000 India Liberalisation (c) * 268,000
11,000 Morgan Stanley India Fund Inc * 88,688
------------------
990,619
------------------
Korea - 0.0%
100 Dong Yang Dragon Fund * 413,000
------------------
Russia - 0.4%
180,000 First Russian Frontiers Trust Plc * 3,022,974
38,000 First Russian Frontiers Trust Plc Warrants 6/3/2001 * 312,835
------------------
3,335,809
------------------
South Africa - 0.0%
29,000 New South Africa Fund Inc 404,188
------------------
TOTAL INVESTMENT FUNDS (Cost $6,544,132) 5,470,617
------------------
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS - 0.6%
Hong Kong - 0.1%
HKD 810,000 Sino Land Co, 5.00% due 2/26/01 562,950
---------------
Japan - 0.3%
JPY 49,000,000 MTI Capital (Cayman) Ltd, 0.50% due 10/01/07 931,766
$ 2,200,000 SB Treasury Co, 9.40% due 12/29/49 144A 2,244,000
JPY 45,000,000 STB Cayman Capital Ltd., .50% due 10/01/07 1,030,139
---------------
4,205,905
---------------
Mexico - 0.0%
$ 870,000 Grupo Financiero Invermexico, 7.50% due 6/16/01 313,200
---------------
New Zealand - 0.1%
NZD 978,881 Brierley Investment, 9.00% due 6/30/98 620,201
---------------
Singapore - 0.1%
$ 1,750,000 Keppel Corp 2.0% due 8/12/02 144A 1,575,000
---------------
TOTAL CONVERTIBLE BONDS (Cost $8,455,862) 7,277,256
---------------
DEBT OBLIGATIONS - 0.0%
United Kingdom - 0.0%
GBP 441,778 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 727,387
GBP 116,542 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 191,886
---------------
919,273
---------------
TOTAL DEBT OBLIGATIONS (Cost $541,150) 919,273
---------------
SHORT-TERM INVESTMENTS - 8.2%
Cash Equivalents - 8.2%
41,830,578 The Boston Global Investment Trust (a) 41,830,578
$ 49,600,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 49,600,000
---------------
91,430,578
---------------
TOTAL SHORT-TERM INVESTMENTS (Cost $91,430,578) 91,430,578
---------------
TOTAL INVESTMENTS - 103.2%
(Cost $1,008,985,023) 1,157,505,450
Other Assets and Liabilities (net) - (3.2%) (36,344,226)
---------------
TOTAL NET ASSETS - 100.0% $ 1,121,161,224
===============
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GDR Global Depository Receipt
GBP British Pounds
HKD Hong Kong Dollar
JPY Japanese Yen
NZD New Zealand Dollar
(a) Represents investment of security lending collateral
(Note 1).
(b) Bankrupt issuer.
(c) Security is restricted as to public resale. The aggregate
market value of restricted securities is $3,884,205 or .35%
of net assets.
144A - Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
* Non-income producing security. A dividend has not been
declared for the twelve months ended February 28, 1998.
16 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector
diversification of the Fund's investments
(excluding short-term investments) was as
follows:
Percentage of
Industry Sector (Unaudited) Net Assets
Banking 13.5 %
Consumer Goods 8.4
Insurance 6.5
Telecommunications 5.7
Conglomerates 5.4
Electronic Equipment 5.3
Oil and Gas 5.2
Utilities 4.9
Machinery 4.8
Construction 4.7
Real Estate 4.3
Services 4.1
Chemicals 3.6
Retail Trade 3.5
Automotive 3.3
Health Care 3.0
Food and Beverage 2.7
Metals and Mining 2.0
Computers 1.6
Transportation 1.6
Financial Services 1.4
Communications 1.0
Paper and Allied Products 0.9
Textiles 0.4
Aerospace 0.3
Miscellaneous 1.9
---------
100.0 %
=========
See accompanying notes to the financial statements. 17
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $1,008,985,023) (Note 1) $ 1,157,505,450
Foreign currency, at value (cost $4,775,756) (Note 1) 4,792,367
Cash 70,394
Receivable for investments sold 10,008,676
Dividends and interest receivable 912,395
Foreign withholding taxes receivable 743,908
Receivable for expenses waived or borne by Manager (Note 2) 151,009
------------------
Total assets 1,174,184,199
------------------
Liabilities:
Payable upon return of securities loaned (Note 1) 41,830,578
Payable for investments purchased 10,179,794
Payable to affiliate for (Note 2):
Management fee 641,714
Shareholder service fee 121,038
Accrued expenses 249,851
------------------
Total liabilities 53,022,975
------------------
Net assets $ 1,121,161,224
==================
Net assets consist of:
Paid-in capital $ 977,911,429
Distributions in excess of net investment income (343,662)
Distributions in excess of net realized gain (4,941,071)
Net unrealized appreciation 148,534,528
------------------
$ 1,121,161,224
==================
Net assets attributable to:
Class II Shares $ 53,949,208
==================
Class III Shares $ 847,427,349
==================
Class IV Shares $ 219,784,667
==================
Shares outstanding:
Class II 4,460,629
==================
Class III 70,009,604
==================
Class IV 18,152,694
==================
Net asset value per share:
Class II $ 12.09
==================
Class III $ 12.10
==================
Class IV $ 12.11
==================
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $2,151,041) $ 18,850,954
Interest (including security lending income of $370,217) 4,656,131
-----------------
Total income 23,507,085
-----------------
Expenses:
Management fee (Note 2) 7,035,104
Custodian fees 810,268
Audit fees 50,042
Stamp duties and transfer taxes 12,573
Transfer agent fees 58,410
Legal fees 18,407
Registration fees 10,689
Trustees fee (Note 2) 8,197
Miscellaneous 6,900
Fees waived or borne by Manager (Note 2) (2,369,507)
-----------------
5,641,083
Shareholder service fee (Note 2)
Class I 25,021
Class II 62,048
Class III 1,311,907
Class IV 22,912
-----------------
Net expenses 7,062,971
-----------------
Net investment income 16,444,114
-----------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (1,283,691)
Foreign currency, forward contracts and foreign currency
related transactions 2,625,319
-----------------
Net realized gain 1,341,628
-----------------
Change in net unrealized appreciation (depreciation) on:
Investments 106,309,982
Foreign currency, forward contracts and foreign currency
related transactions 6,703
-----------------
Net unrealized gain 106,316,685
-----------------
Net realized and unrealized gain 107,658,313
-----------------
Net increase in net assets resulting from operations $ 124,102,427
=================
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (decrease) in net assets: Year Ended Period Ended
Operations: February 28, 1998 February 28, 1997 *
------------------ --------------------
<S> <C> <C>
Net investment income $ 16,444,114 $ 4,998,592
Net realized gain (loss) 1,341,628 (3,379,420)
Change in net unrealized appreciation (depreciation) 106,316,685 42,217,843
------------------ -------------------
Net increase in net assets resulting from operations 124,102,427 43,837,015
------------------ -------------------
Distributions to shareholders from:
Net investment income
Class I (265,008) (32,692)
Class II (647,192) (86,399)
Class III (18,851,879) (4,439,981)
------------------ -------------------
Total distributions from net investment income (19,764,079) (4,559,072)
------------------ -------------------
Distributions to shareholders from:
Net realized gains
Class I (5,149) -
Class II (12,389) -
Class III (348,959) -
------------------ -------------------
Total distributions from net realized gains (366,497) -
------------------ -------------------
Net share transactions: (Note 5)
Class I (4,265,890) 4,554,323
Class II 26,425,821 21,186,399
Class III 98,158,725 633,658,060
Class IV 198,193,992 -
------------------ -------------------
Increase in net assets resulting from net share transactions 318,512,648 659,398,782
------------------ -------------------
Total increase in net assets 422,484,499 698,676,725
Net assets:
Beginning of period 698,676,725 -
------------------ -------------------
End of period (including distributions in excess of net
investment income of $343,662 and $76,274, respectively) $ 1,121,161,224 $ 698,676,725
================== ===================
</TABLE>
* Period from June 28, 1996 (commencement of operations) to February 28, 1997.
20 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 1, 1997 Period Ended
to January 9, 1998 February 28, 1997 *
--------------------- ---------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.65 $ 9.88
------------- -------------
Income from investment operations:
Net investment income 0.18(d) 0.06
Net realized and unrealized gain 0.28 0.78
------------- -------------
Total from investment operations 0.46 0.84
------------- -------------
Less distributions to shareholders from:
Net investment income (0.22) (0.07)
Net realized gains (0.00)(f) --
------------- -------------
Total distributions (0.22) (0.07)
------------- -------------
Net asset value, end of period $ 10.89(e) $ 10.65
============= =============
Total Return (a) 4.31% 8.53%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ 4,891
Net expenses to average
daily net assets 0.88%** 0.89%**(b)
Net investment income to average
daily net assets 1.82%** 0.98%**
Portfolio turnover rate 19% 13%
Average broker commission rate per equity share (c) $ 0.0153 $ 0.0204
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.02
</TABLE>
* Period from July 10, 1996 (commencement of operations) to February 28, 1997.
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .01% of average daily net assets for the period
ended February 28, 1997.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
(d) Computed using average shares outstanding throughout the period.
(e) All Class I shares of the Fund were exchanged for Class II shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(f) The per share realized gain distribution was $0.004.
See accompanying notes to the financial statements. 21
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period Ended
February 28, 1998 February 28, 1997 *
-------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.65 $ 10.02
-------------------- --------------------
Income from investment operations:
Net investment income 0.18 (d) 0.06
Net realized and unrealized gain 1.48 0.65
-------------------- --------------------
Total from investment operations 1.66 0.71
-------------------- --------------------
Less distributions to shareholders from:
Net investment income (0.22) (0.08)
Net realized gains (0.00)(e) --
-------------------- --------------------
Total distributions (0.22) (0.08)
-------------------- --------------------
Net asset value, end of period $ 12.09 $ 10.65
==================== ====================
Total Return (a) 15.94% 7.08%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 53,949 $ 21,957
Net expenses to average
daily net assets 0.82% 0.84% **(b)
Net investment income to average
daily net assets 1.60% 0.83% **
Portfolio turnover rate 19% 13%
Average broker commission rate per equity share (c) $ 0.0153 $ 0.0204
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.02
</TABLE>
* Period from September 30, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .02% of average daily net assets for the period
ended February 28, 1997.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
(d) Computed using average shares outstanding throughout the period.
(e) The per share realized gain distribution was $0.004.
22 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period Ended
February 28, 1998 February 28, 1997 *
--------------------- ---------------------
<S> <C>
Net asset value, beginning of period $ 10.66 $ 10.00
--------------------- ---------------------
Income from investment operations:
Net investment income 0.21 (d) 0.08
Net realized and unrealized gain 1.45 0.66
--------------------- ---------------------
Total from investment operations 1.66 0.74
--------------------- ---------------------
Less distributions to shareholders from:
Net investment income (0.22) (0.08)
Net realized gains (0.00)(e) -
--------------------- ---------------------
Total distributions (0.22) (0.08)
--------------------- ---------------------
Net asset value, end of period $ 12.10 $ 10.66
===================== =====================
Total Return (a) 15.95% 7.37%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 847,427 $ 671,829
Net expenses to average
daily net assets 0.75% 0.76% **(b)
Net investment income to average
daily net assets 1.80% 1.24% **
Portfolio turnover rate 19% 13%
Average broker commission rate per equity share (c) $ 0.0153 $ 0.0204
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.02
</TABLE>
* Period from June 28, 1996 (commencement of operations) to February 28, 1997.
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .01% of average daily net assets for the period
ended February 28, 1997.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
(d) Computed using average shares outstanding throughout the period.
(e) The per share realized gain distribution was $0.004.
See accompanying notes to the financial statements. 23
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
--------------------
<S> <C>
Net asset value, beginning of period $ 10.90
--------------
Income from investment operations:
Net investment income - (c)
Net realized and unrealized gain 1.21
--------------
Total from investment operations 1.21
--------------
Net asset value, end of period $ 12.11
==============
Total Return (a) 11.10%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 219,785
Net expenses to average
daily net assets 0.69 *
Net investment income to average
daily net assets 0.26% *
Portfolio turnover rate 19%
Average broker commission rate per equity share (b) $ 0.0153
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ (d)
</TABLE>
* Annualized.
(a) The total return would have been lower had certain expenses not been waived
during the period shown.
(b) The average broker commission rate will vary depending on the markets in
which trades are executed.
(c) Net investment income earned was less than $.01 per share. Computed using
average shares outstanding throughout the period.
(d) Fees or expenses voluntarily waived or borne by the manager were less than
$.01 per share.
24 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund commenced operations on June 28, 1996 subsequent to a transaction
involving the reorganization of the GMO International Equities Pool of The
Common Fund for Nonprofit Organizations (the "GMO Pool"). The GMO Pool was
discontinued and its net assets distributed pro rata to the unitholders of
the GMO Pool as a liquidating distribution. Such net assets were
immediately thereafter transferred by the unitholders to the Fund in
exchange for shares of the Fund. The portfolio of the Fund on June 28, 1996
was the same as the portfolio of the GMO Pool prior to the transfer.
The Fund seeks maximum total return through investment primarily in equity
securities of non-U.S. issuers.
At the beginning of the fiscal year the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
between the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class II shares. Additionally, Class IV shares commenced
operations on January 9, 1998.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
25
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. These prices may differ
from the value that would have been used had a broader market for the
securities existed and the differences could be material to the financial
statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the
26
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. There were no open forward currency contracts as of February 28,
1998.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998 the Fund loaned securities having a market
value of $39,067,463 collateralized by cash in the amount of $41,830,578
which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency and passive foreign investment
company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
27
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions in Excess of Distributions in Excess of
Net Investment Income Net Realized Gain Paid-in Capital
- ---------------------------- ----------------------------- -----------------
$3,052,577 ($3,052,577) -
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments of domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, .15% for Class III shares,
and .09% for Class IV shares.
28
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees and extraordinary expenses) exceed .60% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $8,197. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998 aggregated
$484,290,643 and $163,395,052, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
----------------- ------------------- ------------------- ----------------
$1,014,608,048 $222,372,914 ($79,475,512) $142,897,402
4. Principal shareholder
At February 28, 1998, 11.88% of the outstanding shares of the Fund were
held by one shareholder.
29
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from July 10, 1996
Period from March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------------------------ -------------------------------
Class I: Shares Amount Shares Amount
--------------- ------------------ -------------- -------------
<S> <C> <C> <C> <C>
Shares sold 826,358 $ 9,729,112 455,993 $ 4,521,631
Shares issued to shareholders in
reinvestment of distributions
24,544 270,157 3,119 32,692
Shares repurchased (1,310,014) (14,265,159) - -
--------------- ----------------- -------------- ------------
Net increase / (decrease) (459,112) $ (4,265,890) 459,112 $ 4,554,323
=============== ================= ============== ============
<CAPTION>
Period from September 30, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
----------------------------------- -----------------------------------
Class II: Shares Amount Shares Amount
--------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares sold 2,339,569 $ 25,766,240 2,052,856 $ 21,100,000
Shares issued to
shareholders in reinvestment
of distributions 59,960 659,581 8,244 86,399
Shares repurchased - - - -
--------------- --------------- --------------- --------------
Net increase 2,399,529 $ 26,425,821 2,061,100 $ 21,186,399
=============== =============== =============== ==============
</TABLE>
30
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from June 28, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
-------------------------------------------- --------------------------------------
Class III: Shares Amount Shares Amount
------------------- ---------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Shares sold 29,233,963 $ 347,802,219 64,118,750 $ 644,703,588
Shares issued to shareholders in
reinvestment of distributions
851,431 9,367,832 167,499 1,757,065
Shares repurchased (23,128,254) (259,011,326) (1,233,785) (12,802,593)
------------------ -------------------- --------------- -----------------
Net increase 6,957,140 $ 98,158,725 63,052,464 $ 633,658,060
================== ==================== =============== =================
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
------------------------------------------
Class IV: Shares Amount
------------------- --------------------
<S> <C> <C>
Shares sold 18,491,750 $ 202,184,682
Shares issued to shareholders in
reinvestment of distributions - -
Shares repurchased (339,056) (3,990,690)
------------------ --------------------
Net increase 18,152,694 $ 198,193,992
================== ====================
</TABLE>
31
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 1.51% of distributions as net capital gain dividends.
32
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. Jui Lai and Ms. Ann Spruill are responsible for the management of the GMO
International Active Division. Mr. Jui and Ms. Spruill have been portfolio
managers with GMO for ten and eight years, respectively. The GMO Foreign Fund is
managed on a geographic basis by Ms. Spruill, Mr. Lai, Mr. Hoyt Ludington, Mr.
Richard Mattione and Mr. Joshua Rosenthal.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
For the fiscal year ended February 28, 1998, the Class III shares of the GMO
Foreign Fund returned 16.0%, outperforming its EAFE benchmark by 0.5% after
fees. Stock selection more than accounted for the outperformance, as country
selection was negative; there was also a small boost from hedging.
Seventeen of the twenty-one equity markets within the Morgan Stanley Capital
International Europe, Australasia and Far East (EAFE) Index posted positive
returns in local currencies over the past twelve months. The four exceptions
were all in Asia: Japan, Singapore, Hong Kong and Malaysia. However, while the
S&P 500 returned 35%, the EAFE Index returned only 15.5%. EAFE's lower return
was the result of three major influences -- the strong dollar, a small decline
in the Japanese stock market, and substantial weakness in the other Asian
markets. Stripping out the effects of the strong dollar and the weakness in
Japan and Asia, the EAFE index excluding the four Asian markets returned 40.5%
in local terms over this period. In dollar terms that same group returned
34.7%, nearly matching the return of the S&P 500.
Nine of the twenty-one EAFE markets outperformed the S&P 500 in local terms.
However, once adjusted into U.S. dollars, only six countries posted a return
higher than that of the S&P 500. Portugal did best, with a return of 61.5%, but
most of that came before its inclusion in the index in December 1997. Of those
markets in the EAFE index for the full year, Spain did best with a return of
61.1%.
The major influence on the Foreign Fund's return was the decline in the Japanese
stock market. That market had the worst performance among the major developed
country markets, falling by 8.4% in dollar terms over the past fiscal year. Our
country selection benefited as we were underweight in Japan throughout the year,
having started the fiscal year with a Japanese weight of 22.2% in the GMO
Foreign Fund, against the benchmark EAFE weight of 30.2%. Our stock selections
were slanted away from the financial companies and toward the exporters, which
had a further positive influence on our returns.
Another key influence on the Foreign Fund's return was the weakness in other
Asian markets. Excess capital spending, financial leverage, and dependence on
foreign debt caused a once-in-a-decade meltdown in currency and stock markets
throughout the region. Only three of the countries - Hong Kong, Singapore and
Malaysia - are in the EAFE index, but they fell sharply, with declines in dollar
terms of 19%, 28.5%, and 60.1%, respectively. We were helped by our lower
aggregate weight of 4.8% in these markets, against 8% in the EAFE benchmark. We
had no exposure at all to Malaysia until prices had fallen to levels that in our
opinion reflected value.
We are currently at a weight of 19.0% in Japan. This is 5.1% underweight
relative to the benchmark. On balance we are slightly more negative on Japan
than was the case a year ago. Japan's statistical positives are numerous: the
long-term underperformance of the market, a weak
<PAGE>
currency, its recent attractiveness on the price-to-book ratio, and an ROE that
seems considerably below what could be accomplished. There are even stronger
negatives, however. First, most of the truly cheap stocks available in Japan a
year ago did substantially outperform the market during the past fiscal year, so
there are very few bargains available on a global comparison derived from
earnings rather than book value. Second, Japanese management still shows little
interest in taking the truly radical measures necessary to boost earnings,
rather than the more modest measures that at best allow short-term survival. We
are currently most overweight in Spain, Belgium, Germany and Hong Kong.
Currency Hedging
Currency hedging added 40 basis points to our total return over the past fiscal
year. All of this was due to a hedge of the Korean won implemented in November
1997 and closed out in February 1998.
Our policy is generally to be unhedged, recognizing that in doing so we achieve
the desired exposure to the underlying real assets (the business operations).
However, to protect the dollar value of our investments, we will on occasion
hedge out a particular currency, either because it is significantly overvalued
or because the currency seems at risk due to unfavorable economic developments.
After the end of the fiscal year we hedged our 0.3% exposure to the Malaysian
ringgit.
Emerging Markets
Emerging markets have grown considerably in recent years in terms of the number
of investable markets and the number of stocks listed, although the sharp
setback last year in a number of the markets reduced market capitalization. Our
investments in emerging markets have been on an opportunistic stock-picking
basis using GMO's traditional long-term value investment philosophy. Our policy
is to invest from 0% to 10% of the portfolio in emerging markets, subject to
stock selection opportunities and attractive valuations relative to the
developed markets. At the end of the fiscal year only 2.2% of the GMO Foreign
Fund was invested in emerging markets, with Russia and Korea still comprising
the majority of the emerging exposure. Because of the extremely weak
performance of emerging markets, our exposure to emerging markets diminished our
returns by 146 basis points during the past fiscal year, and thus reduced the
amount by which the Fund beat the EAFE index.
Outlook
The Foreign Fund is managed with a long-term investment horizon and consequent
low turnover. We typically buy company stocks at relatively low price-to-
earnings, low price-to-cash flow, and low price-to-book or asset ratios.
Currently the Foreign Fund stands at a discount to the market on all of these
ratios as well as a premium on yield.
We believe that this is an opportune time to invest in foreign markets. In
Europe we see an increasing number of companies starting to adopt a more
positive attitude to shareholder value which, in line with the U.S. experience,
should be good for returns. In much of Asia there has been a return to
realistic valuations. Furthermore, the relative inefficiencies of foreign
markets should allow us to achieve superior returns.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Foreign Fund
Comparison of Change in Value of a $10,000 Investment in
GMO Foreign Fund Class III Shares and the MSCI EAFE Index
As of February 28, 1998
-------------------------------------------------
Average Annual Total Return
-------------------------------------------------
Since
1 Year 5 Year 10 Year Inception
-------------------------------------------------
Class 9/30/96
II 15.9% n/a n/a 18.7%
-------------------------------------------------
Class
III 16.0% 16.7% 12.7% n/a
-------------------------------------------------
Class 1/9/98
IV n/a n/a n/a 11.1%
-------------------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Foreign Fund MSCI EAFE
Date Class III Shares Index
- --------------- ---------------- ---------
2/29/88 $10,000 $10,000
2/28/89 $12,365 $12,084
2/28/90 $14,759 $11,695
2/28/91 $15,429 $11,426
2/29/92 $15,832 $10,577
2/28/93 $15,278 $10,140
2/28/94 $22,070 $14,113
2/28/95 $21,421 $13,485
2/29/96 $25,553 $15,757
2/28/97 $28,579 $16,268
2/28/98 $33,137 $18,784
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. The Fund commenced
operations on June 28, 1996 subsequent to a transaction involving, in essence,
the reorganization of the GMO International Equities Pool of the Common Fund for
Non-Profit Organizations (the "GMO Pool") as the Foreign Fund. All information
relating to the time periods prior to June 28, 1996 relates to the GMO Pool.
Class III shares are a redesignation of the single class of shares that has been
offered by the Fund since inception. Performance for Class IV and Class II
shares may vary due to different shareholder service fees. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Global Properties Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Properties Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <S> <C>
REAL ESTATE INVESTMENTS - 97.5%
Canada - 11.4%
13,700 Brookfield Properties Corp 228,630
40,000 Burcon Properties Ltd * 414,573
10,000 Cambridge Shopping Centres Ltd 104,346
9,000 Canadian Hotel Income Properties 59,762
10,000 Oxford Properties Group * 240,312
4,000 Trizec Hahn Corp (Sub-Voting) 98,250
----------------
1,145,873
----------------
France - 11.0%
2,665 Klepierre 407,021
1,357 Silic 209,703
11,500 Sophia SA 487,252
----------------
1,103,976
----------------
Hong Kong - 5.5%
35,000 Cheung Kong Holdings 245,237
30,000 Great Eagle Holdings Ltd 44,172
30,000 Sun Hung Kai Properties Ltd 224,734
115,000 Tai Cheung Holdings Ltd 39,361
----------------
553,504
----------------
Japan - 7.6%
8,000 Daibiru Corp 65,859
5,000 Hankyu Realty Co Ltd 29,288
10,000 Heiwa Real Estate Co Ltd 41,954
5,000 Keihanshin Real Estate 23,352
26,000 Mitsubishi Real Estate Co Ltd 290,192
13,000 Mitsui Fudosan Co Ltd 139,951
7,000 Sankei Building Co Ltd 24,990
11,000 Sumitomo Realty and Development Co Ltd 72,706
6,000 TOC Co Ltd 57,943
5,000 Tokyo Rakutenchi 14,763
----------------
760,998
----------------
Netherlands - 16.9%
65,000 Breevast NV 571,610
16,880 German City Estates NV (Bearer) 217,716
11,586 Nagron National 275,662
8,500 Vastned (Offices) NV 321,836
2,700 Vastned Retail NV 148,531
5,896 VIB NV 161,309
----------------
1,696,664
----------------
New Zealand - 9.7%
500,000 Trans Tasman Properties 205,328
1,736,363 Trans Tasman Properties Ltd 774,164
----------------
979,492
----------------
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <S> <C>
Singapore - 0.9%
25,000 DBS Land Ltd 38,711
20,000 Singapore Land Ltd 56,015
----------------
94,726
----------------
United Kingdom - 9.4%
750,000 Hemingway Properties Plc 580,391
150,000 Nursing Home Properties 361,818
----------------
942,209
----------------
United States - 25.1%
6,000 Arden Realty Group Inc 171,375
2,500 Avalon Properties 71,874
4,500 Bedford Properties Investments Inc 88,313
3,000 Boston Properties Inc 102,000
3,000 Bradley Real Estate Inc 64,313
2,000 Brandywine Realty Trust 47,250
4,000 Crescent Real Estate Equities 136,250
4,500 Eastgroup Properties Inc 91,125
5,000 Felcor Suite Hotels Inc 179,375
2,500 First Industrial Realty Trust Inc 90,313
3,000 Gables Residential Trust 79,313
2,000 Glimcher Realty Trust 45,000
8,000 Host Marriott Corp * 158,500
1,000 HRE Properties 18,625
2,000 Mills Corp 53,375
2,000 Parkway Properties Inc 65,250
5,498 Patriot American Hospitality Preferred 137,450
3,500 Prentiss Properties Trust 93,406
6,000 Reckson Associates Realty Corp 151,125
2,812 Security Capital Atlantic Inc 59,052
349 Security Capital Group Inc Class B Warrants 9/18/98 * 1,287
2,857 Security Capital Pacific Trust 65,532
4,000 Simon DeBartolo Group Inc 123,500
3,000 Smith (Charles E) Residential Realty 99,000
3,000 Starwood Hotels & Resorts 169,688
5,000 Urban Shopping Centers Inc 166,875
----------------
2,529,166
----------------
TOTAL REAL ESTATE INVESTMENTS (Cost $9,834,115) 9,806,608
----------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 2.0%
Cash Equivalents - 2.0%
$ 200,000 First National Bank of Chicago Time Deposit, 5.60%, due 3/2/98 200,000
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $200,000) 200,000
----------------
TOTAL INVESTMENTS - 99.5%
(Cost $10,034,115) 10,006,608
Other Assets and Liabilities (net) - 0.5% 54,451
----------------
TOTAL NET ASSETS - 100.0% $ 10,061,059
================
</TABLE>
Notes to the Schedule of Investments:
* Non-income producing security. A dividend has not been declared for
the twelve months ended February 28, 1998.
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $10,034,115) (Note 1) $ 10,006,608
Foreign currency, at value (cost $109,297) 108,358
Cash 14,328
Dividends and interest receivable 3,351
Foreign withholding taxes receivable 3,949
----------------
Total assets 10,136,594
----------------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 5,740
Shareholder service fee 1,148
Accrued expenses and other liabilities 68,647
----------------
Total liabilities 75,535
----------------
Net assets $ 10,061,059
================
Net assets consist of:
Paid-in capital $ 9,981,711
Distributions in excess of net investment income (111,901)
Accumulated undistributed net realized gain 219,695
Net unrealized depreciation (28,446)
----------------
$ 10,061,059
================
Net assets attributable to Class III Shares $ 10,061,059
================
Shares outstanding - Class III 992,142
================
Net asset value per share - Class III $ 10.14
================
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $14,213) $ 275,629
Interest 154,424
------------
Total income 430,053
------------
Expenses:
Management fee (Note 2) 74,657
Custodian fees 67,776
Transfer agent fees 29,867
Audit fees 20,169
Legal fees 12,233
Trustees fee (Note 2) 90
Fees waived or borne by Manager (Note 2) (77,290)
------------
127,502
Shareholder service fee - Class III (Note 2) 14,931
------------
Net expenses 142,433
------------
Net investment income 287,620
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 90,805
Foreign currency and foreign currency related transactions (4,151)
------------
Net realized gain 86,654
------------
Change in net unrealized appreciation (depreciation) on:
Investments 16,578
Foreign currency and foreign currency related transactions (939)
------------
Net unrealized gain 15,639
------------
Net realized and unrealized gain 102,293
------------
Net increase in net assets resulting from operations $ 389,913
============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------
Year Ended Period Ended
February 28, 1998 February 28, 1997 *
------------------- -------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 287,620 $ 42,303
Net realized gain (loss) 86,654 (1,952)
Change in net unrealized appreciation (depreciation) 15,639 (44,085)
------------------ ------------------
Net increase (decrease) in net assets resulting from operations 389,913 (3,734)
------------------ ------------------
Distributions to shareholders from:
Net investment income - Class III (306,831) -
------------------ ------------------
Net share transactions - Class III (Note 5) 513,622 9,468,089
------------------ ------------------
Total increase in net assets 596,704 9,464,355
Net assets:
Beginning of period 9,464,355 -
------------------ ------------------
End of period (including distributions in excess of net
investment income of $111,901 and accumulated
undistributed net investment income of $40,351,
respectively) $ 10,061,059 $ 9,464,355
================== ==================
</TABLE>
* Period from December 20, 1996 (commencement of operations) to February 28,
1997.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- -------------------------------------------------------------------------------------------------------------------
Year Ended Period Ended
February 28, 1998 February 28, 1997 *
-------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.06 $ 10.00
-------------------- --------------------
Income from investment operations:
Net investment income 0.30 0.04
Net realized and unrealized gain 0.10 0.02(c)
-------------------- --------------------
Total from investment operations 0.40 0.06
-------------------- --------------------
Less distributions to shareholders:
From net investment income (0.32) --
-------------------- --------------------
Net asset value, end of period $ 10.14 $ 10.06
==================== ====================
Total Return (a) 4.07% 0.60%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 10,061 $ 9,464
Net expenses to average
daily net assets 1.43% 1.98%**
Net investment income to average
daily net assets 2.89% 2.39%**
Portfolio turnover rate 15% 0%
Average broker commission rate (b) $ 0.0158 $ 0.0062
Fees and expenses voluntarily waived or
borne by the Manager consisted of
the following per share amounts: $ 0.08 $ 0.05
</TABLE>
* Period from December 20, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) The average broker commission rate will vary depending on the markets in
which trades are executed.
(c) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1997 due to the timing of purchases and
redemptions of Fund shares in relation to fluctuating market values of the
investments of the Fund.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Properties Fund (the "Fund"), which commenced operations on
December 20, 1996, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks long-term capital growth primarily through investment in
securities of issuers throughout the world which are engaged in or related
to the real estate industry or which own significant real estate assets.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II, and Class III. The principal economic difference
between the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
8
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
9
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions in Accumulated
Excess of Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
- ----------------------- ------------------------ -------------------------
($133,041) $133,041 -
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
The Fund's investments in REIT equity securities may at times result in the
Fund's receipt of cash in excess of its interest in the REIT's earnings.
The excess amount cannot be determined by the Fund at the time of receipt.
If the Fund distributes amounts which are subsequently determined to exceed
REIT earnings, such amounts would constitute a return of capital to Fund
shareholders for federal income tax purposes.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis. Dividends representing a return of capital
are reflected as a reduction of cost.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. In the case of cash redemptions, the fee is .30% of the amount
redeemed. All purchase premiums and redemption fees are paid to and are
recorded by the Fund as paid-in capital. These fees are allocated relative
to each class' net assets on the share transaction date. Purchase premiums
are included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 28, 1998, the Fund
received $1,461 in purchase premiums and no redemption fees. There is no
premium for reinvested distributions.
10
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Investment risks
There are certain additional risks involved in investing in real-estate
related securities rather than a more diversified portfolio of investments.
Since the Fund's investments are concentrated in real-estate related
securities, the value of its shares can be expected to change in light of
factors affecting the real estate industry, including local or regional
economic conditions, changes in zoning laws, changes in real estate values
and property taxes, and changes in interest rates. The value of the Fund's
shares may fluctuate more widely than the value of shares of a portfolio
that invests in a broader range of industries. Additionally, there are
certain additional risks involved in investing in foreign securities that
are not inherent in investments in domestic securities. These risks may
involve adverse political and economic developments and the possible
imposition of currency exchange blockages or other foreign governmental
laws or restrictions. In addition, the securities of some foreign companies
and securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, and .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding custody fees, brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceed .60% of average
daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $90. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
11
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$7,465,951 and $1,106,058, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
- ------------------ -------------------- ------------------- ------------------
$10,165,897 $703,464 $862,753 $159,289
4. Principal shareholder
At February 28, 1998, 70.7% of the outstanding shares of the Fund were held
by one shareholder, who is an affiliate of the Manager.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums and redemption fees received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Class III: Period from December 20, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
------------------------------------------ ------------------------------------------
Shares Amount Shares Amount
------------------ -------------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Shares sold 24,144 $ 243,500 940,343 $ 9,468,089
Shares issued to
shareholders
in reinvestment of
distributions 27,655 270,122 - -
Shares
repurchased - - - -
------------------ -------------------- ---------------- ---------------------
Net increase 51,799 $ 513,622 940,343 $ 9,468,089
================== ==================== ================ =====================
</TABLE>
12
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions are
from investment company taxable income.
13
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. Eyk Van Otterloo and Mr. Wilson Magee are primarily responsible for the day-
to-day management of the Fund's portfolio. Mr. Van Otterloo has been with GMO
since its founding in 1977. Mr. Magee joined GMO in January 1997 following 15
years of experience in the real estate industry.
Management Discussion and Analysis of Performance
- -------------------------------------------------
The Class III shares of the Global Properties Fund (GPF) returned 4.0% during
the twelve months ended February 28, 1998. During the same period, the Salomon
Brothers World Property Equity Index and the Global Property Research/LIFE
Global Property Index returned -8.2% and -11.0%, respectively, and the MSCI
World Equity Index returned 23.9%.
Most significant in terms of value-added were country allocations. The most
significant country allocations included a large overweighting in Canadian
property stocks and the absence of fund holdings, until December 1997, in Hong
Kong, Singapore and emerging Asia. Foreign exchange added modest value,
although the Fund did not employ any currency hedges during the fiscal year.
Stock selection added value overall and was positive in seven of the ten
countries in which the Fund invested.
Security Selection
Property stocks are selected using a three-tier process. First, property
markets are analyzed to identify prospective fundamental trends that affect each
property type within the context of macroeconomic trends that are particularly
meaningful to property investment, namely interest rate changes, inflation, real
GDP growth, and demographics. Second, country allocations are established
utilizing our country models of relative real estate and (real estate)
securities index values. Initial currency hedging strategies are also
established. Finally, fundamental securities analysis is employed to select
securities of undervalued companies.
<PAGE>
Outlook
The outlook for property stocks varies by country. We remain positive on Canada
due to attractive valuations of high quality property companies and a property
cycle that lags that of the United States where we think property trends
continue to be positive. In Europe, France, Netherlands and Sweden are
recovering markets with improving prospects for property companies. We have
become more cautious about the soaring UK property market. Despite the steep
decline in prices for property companies in Asia, our outlook is not for a rapid
recovery as supplies of most property types are quite excessive. We are
particularly cautious about property equities in emerging Asian markets such as
Thailand, Malaysia and Indonesia, where companies borrowed liberally in US
dollars. We remain optimistic about the long-term outlook for property
companies with significant commercial exposure in Japan.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Global Properties Fund
Comparison of Change in Value of a $10,000 Investment in
GMO Global Properties Fund Class III Shares and the Salomon Brothers
World Equity Property Industry Index
As of February 28, 1998
-----------------------------
Average Annual Total Return
-----------------------------
Since
Inception
1 Year 12/20/96
-----------------------------
Class
III 3.1% 3.2%
-----------------------------
[LINE GRAPH APPEARS HERE]
GMO Global Salomon BMI
Date Properties Fund World Index
---- --------------- -----------
12/20/96 $ 9,940 $10,000
2/28/97 $10,000 $10,413
2/28/98 $10,375 $ 9,553
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase and 30 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Information is
unaudited.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Evolving Countries Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Evolving Countries Fund at
February 28, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the period August 29, 1997 (commencement
of operations) through February 28, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provides a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND EQUIVALENTS - 90.3%
Argentina - 0.8%
14,800 Banco Frances del Rio de la Plata SA 147,334
3,000 YPF SA ADR 94,875
2,900 YPF SA Class D 92,266
---------------
334,475
---------------
Brazil - 8.5%
1,953,911 Banco Bradesco Receipts* 16,597
22,791,000 Electrobras Class B Preferred (Registered) 1,068,817
540,000 Itaubanco SA Preferred (Registered) 319,179
172,838 Souza Cruz (Registered) 1,506,397
3,900 Telebras ADR 477,506
---------------
3,388,496
---------------
Chile - 7.5%
13,800 Chilectra SA ADR 339,894
30,100 Chilgener ADR 722,400
24,600 Compania de Telefones de Chile ADR 673,425
14,800 Embotelladora Andina ADR Class A 310,800
26,800 Empresa Natl de Electricidad ADR 494,125
41,000 Quinenco SA ADR* 440,750
---------------
2,981,394
---------------
Colombia - 1.3%
6,600 Banco Ganadero SA ADR 231,000
22,600 Banco Industrial Colombia ADR 265,550
---------------
496,550
---------------
India - 8.7%
5,250 Bajaj Auto Ltd GDR (Registered)* 103,688
6,800 ITC Ltd 114,313
20,000 ITC Ltd GDR* (a) 555,000
30,000 Larsen & Toubro GDR 393,750
119,000 Mahanagar Telephone 788,696
12,000 Mahanagar Telephone GDR 144A* 204,000
43,500 Mahindra & Mahindra GDR 144A 368,663
28,700 Reliance Industries GDR (Registered) 248,255
65,000 Satyam Computer Service 339,123
15,600 State Bank of India GDR (Registered) 309,660
13,000 Steel Authority of India GDR 32,825
---------------
3,457,973
---------------
Indonesia - 1.2%
264,000 Aneka Tambang* 46,983
385,000 Astra International 72,867
377,000 Barito Pacific Timber 85,198
101,000 HM Sampoerna 58,203
447,000 Indah Kiat Pulp & Paper 98,492
41,500 International Nickel 46,893
158,000 Telekomunikasi Indonesia 62,486
---------------
471,122
---------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Israel - 4.5%
46,000 Bank Hapoalim 107,695
229,000 Bank Leumi Le Israel 388,520
7,900 Formula Systems Ltd* 240,506
40,100 Makhteshim Chemicals Works Ltd* 308,836
8,050 Supersol Ltd ADR 126,788
7,000 Tadiran Ltd ADR 280,000
8,100 Teva Pharmaceutical Industries Ltd ADR 340,200
---------------
1,792,545
---------------
Korea - 4.6%
76,600 Daewoo Corp 294,579
11,783 Housing & Commercial Bank Korea GDR 88,373
15,700 Kookmin Bank GDS 144A 100,480
4,020 Pohang Iron & Steel 241,008
1,650 Samsung Display Devices 95,989
4,350 Samsung Electronics 251,730
33,614 Samsung Electronics GDS 144A (Non Voting) 466,394
629 SK Telecom 285,800
2,307 SK Telecom ADR 19,898
---------------
1,844,251
---------------
Malaysia - 0.0%
600 Oriental Holdings Berhad 1,224
---------------
Mexico - 10.0%
11,000 Alfa SA Class A 62,592
87,000 Carso Global Telecom Class A 285,798
94,000 Cemex SA Class B 449,956
17,000 El Puerto de Liverpool SA 23,335
39,000 Empresas ICA Sociedad Controladora 77,602
37,000 Empresas La Moderna SA de CV Class A* 186,443
56,000 Fomento Economico Mexicano SA de CV Class B 417,200
20,000 Grupo Carso SA de CV Class A 122,485
110,000 Grupo Mexico Class B 379,422
39,500 Grupo Televisa SA PTG Certs (1A,L & D) 692,820
25,200 Telefonos de Mexico ADR Class L 1,277,325
---------------
3,974,978
---------------
Pakistan - 2.3%
26,000 Hub Power Co Ltd GDR 786,500
16,800 Pakistan State Oil 112,621
---------------
899,121
---------------
Russia - 9.6%
103,000 Irkutskenergo ADR 721,000
7,800 Lukoil Holding Co ADR 546,975
7,000 Mosenergo ADR* 272,125
37 Norilsk Nickel RDC 144A* 185,000
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Russia - continued
59,000 Norilsk Nickel (Registered)* 312,700
77,000 Rostelekom* 269,500
35,000 Surgutneftegaz ADR 245,000
8,500 Unified Energy Systems ADR* 232,688
37,830 Unified Energy Systems GDR* 1,035,596
---------------
3,820,584
---------------
South Africa - 17.6%
123,700 Amalgamated Bank of South Africa Group Limited 951,250
8,520 Anglo American Corp of South Africa 356,904
16,000 Anglo American Industrial Ltd 376,242
21,600 Anglo American Platinum Corp 307,728
103,200 De Beers Centenary Link Units 2,046,666
2,900 De Beers Consolidated Mines Ltd ADR 57,819
43,300 First National Bank Holdings 490,701
37,200 Liberty Life Association of Africa Ltd 1,129,212
26,700 Nedcor Ltd 778,063
23,200 Rembrandt Group Ltd 158,689
36,200 Sasol Ltd 309,145
---------------
6,962,419
---------------
Thailand - 10.3%
38,200 Advanced Info Service Public Co Ltd (Foreign Registered) 290,710
531,000 Bangkok Expressway Plc (Foreign Registered)* 517,448
402,000 Cogeneration Public Co (Foreign Registered) 419,722
130,000 Electricity Generating Public Co Ltd (Foreign Registered) 340,835
110,400 Hana Microelectronic Plc (Foreign Registered) 435,452
13,300 KCE Electronics Plc (Foreign Registered) 98,747
16,100 KR Precision Plc (Foreign Registered) 56,032
340,847 Land & House Public Co Ltd (Foreign Registered) 211,547
10,800 PTT Exploration and Production Public Co Ltd (Foreign Registered) 140,325
101,636 Shinawatra Computer and Communications Public Co Ltd (Foreign Registered) 655,564
110,000 Thai Airways International Plc 135,267
223,300 Thai Airways International (Foreign Registered) 274,592
49,000 Thai Farmers Bank Plc (Foreign Registered) 146,659
1,313,000 Thai Petrochemical (Foreign Registered) 350,336
---------------
4,073,236
---------------
Venezuela - 3.4%
37,600 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 1,332,450
---------------
TOTAL STOCK AND EQUIVALENTS (Cost $36,774,895) 35,830,818
---------------
INVESTMENT FUNDS - 1.0%
Russia - 0.5%
8,100 Morgan Stanley Russia & New Europe Fund 190,350
---------------
United States - 0.5%
15,000 Morgan Stanley Emerging Markets Fund 190,313
---------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT FUNDS (Cost $445,889) 380,663
---------------
SHORT-TERM INVESTMENTS - 10.6%
Cash Equivalents - 10.6%
$ 4,200,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 4,200,000
---------------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,200,000) 4,200,000
---------------
TOTAL INVESTMENTS - 101.8%
(Cost $41,420,784) 40,411,481
Other Assets and Liabilities (net) - (1.8%) (713,129)
---------------
TOTAL NET ASSETS - 100.0% $ 39,698,352
===============
</TABLE>
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GDR Global Depository Receipt
GDS Global Depository Shares
RDC Russian Depository Certificate
144A Securities exempt from registration under
Rule 144A of the Securities Act of 1933.
These securities may be resold in
transactions exempt from registration,
normally to qualified institutional buyers.
* Non-income producing security. A dividend has not been
declared for the twelve months ended February 28, 1998.
(a) Warrants included in position of security.
4 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector diversification
of the Fund's equity investments was as follows:
Industry Sector (Unaudited)
Utilities 19.7%
Telecommunications 14.2
Banking 11.9
Conglomerates 9.7
Food and Beverage 6.0
Electronic Equipment 5.7
Oil and Gas 3.9
Communications 3.7
Metals and Mining 3.3
Insurance 3.1
Transportation 2.5
Consumer Goods 2.4
Machinery 2.1
Construction 2.0
Chemicals 1.8
Financial Services 1.6
Computers 1.6
Automotive 1.3
Textiles 0.7
Paper and Allied Products 0.5
Health Care 0.2
Retail Trade 0.1
Miscellaneous 2.0
-----------
100.0%
===========
See accompanying notes to the financial statements. 5
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $41,420,784) (Note 1) $ 40,411,481
Foreign currency, at value (cost $471,758) (Note 1) 472,314
Cash 70,705
Receivable for investments sold 167,042
Dividends and interest receivable 48,814
Receivable for expenses waived or borne by Manager 5,882
--------------
Total assets 41,176,238
--------------
Liabilities:
Payable for investments purchased 1,349,155
Payable to affiliate for (Note 2):
Management fee 21,255
Shareholder service fee 3,985
Accrued expenses 103,491
--------------
Total liabilities 1,477,886
--------------
Net assets $ 39,698,352
==============
Net assets consist of:
Paid-in capital $ 42,117,498
Accumulated undistributed net investment income 137,543
Accumulated net realized loss (1,553,325)
Net unrealized depreciation (1,003,364)
--------------
$ 39,698,352
==============
Net assets attributable to Class III Shares $ 39,698,352
==============
Shares outstanding - Class III 4,612,685
==============
Net asset value per share - Class III $ 8.61
==============
6 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Period from August 29, 1997
(commencement of operations) to February 28, 1998
- -------------------------------------------------------------------------------------
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $15,498) $ 186,718
Interest 102,450
---------------
Total income 289,168
---------------
Expenses:
Management fee (Note 2) 94,952
Custodian fees 75,188
Audit fees 40,959
Stamp duties and transfer taxes 19,065
Transfer agent fees 14,697
Registration fees 2,511
Legal fees 460
Trustees fee (Note 2) 372
Miscellaneous 7,937
Fees waived or borne by Manager (Note 2) (77,826)
---------------
178,315
Shareholder service fee - Class III (Note 2) 17,804
---------------
Net expenses 196,119
---------------
Net investment income 93,049
---------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (1,553,323)
Foreign currency, forward contracts and foreign
currency related transactions 44,492
---------------
Net realized loss (1,508,831)
---------------
Change in net unrealized appreciation (depreciation) on:
Investments (1,009,303)
Foreign currency, forward contracts and foreign
currency related transactions 5,939
---------------
Net unrealized loss (1,003,364)
---------------
Net realized and unrealized loss (2,512,195)
---------------
Net decrease in net assets resulting from operations $ (2,419,146)
===============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from August 29, 1997
(commencement of operations)
to February 28, 1998
-----------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 93,049
Net realized loss (1,508,831)
Change in net unrealized depreciation (1,003,364)
---------------
Net decrease in net assets resulting from operations (2,419,146)
---------------
Net share transactions - Class III (Note 5) 42,117,498
---------------
Total increase in net assets 39,698,352
Net assets:
Beginning of period -
---------------
End of period (including accumulated undistributed
net investment income of $137,543) $ 39,698,352
===============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from August 29, 1997
(commencement of operations)
to February 28, 1998
-----------------
<S> <C>
Net asset value, beginning of period $ 10.00
------------
Income from investment operations:
Net investment income 0.30 +
Net realized and unrealized loss (1.42)
------------
Total from investment operations (1.39)
------------
Net asset value, end of period $ 8.61
============
Total Return (a) (13.90%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 39,698
Net expenses to average
daily net assets 1.65% *(b)
Net investment income to average
daily net assets 0.78% *
Portfolio turnover rate 56%
Average broker commission rate (c) $ 0.0013
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ 0.03
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized.
(a) Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived
during the period shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
manager, which approximates .16% of average daily net assets.
(c) The average broker commission rate will vary depending on the markets in
which trades are executed.
See accompanying notes to the financial statements. 9
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Evolving Countries Fund (the "Fund"), which commenced operations on
August 29, 1997, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I and Class II shares ceased to be
offered.
The Fund seeks long-term capital appreciation consistent with a prudent
level of risk through investment in equity and equity-related securities
traded in the securities markets of newly industrializing countries in
Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
10
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
When a forward currency contract is extinguished through delivery or offset
by entering into another forward currency contract, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value of the contract at the
time it was extinguished or offset. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. There
were no open forward currency contracts as of February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States.
11
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to the differing
treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
------------------------ ------------------------------ -----------------
$44,494 $(44,494) -
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on
12
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
the relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.60% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. These fees may be reduced by 50% with respect to any portion of a
purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. These fees are allocated relative to each class' net assets on the
share transaction date. Purchase premiums are included as part of each
class' "shares sold" and redemption fees are included as part of each
class' "shares repurchased", respectively, as summarized in Note 5. For the
period ended February 28, 1998, the Fund received $681,488 in purchase
premiums and $1,902 in redemption fees. There is no premium for reinvested
distributions.
Investment risk
Investments in emerging countries present certain risks that are not
inherent in many other securities. Many emerging countries present elements
of political and/or economic instability. Investing in equity securities of
Russian companies includes the risk of loss from Russia's underdeveloped
systems of share registration and transfer. Further, countries may impose
various types of foreign currency regulations or controls which may impede
the fund's ability to repatriate amounts it receives. The fund may acquire
interests in securities in anticipation of improving conditions in the
related countries. These factors may result in significant volatility in
the values of its holdings. The markets for emerging countries are
relatively illiquid. Accordingly, the fund may not be able to realize in an
actual sale amounts approximating those used to value its holdings.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .80% of
average daily net assets. In addition, the Fund has adopted a Shareholder
Service Plan under which the Fund pays GMO a shareholder service fee for
client and shareholder service, reporting and other support. Pursuant to
the Shareholder Service Plan, the shareholder service fee is calculated
based on the average daily net assets at the annual rate of .28% for Class
I shares, .22% for Class II shares, and .15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding custody fees, brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceed .65% of average
daily net assets.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to
13
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
the Consultant will not affect the amounts payable by the Fund to the
Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 28, 1998, was $372. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 1998, aggregated
$50,240,655 and $11,466,548, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------- ------------------ -------------------- ---------------
$41,791,498 $2,367,593 $3,747,610 $1,380,017
4. Principal shareholders
At February 28, 1998, 69% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums and redemption fees received by the
Fund, were as follows:
Period from August 29, 1997
(commencement of operations)
to February 28, 1998
------------------------------------
Class III: Shares Amount
---------------- ----------------
Shares sold 4,671,266 $ 42,593,027
Shares issued to shareholders in
reinvestment of distributions - -
Shares repurchased (58,581) (475,529)
---------------- ----------------
Net increase 4,612,685 $ 42,117,498
================ ================
14
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
At February 28, 1998, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
Year of Expiration Amount
------------------ --------
2006 $353,921
The Fund has also elected to defer to March 1, 1998 post-October losses of
$828,688.
15
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO
since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant
Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an
exclusive consulting management agreement with GMO.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The GMO Evolving Countries Fund was launched August 29, 1997. Since inception,
the Fund is down -13.9% compared to the Fund's benchmark, the IFC Investable
Composite, which is down -14.2% during the same period. The Fund has country
weights that are similar to the GMO Emerging Markets Fund, but stock selection
is focused on larger and more liquid companies within each of these markets.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in equity securities throughout the period.
During the period, the Fund held overweight positions in Russia, Korea and Chile
which underperformed the benchmark. Our underweight positions in Taiwan and
Portugal hurt us. Our overweight positions in India and South Africa positively
impacted relative performance.
Korea and Russia were badly hit by the Asian contagion, impacting negatively on
performance. Russia was particularly hard hit, with political fears and worries
concerning Mr. Yeltsin's health re-emerging. For foreign investors, these issues
compounded the existing Asia worries. Portugal continued to do well on prospects
of convergence with other European Union countries. While the Taiwanese market
was expensive going into the Asia crisis, its strong economic fundamentals
protected it from the meltdown. As a result, it outperformed the other Asian
markets.
Outlook
The Asian crisis has had a positive impact on the behavior of other emerging
market policy makers, especially in Brazil and Russia. In these and other
emerging countries, policy makers have acted quickly to address macroeconomic
imbalances, lest global investors punish them. In the long run, this bodes well
for emerging markets as an asset class.
We have been gradually increasing our weights in Asia, reducing our exposure to
Latin America and continue to be overweight Russia.
The ASEAN markets have now fallen more than 70% from their peak in US$ terms and
are already discounting poor profitability and weaker economic conditions. The
principal factors that influenced a V shaped recovery in Mexico were a strong
bailout package, rapid change in the trade deficit and a strong commitment by
the government to implement tough IMF conditions. The first two conditions are
now present in Asia. However, hubris amongst Asian governments helped cause the
crisis and only when they begin to accept reality will they make the appropriate
structural changes that are so desperately needed. We think Thailand and Korea
are aggressively addressing these issues and are enthusiastic about them.
The new political coalition in Thailand has shown a strong willingness to accept
and implement tough policies. We continue to be underweight Malaysia,
Philippines and are neutral in Indonesia. While Indonesian political risk has
increased substantially with Mr. Suharto's recent
<PAGE>
stroke, the currency has fallen from 2,300 to the dollar to over 8,000. Our
currency model has the Indonesian rupiah at the cheapest level we have ever seen
in any currency. We continue to be overweight India and Pakistan, and are
hopeful that the new coalition government in India will accelerate the pace of
reforms.
In order to protect the real, the Brazilian government has made all the right
moves; reducing government spending and increasing the pace of liberalization
and privatization. We are impressed by their actions, but all of Latin America
remains vulnerable to further contagion from Asia as well as a downdraft in the
U.S. equity market. As a result we remain close to neutral on Brazil. The
Mexican economy continues to surprise with strong economic growth. We have been
overweight for quite a while but valuations are starting to get stretched.
Accordingly, we are close to neutral but are gradually reducing our weight in
Mexico. We also like Chile, which is likely to be a safe harbor if the storm
comes to Latin America.
We have been underweight South Africa for the last 3 years, but are gradually
increasing our weight there. Valuations are starting to get attractive, while
inflation is at a 25 year low and interest rates are likely to fall. However,
the currency remains vulnerable.
Despite the risks, we continue to be overweight Russia. We think the biggest
risk to the Russian market will come from capital outflows caused by a volatile
external environment and domestic concerns (Mr. Yeltsin's health, etc.). Under
this scenario, economic recovery would be threatened by higher domestic interest
rates, which would have to be raised in order to defend the ruble. On the other
hand, key macroeconomic indicators point to an economic recovery in 1998. The
40% drop in the market during the last quarter led to the big blue chips
becoming cheap again. Our portfolio is well positioned to take advantage of the
anticipated industrial recovery.
We have continued to take profits in Turkey and Hungary. Both these markets had
strong moves in 1997, up 100% and 70%, respectively, and our model has turned
quite negative. We remain positive on Israel; with growth slowing down, we
anticipate falling interest rates.
Overall, emerging markets in general and Asia in particular are starting to look
extremely cheap on a three- to five-year view.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Evolving Countries Fund Class III Shares and the IFC Investable Composite
As of February 28, 1998
- ----------------------------------
Average Annual Total Return
- ----------------------------------
Since
Inception
1 Year 8/29/97
- ----------------------------------
Class III n/a -15.6%
- ----------------------------------
[LINE GRAPH APPEARS HERE]
GMO Evolving Countries Fund IFC Investable Composite
--------------------------- ------------------------
8/29/97 $9,840 $10,000
2/28/98 $8,438 $8,578
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 160 bp on the purchase and 40 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Core Fund at February 28, 1998, the results of its operations for the year then
ended, the changes in its net assets and the financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND EQUIVALENTS - 97.6%
Australia - 4.3%
103,100 Advance Property Fund 120,105
12,100 Amalgamated Holdings Ltd 50,778
51,300 Amcor Ltd 224,017
360,395 Australia and New Zealand Banking Group Ltd 2,479,743
4,200 Australian Gas & Light 33,477
156,708 Australian National Industries Ltd 133,447
49,800 Austrim Ltd 126,884
436,209 Boral Ltd 1,057,916
54,900 Broken Hill Proprietary Ltd 542,309
139,229 Burns Philp & Co Ltd 22,764
42,600 Capcount Property Trust 29,602
68,900 Capital Property Trust 112,182
76,000 Capral Aluminum Ltd 160,503
21,300 Coca-Cola Amatil Ltd 183,559
461,098 Coles Myer Ltd 2,393,617
38,700 Comalco Ltd 169,787
48,656 Commonwealth Bank of Australia 604,931
109,196 Consolidated Rutile Ltd * 43,146
3,300 Coventry Group Ltd 13,264
19,500 CRA Ltd 256,123
7,700 CSL Ltd 59,485
518,763 CSR Ltd 1,721,094
107,100 Cultus Petroleum * 191,160
39,100 Email Ltd 87,902
3,600 Faulding (FH) & Co Ltd 18,948
62,690 Foodland Associated 471,919
109,029 Fosters Brewing Group Ltd 241,397
6,910 G E Crane Holdings Ltd 57,666
528,127 Goodman Fielder Ltd 913,858
57,700 Hardie (James) Industries Ltd 179,245
29,150 Incitec Ltd 106,878
28,700 Jupiters Ltd 56,309
16,700 KLZ Ltd 22,754
8,200 Macquarie Bank Ltd 77,090
421,300 MIM Holdings Ltd 235,349
47,700 Mirvac Ltd 76,365
99,366 National Australia Bank Ltd 1,374,170
68,430 National Consolidated Ltd 32,166
108,200 National Mutual Property Trust 93,613
366,003 News Corp Ltd 2,331,325
205,315 Normandy Mining Ltd 204,211
54,749 North Broken Hill Peko Ltd 148,743
17,500 Oil Search Ltd 33,977
15,500 Pacific Dunlop Ltd 27,454
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Australia - continued
39,900 Pasminco Ltd 44,334
622,752 Pioneer International Ltd 1,803,062
51,674 PMP Communications Ltd 108,073
22,000 Pacific Dunlop Ltd 35,221
172,500 Qantas Airways Ltd 294,964
156,535 QCT Resources Ltd 134,046
30,269 Rothmans Holdings Ltd 183,112
138,904 Santos Ltd 534,177
199,197 Schroders Property 360,970
42,245 Sea World Property Trust 33,384
13,600 Seven Network Ltd 48,827
27,651 Simsmetal Ltd 157,291
31,100 Southcorp Holdings Ltd 115,257
47,600 Stockland Trust Group 121,603
61,500 Sydney Harbour Casinos Preferred * 59,494
3,549 W H Soul Pattison & Co Ltd 72,533
56,800 Westfarmers Ltd 548,695
86,300 Westfield Holdings Ltd 423,302
266,065 Westfield Trust Units 576,397
121,250 Westpac Banking Corp 840,884
11,800 Wills (WD & HO) Holdings Ltd 16,158
65,700 Woodside Petroleum Ltd 404,613
-------------------
24,437,629
-------------------
Austria - 1.7%
156 Bank Austria AG Preferred * 10,239
3,068 Bank Austria AG (Participating Certificate) 180,934
3,896 Bank Austria AG * 266,656
1,092 Bau Holdings AG 64,315
7,886 Bau Holdings AG Preferred 2.42% (Non Voting) 375,518
4,641 Boehler Uddeholm (Bearer) 296,928
7,476 Brau Union AG 439,138
1,794 EA-Generali AG 587,593
273 EA-Generali AG Preferred 6.00% 51,743
1,781 Interunfall Versicherung AG 272,697
13,853 Lenzing AG * 905,943
20,797 Leykam-Muerztaler Papier und Zellstoff AG * 479,685
182 Mayr-Melnhof Karton AG (Bearer) 10,548
1,870 Oesterreichische Brau Beteiligungs AG 109,550
14,959 Oesterreichische Elektrizitaetswirtschafts AG 1,572,850
18,492 Oesterreichische Laenderbank AG 1,252,767
8,320 Oesterreichische Laenderbank AG Preferred (Non Voting) 567,560
22,490 Radex-Heraklith AG 903,602
33,007 Voest-Alpine Stahl AG 1,299,527
-------------------
9,647,793
-------------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Canada - 4.6%
10,798 Abitibi Consolidated Inc 154,024
50,561 Agrium Inc 667,918
85,000 Air Canada Inc * 779,433
14,400 Anderson Exploration Ltd * 169,989
14,800 BC Telecom Inc 501,774
58,796 BCE Inc 2,086,356
13,900 Biochem Pharma Inc * 312,546
65,400 Bombardier Inc Class B 1,406,205
41,900 CAE Industries Inc 323,859
11,900 Canadian Hotel Inc 739,177
50,000 Canadian Marconi Co 667,533
22,600 Canadian Tire Corp Ltd Class A 540,723
32,589 Cominco Ltd 549,581
8,400 Co-Steel Inc 116,277
34,300 Cott Corp 294,038
36,200 Dofasco Inc 634,641
12,500 Donohue Inc Class A 251,203
1,600 Edperbrascan Corp Ltd Class A (Voting Shares) 30,243
10,693 Fletcher Challenge Ltd Class A 142,759
59,798 Gulf Canada Resources Ltd * 350,851
34,100 Imasco Ltd 1,297,484
26,693 Imperial Oil Ltd 1,574,590
26,800 Inco Ltd 466,079
14,250 Ipsco Inc 405,526
19,400 Laidlaw Inc 282,858
49,981 Macmillan Bloedel Ltd 630,404
5,000 Magna International Class A 301,268
25,900 Methanex Corp * 211,109
13,900 Molson Co Ltd Class A 249,549
17,500 Moore Corporation Ltd 272,986
18,800 Newbridge Networks Corp * 440,558
37,700 Noranda Forest Inc 231,792
12,700 Noranda Inc 243,175
49,996 Norcen Energy Resource 693,828
101,100 Nova Corp of Alberta 1,115,322
24,900 Nova Scotia Power Inc 332,432
4,300 Potash Corp of Saskatchewan 384,482
22,800 Quebecor Inc Class B 442,174
22,200 Rogers Cantel Mobile Communications Class B * 206,689
24,600 Seagram Ltd 933,422
8,200 Suncor Energy Inc 301,058
17,794 Teck Corp Class B 255,691
28,400 Telus Corp 714,415
9,900 Thomson Corp 296,343
47,900 Transalta Corp 806,103
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Canada - continued
47,900 Transcanada Pipelines Ltd 1,075,365
14,899 United Dominion Industries Ltd 427,136
24,500 Westcoast Energy Inc 619,752
2,000 Weston (George) Ltd 168,640
-------------------
26,099,360
-------------------
Finland - 0.6%
18,800 Amer Group Class A * 375,297
185,400 Enso OY Class R 1,675,575
5,300 Instrumentarium OY Class A 298,169
2,800 Metra AB Class A 73,172
2,000 Metra AB Class B 50,632
23,500 Partek OY 400,886
46,095 Rautaruukki OY 386,474
700 Stockmann AB Class A 57,928
15,300 Valmet OY 229,626
-------------------
3,547,759
-------------------
France - 8.7%
4,535 Accor SA 1,047,126
1,668 Air Liquide L Shares 269,543
8,053 Alcatel Alsthom Cie Generale d'Electricite SA 1,047,416
31,500 Assurances Generales De France (Bearer) 1,709,693
355 Axa SA 34,338
52,199 Banque Nationale de Paris 3,154,614
3,720 Bouygues 521,719
400 Canal Plus 84,280
195 Carrefour 117,014
15,859 Cerus * 89,462
1,970 CGIP 847,301
1 Colas SA 161
15,890 Credit Commercial de France 1,174,544
5,830 Credit Local de France SA 743,919
17,126 Credit Lyonnais * 1,251,561
3,727 Credit National 226,463
27,020 Elf Aquitaine SA 3,075,068
12,848 Elf Sanofi SA 1,455,864
17,064 Eridania Beghin-Say SA 3,043,315
155,500 Eurotunnel SA Units (Bearer) * 148,113
155,500 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 28,090
41,380 Financiere de Paribas SA 3,934,642
37,325 GAN (Group Assurances National) * 918,835
9,010 Generale Des Eaux 1,417,511
3,420 Generale Des Eaux Warrants 5/2/2001 * 3,426
8,340 Groupe Danone 1,684,641
1,520 GTM-Entrepose 98,600
262 Havas Advertising 39,154
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
France - continued
412 Labinal SA 115,158
13,223 Lafarge Coppee SA 975,669
7,157 Lyonnaise Des Eaux 943,806
1,000 Metaleurop SA * 10,215
14,703 Michelin SA Class B 910,298
11,210 Pernod-Ricard 732,698
14,395 Peugeot SA 2,049,590
410 Pinault Printemps Redoute 268,788
15,980 Renault SA * 556,351
75,685 Rhone Poulenc SA Class A 3,487,656
10,400 Saint-Gobain 1,456,863
24,460 Seita 1,068,499
8,890 SGS Thomson Microelectronics * 681,067
2,240 Societe Eurafrance 1,042,887
24,037 Societe Generale Paris 3,623,758
4,140 Sommer Allibert 161,405
14,859 SPIE Batignolles 924,837
3,020 Synthelabo 421,563
1,140 Technip SA 128,804
9,867 Thomson CSF 340,283
7,350 Total SA 806,306
29,100 Usinor Sacilor 436,554
8,303 Worms et Compagnie SA 518,149
-------------------
49,827,617
-------------------
Germany - 3.8%
6,100 Adidas Salomon AG 961,345
17,705 AGIV AG * 380,490
46,600 Bankgesellschaft Berlin AG 989,905
29,300 BASF AG 1,061,081
54,900 Bayer AG 2,333,950
7,700 Bayerische Hypotheken und Wechsel - Bank AG 357,898
500 Bayerische Vereinsbank 30,968
18,430 Berliner Kraft & Licht Class A 812,454
10,300 BHF Bank AG 300,813
5,450 Bilfinger & Berger 143,251
42,490 Continental AG 1,020,837
250 Deutsche Babcock & Wilcox * 13,776
14,600 Douglas Holdings AG 516,501
100 Escada AG 13,886
1,981 FAG Kugelfischer 27,127
4,200 Fresenius Medical Care AG Preferred .82 (Non Voting) 863,259
300 Friedrich Grohe AG Preferred (Non Voting) 83,979
1,200 Friedrich Krupp AG 216,228
3,050 Gerresheimer Glas AG 43,361
450 Hamburgische Electricitaets-Werke AG 117,289
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Germany - continued
8,155 Heidelberg Port-Zement 600,812
20,750 Henkel KGAA Preferred 1,345,791
27,096 Klockner Humboldt Deutz * 219,485
393 Klockner-Werke AG * 26,810
50 Krones Preferred 15,567
22,805 Lufthansa AG * 438,570
400 MAN AG 120,105
350 MAN AG Preferred 81,678
790 Metallgesellschaft * 16,063
796 Porsche AG Preferred (Non Voting) .12% 1,390,450
900 Preussag AG 291,114
6,250 Puma AG Preferred 126,567
15,150 RWE Preferred 710,854
1,100 SAP AG Preferred 454,184
10,700 Schering AG 1,201,631
1,950 Schwarz Pharma AG 159,030
25,050 Siemens AG 1,548,759
13,150 SKW Trostberg AG 449,263
150 Strabag Bau AG * 10,415
1,000 Thyssen AG 217,661
20,200 Veba AG 1,362,436
1,050 Viag AG 568,756
350 Walter Bau AG 34,716
150 Wella AG 104,229
-------------------
21,783,344
-------------------
Hong Kong - 6.2%
2,516,000 Allied Properties Ltd 243,720
472,400 Allied Properties Ltd Warrants 7/3/00 * 10,616
1,550,000 Amoy Properties Ltd 1,311,269
18,000 Asia Satellite Telecom 33,245
1,839,000 Cathay Pacific Airways Ltd 1,567,633
585,500 Century City International 103,602
38,275 Century City International Warrants 12/31/98 * 855
38,275 Century City International Warrants 12/31/99 * 534
70,000 Champion Technology Holdings 8,047
145,600 Champion Technology Holdings Warrants 6/30/98 * 1,504
702,000 Cheung Kong Holdings 4,918,760
1,086,000 China Overseas Land & Investment Ltd 329,622
778,000 CLP Holdings Limited 4,009,325
12,400 Dah Sing Financial Services 33,953
181,500 Dao Heng Bank 520,413
44,133 Dickson Concept International Ltd 76,381
2,240,000 Elec & Eltek International Holdings Ltd 643,720
58,000 Far East Consortium 7,416
9,400 Gold Peak Industries Ltd Warrants 8/6/00 * 668
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hong Kong - continued
540,281 Great Eagle Holdings Ltd 795,506
111,656 Great Eagle Holdings Ltd Warrants 11/30/98 * 9,518
55,700 Guoco Group 141,723
1,221,300 Hang Lung Development Co Ltd 1,790,346
36,800 Hang Seng Bank 348,156
1,616,000 Henderson Investment Ltd 1,356,668
245,000 Henderson Land Development Co Ltd 1,278,398
100,000 HKCB Bank Holding Co Ltd 55,538
323,968 HKR International Ltd 242,688
158,300 Hong Kong Aircraft Engineering Co Ltd 338,375
921,500 Hong Kong Electric Holdings Ltd 3,273,006
143,000 Hong Kong Ferry Co Ltd 147,756
74,000 Hong Kong & Shanghai Hotels 63,558
34,000 Hung Hing Printing Group Ltd 15,260
163,000 Hutchison Whampoa 1,152,632
154,600 Hysan Development Co Ltd 294,524
100 Innovative International Holding Warrants 8/31/99 * 2
1,000 Innovative International Holdings 183
187,400 International Bank of Asia 78,058
107,085 International Bank of Asia Rights 3/20/98 * 18,672
92,000 K Wah International Holdings Ltd 13,902
8,400 Kowloon Motor Bus Co Ltd 16,654
212,127 Kumagai Gumi Ltd 143,838
116,400 Lai Sun Garment International Ltd 63,142
71,049 Lai Sun Hotel International Warrants 4/30/99 * 395
220,000 Lane Crawford International Ltd Class B 14,776
44,796 Leading Spirit Conrowa Electric * 9,546
32,900 Liu Chong Hing Bank Ltd 49,504
142,000 Liu Chong Hing Investment Ltd 121,963
233,000 Mandarin Oriental 194,555
67,000 Mingly Corp 11,942
192,600 New Asia Realty & Trust A Shares 388,061
312,815 New World Development Co Ltd 1,151,466
1,000 Oriental Press Group 258
65,300 Oriental Press Group Warrants 10/2/98 * 152
18,100 Realty Development Corp Ltd Class A 43,716
5,102,000 Regal Hotels International Ltd 797,342
47,000 Ryoden Development 7,892
181,800 Semi Tech (Global) Co Ltd 21,133
70,000 Shanghai Petrochemical Co Class H 11,572
126,900 Shaw Brothers Ltd 79,082
1,144,000 Shun Tak Holdings Ltd 285,169
1,431,972 South China Morning Post Ltd 1,035,718
142,000 Sun Hung Kai Properties Ltd 1,063,739
134,600 Sun Hung Kai Properties Warrants 2/18/00 * 3,025
118,500 Swire Pacific Ltd Class A 713,219
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hong Kong - continued
597,500 Swire Pacific Ltd Class B 601,937
153,500 Tai Cheung Holdings Ltd 52,538
108,000 Tem Fat Hing Fung 11,159
38,000 Union Bank of Hong Kong 53,252
27,000 VTech Holdings Ltd 94,156
480,000 Wharf Holdings Ltd 1,010,526
1,467,200 Wheelock & Co Ltd 1,696,021
31,480 Wing Lung Bank 138,646
49,000 Yue Yuen Industrial Holdings 94,298
-------------------
35,216,144
-------------------
Italy - 5.6%
17,136 Alitalia Linee Aeree * 148,430
28,000 Alleanza Assicurazioni SPA 346,587
129,250 Assicurazioni Generali SPA 3,690,897
133,500 Assicurazioni Generali SPA Rights 3/10/98 * 274,542
245,169 Autostrade Concessioni e Costruzioni SPA Class B Preferred 6.39% 917,954
117,000 Banca Commerciale Italiana SPA 534,181
577,017 Banca di Roma * 796,464
135,718 Banca Fideuram SPA 861,960
11,500 Banca Popolare di Bergamo Credit 243,566
32,000 Banca Popolare di Milano 274,498
31,000 Banco Ambrosiano Veneto SPA (Non Convertible) 70,941
60,997 Banco di Napoli di Risp * 88,967
51,000 Bulgari SPA 296,404
33,900 Cartiere Burgo SPA 230,269
120,500 COFIDE SPA * 76,430
105,000 Compart SPA * 81,796
227,500 Credito Italiano 873,411
58,750 Credito Italiano (Non Convertible) 179,587
4,000 Edison SPA 27,338
289,700 Fiat SPA 1,018,309
208,500 Fiat SPA Preferred 408,972
538,270 Fiat SPA (Non Convertible) 1,126,503
157,500 Finmeccanica SPA * 131,936
50,500 Gruppo Editoriale L' Express * 334,277
490,480 HPI SPA * 367,562
80,000 IFI Istituto Finanziario Preferred 1,551,315
33,000 IFIL Finanziaria di Partecipazioni SPA 141,077
112,900 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 292,116
69,700 Industriali Riunite SPA (Non Convertible) * 49,779
210,700 Industriali Riunite SPA * 267,871
99,500 Istituto Bancario San Paolo 1,167,677
73,000 Istituto Mobilaire Italiano 1,017,827
550,892 Istituto Nazionale Delle Assicurazioni 1,496,178
48,750 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 226,117
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Italy - continued
4,500 Italmobiliare SPA 140,825
2,650 Luxottica Group Sponsored ADR 203,388
59,000 Mediobanca SPA 603,370
62,500 Merloni Elettrodomestici SPA 304,737
12,500 Mondadori Editore 134,818
1,089,200 Montedison SPA 1,124,229
160,000 Montedison SPA (Non Convertible) 120,618
76,333 Montefibre SPA 62,493
187,136 Olivetti and Co SPA * 184,475
90,535 Parmalat Finanziaria SPA 148,746
1,721,269 Permafin Finanziaria * 1,615,989
142,200 Pirelli SPA (Non Convertible) 313,890
29,500 RAS SPA 347,844
15,000 RAS SPA (Non Convertible) 135,461
258,000 Seat SPA * 103,376
32,650 Sirti SPA 189,939
166,240 SMI (Societa Metallurgica Italy) * 119,377
220,000 Sopaf SPA * 194,864
31,549 Stefanel SPA * 81,982
727,500 Telecom Italia Mobile SPA 3,327,608
507,646 Telecom Italia Mobile SPA (Non Convertible) 1,489,363
214,936 Telecom Italia SPA (Non Convertible) 1,043,180
53,000 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 268,932
----------------
31,871,242
----------------
Japan - 15.1%
8,100 Advantest Corp 572,572
6,000 Aiwa Co 170,031
45,000 Amada Co Ltd 210,876
17,000 Anritsu Corp 172,247
171,000 Aoki Corp * 158,371
7,000 Aoyama Trading 151,825
4,600 Arabian Oil Co Ltd 87,390
35,000 Asahi Breweries Ltd 468,218
99,000 Atsugi Nylon Industrial 188,079
12,000 Bandai Co 178,580
22,000 Banyu Pharmaceutical Co Ltd 287,343
51,000 Brother Industries Ltd 138,874
42,000 Canon Inc 960,817
24,000 Canon Sales Co Inc 322,964
37,000 Casio Computer Co 304,599
32,100 Chubu Electric Power Co Inc 513,275
9,000 Chudenko Corp 245,072
58,000 Chugai Pharmaceutical Co Ltd 369,128
12,000 Chugoku Bank Ltd 156,732
13,100 Chugoku Electric Power Co Inc 189,765
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
42,000 Citizen Watch Co 304,203
222,000 Cosmo Oil Co Ltd 509,618
123,000 Daicel Chemical Industries Ltd 272,619
27,000 Daiichi Seiyaku Co Ltd 369,746
36,000 Dainippon Pharmaceutical Co Ltd 163,287
44,000 Dainippon Screen Manufacturing Co Ltd 255,996
98,000 Daishowa Paper Manufacturing * 572,501
19,500 Daito Trust Construction Co Ltd 172,881
18,000 Daiwa House Industry Co Ltd 140,774
64,000 Daiwa Securities Co Ltd 315,618
49,000 Denso Corp 1,000,712
243 East Japan Railway Co 1,148,350
27,000 Eisai Co Ltd 472,334
43,000 Ezaki Glico Co Ltd 268,899
5,300 Familymart 206,831
20,900 Fanuc Co 761,023
122,000 Fuji Heavy Industries Ltd 457,754
49,800 Fuji Photo Film Co Ltd 1,951,318
49,000 Fujikara Ltd 344,819
25,000 Fujisawa Pharmaceutical Co Ltd 251,326
33,000 Fukuyama Transporting Co Ltd 161,957
56,000 Gakken Co Ltd 139,634
52,000 General Sekiyu (KK) 257,674
77,000 Hankyu Corp 359,004
172,000 Haseko Corp * 157,936
16,000 Heiwa Corp 176,047
64,000 Hino Motors 202,137
369,000 Hitachi Ltd 2,769,033
14,000 Hitachi Maxell Ltd 259,321
62,000 Hitachi Metals Ltd 282,197
22,900 Hokkaido Electric Power 329,914
25,000 Honda Motor Co Ltd 864,799
33,000 House Foods Corp 462,360
5,000 Hoya Corp 132,589
33,000 INAX Corp 138,447
23,000 Intec Inc 160,215
75,000 Itochu Corp 222,631
34,000 Itoham Foods Inc 152,331
28,000 Ito-Yokado 1,529,328
13,000 Japan Airport Terminal Co Ltd 87,366
142,000 Japan Energy Co Ltd 196,707
43,000 Japan Radio Co 274,345
87,000 Japan Synthetic Rubber Co Ltd 452,458
384 Japan Tobacco Inc 2,823,842
50,000 Kamigumi Co Ltd 228,370
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
28,000 Kandenko Co 195,045
44,000 Kaneka Corp 250,772
129,000 Kankaku Securities Co Ltd * 126,621
47,700 Kansai Electric Power 819,354
49,000 Kao Corp 663,263
10,000 Katokichi Co Ltd 132,985
132,000 Kawasaki Kisen * 212,111
90,000 Keio Teito Electric Railway Co Ltd 364,759
38,000 Keisei Electric Railway 150,099
52,000 Kikkoman Corp 328,885
19,000 Kinden Corp 254,176
83,000 Kirin Brewery Co Ltd 722,710
17,000 Kissei Pharmaceutical Co Ltd 266,445
4,000 Kokusai Denshin Denwa 167,814
26,000 Kokusai Electric 240,798
8,000 Kokuyo Co Ltd 139,951
60,000 Konica Corp 313,940
27,000 Koyo Seiko Co Ltd 133,792
59,000 Kubota Corp 169,999
64,000 Kurabo Industries Ltd 110,948
21,000 Kyocera Corp 1,130,373
57,000 Kyowa Hakko Kogyo Co Ltd 279,292
39,500 Kyushu Electric Power Co Inc 575,319
26,000 Kyushu Matsushita Electric 267,553
88,000 Lion Corp 319,037
7,300 Mabuchi Motor Co 390,050
57,000 Maeda Corp 201,235
20,000 Maeda Road Construction 118,420
17,000 Makita Corp 196,470
49,000 Marudai Food Co Ltd 135,756
15,000 Matsushita Communications 491,570
16,000 Matsushita Kotubuki 436,951
10,000 Meiji Milk Products 30,080
48,000 Meiji Seika Kaisha Ltd 184,279
35,000 Minolta Co Ltd 210,560
177,000 Mitsubishi Electric Corp 538,019
60,000 Mitsubishi Gas Chemical Co Inc 196,628
177,000 Mitsubishi Oil Co Ltd 367,086
10,000 Mitsubishi Warehouse & Transportation Co Ltd 113,196
168,000 Mitsui Petrochemical Industries Ltd 472,097
10,000 Mochida Pharmaceutical Co Ltd 48,682
4,000 MOS Food Services 55,410
4,200 Namco Ltd 101,401
19,000 National House Industrial 178,976
72,000 NEC Corp 803,610
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
81,000 New Oji Paper Co Ltd 436,001
23,000 NGK Spark Plug Co 166,223
15,000 Nichicon Corp 157,920
90,000 Nichii Co Ltd 697,459
59,000 Nichirei 149,450
127,000 Nikko Securities 501,646
6,000 Nikon Corp 58,418
20,800 Nintendo Co Ltd 1,909,918
24,000 Nippon Carbon Co Ltd * 51,104
29,000 Nippon Chemi-Con Corp 94,119
9,000 Nippon Electric Glass Co 114,700
26,000 Nippon Express Co Ltd 162,384
10,000 Nippon Flour Mills Co Ltd 24,935
48,000 Nippon Hodo Co 229,114
12,000 Nippon Kayaku Co Ltd 56,424
38,000 Nippon Meat Packers Inc 499,327
152,000 Nippon Oil Co Ltd 548,658
47,000 Nippon Paper Industries 239,223
759 Nippon Telegraph & Telephone 6,969,366
1,700 Nippon Television Network 514,051
39,000 Nishimatsu Construction 200,974
29,000 Nisshin Oil Mills Ltd 80,345
120,000 Nisshinbo Industries Inc 698,171
216,000 Nissho Iwai Corp 615,531
8,000 Nissin Food Products Co Ltd 166,548
39,000 Nomura Securities Co Ltd 537,165
80,000 Oki Electric Industry 206,443
21,000 Okumura Corp 93,256
27,000 Olympus Optical Co Ltd 212,444
92,000 Omron Corp 1,485,633
20,000 Ono Pharmaceutical Co Ltd 460,698
55,000 Onward Kashiyama Co Ltd 783,662
3,300 Orix Corp 240,323
34,000 Q.P. Corp 223,652
108,000 Renown Inc* 112,847
11,000 Rinnai Corp 178,501
4,000 Rohm Co Ltd 395,789
21,000 Royal Co Ltd 317,502
10,000 Ryosan Co 166,231
100,000 Sagami Railway Co Ltd 284,968
22,000 Sanden Corp 117,723
20,000 Sankyo Co Ltd 536,690
17,000 Sanwa Shutter Corp 104,290
30,000 Sapporo Breweries Ltd 135,360
14,500 Secom Co Ltd 903,309
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
75,000 Seino Transportation Co Ltd 447,637
33,000 Sekisui House Ltd 259,915
34,000 Sharp Corp 265,907
31,900 Shikoku Electric Power 467,150
81,000 Shionogi and Co Ltd 419,330
72,000 Shiseido Co Ltd 906,198
213,000 Showa Denko 286,630
121,000 Showa Shell Sekiyu 822,758
16,000 Skylark Co Ltd 178,580
58,000 Snow Brand Milk Products Co Ltd 201,551
99,000 Stanley Electric Co Ltd 342,460
87,000 Sumitomo Bakelite Co Ltd 556,447
310,000 Sumitomo Corp 2,154,516
52,000 Sumitomo Heavy Industries Ltd 185,229
22,000 Suzuki Motor Corp 233,357
18,000 Taiyo Yuden Co Ltd 192,353
23,000 Takara Standard Co 147,653
64,000 Takeda Chemical Industries Ltd 1,773,134
25,000 Takuma Corp 219,663
50,000 Tanabe Seiyaku Co Ltd 284,968
12,700 TDK Corp 970,118
132,000 Teikoku Oil Co Ltd 437,806
32,000 Toei Co Ltd 142,611
40,600 Tohoku Electric Power Co Inc 591,340
41,000 Tokio Marine & Fire Insurance Co 464,102
53,000 Tokyo Electric Co Ltd 174,108
12,000 Tokyo Electron 431,251
67,000 Tokyo Steel Manufacturing Co 307,607
20,000 Tomen Corp 27,072
38,000 Toppan Printing Co Ltd 448,191
159,000 Toshiba Corp 712,372
8,000 Tostem Corp 111,454
25,000 Toyo Suisan Kaisha 184,042
31,000 Toyo Trust & Banking Co Ltd 220,605
137,000 Toyobo Co Ltd 229,906
68,000 Toyota Motor Corp 1,878,572
21,000 Tsumura and Co 109,713
20,000 Ushio Inc 158,157
19,000 Victor Co of Japan Ltd 168,448
19,000 Wacoal Corp 198,528
37,000 Yakult Honsha Co Ltd 250,416
18,000 Yamaha Corp 199,478
22,000 Yamaha Motor Co 141,756
51,000 Yamanouchi Pharmaceutical Co Ltd 1,239,373
27,000 Yamato Transport Co Ltd 339,824
30,000 Yamazaki Baking Co Ltd 337,212
52,000 Yoshitomi Pharmaceutical Industries Ltd 275,786
----------------
86,148,305
----------------
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Malaysia - 2.7%
186,500 AMMB Holdings Berhad 230,397
351,500 Arab Malaysian Finance (Foreign Registered) 169,294
73,000 Berjaya Leisure Berhad 70,716
268,700 Berjaya Sports Toto 753,091
62,700 Carlsberg Brew Malaysia 245,682
101,000 Cement Industries of Malaysia Berhad 82,174
213,000 DMIB Berhad 72,449
213,500 Edaran Otomobil Berhad 464,762
59,000 Genting Berhad 195,864
65,000 Golden Hope Plantations Berhad 86,667
92,000 Guinness Anchor Berhad 145,197
361,000 Highlands and Lowlands Berhad 398,819
753,000 Hong Leong Properties Berhad 264,318
332,300 IGB Corp Berhad 141,962
40,000 Jaya Tiasa Holdings Berhad 66,939
171,300 Kedah Cement Berhad 63,393
62,000 Kuala Lumpur Kepong Berhad 150,993
472,900 Kumpulan Guthrie Berhad 334,569
132,000 Magnum Corp Berhad 111,347
291,550 Malayan Cement Berhad 170,567
83,840 Malaysia Mining Corp Berhad 52,756
293,000 Malaysian Airline Systems 338,046
83,500 Malaysian International Ship 154,503
37,000 Malaysian Pacific Industries 110,748
589,600 Malaysian Resources Corp 399,484
3,000 Matsushita Electric 10,367
830,000 MBF Capital Berhad 395,238
92,000 Nestle Malaysia 495,673
92,000 New Straits Times 142,694
438,680 Oriental Holdings Berhad 895,265
22,000 OYL Industries Berhad 79,020
386,500 Pan Malaysia Cement 140,928
92,300 Perlis Plantations 153,205
37,000 Pernas International Hotel & Property 12,686
512,000 Perusahaan Otomobil 968,272
149,100 Petronas Dagangan Berhad 174,457
204,300 Petronas Gas Berhad 567,037
195,000 Rashid Hussain Berhad 307,755
542,000 Renong Berhad 256,620
88,000 Resorts World Berhad 191,565
310,000 RHB Capital Berhad 293,551
161,000 RJ Reynolds Berhad 313,238
150,000 Rothmans of Pall Mall Berhad 1,336,735
202,000 Sarawak Enterprises Corp 112,680
33,000 Shell Refinery Co 59,265
567,000 Sime Darby Berhad 740,571
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Malaysia - continued
584,000 TA Enterprise Berhad 222,476
894,400 Tan Chong Motor Holdings Berhad 635,207
223,000 Telekom Malaysia Berhad 758,503
234,000 UMW Holdings Berhad 305,633
197,000 YTL Corp 340,395
----------------
15,183,773
----------------
Norway - 0.2%
449 Bona Shipholding Ltd* 4,152
30,800 Norsk Hydro AS 1,346,924
----------------
1,351,076
----------------
Portugal - 0.7%
16,483 Banco Commercial Portugues (Registered) 546,639
9,310 Banco Espirito Santo e Commercial de Lisboa (Registered) 378,252
6,633 Banco Totta & Acores (Registered) 184,027
8,775 BPI-SGPS SA (Registered) 315,004
9,032 Cimpor Cimentos De Portugal SA (Registered) 261,522
38,155 Electricidade De Portugal* 809,078
2,989 Est Jeronimo Martins Filho Admin 103,229
10,165 Portucel Industrial Empresa 77,138
20,065 Portugal Telecom SA 1,052,898
4,403 Sonae Investimentos 198,224
----------------
3,926,011
----------------
Singapore - 4.2%
113,800 Asia Food & Properties Ltd Warrants 7/12/02* 15,932
343,500 City Developments 1,557,511
331,000 Comfort Group 160,293
110,000 Creative Technology Ltd* 2,619,371
54,000 Cycle & Carriage Ltd 239,852
284,000 DBS Land Ltd 439,753
245,900 Development Bank of Singapore (Foreign Registered) 1,926,545
45,000 First Capital Corp Ltd 45,527
469,984 Hai Sun Hup Group Ltd 191,357
13,564 Haw Paw Brothers International Ltd 15,564
9,500 Haw Paw Brothers International Ltd Warrants 7/18/2001* 2,872
7,495 Highlands and Lowlands Berhad 8,091
88,000 Hotel Properties Ltd 57,002
225,708 Inchcape Berhad 341,138
225,708 Inchcape Marketing Services* 57,088
658,441 Jardine Matheson Holdings Ltd 3,081,504
470,500 Jardine Strategic Holdings Ltd 1,340,925
18,000 Keppel Bank Ltd 25,429
95,000 Keppel Land Ltd 100,802
260,000 Marco Polo Developments Ltd 356,077
51,000 Metro Holdings Ltd 69,846
265,000 Natsteel Ltd 366,194
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Singapore - continued
41,500 Neptune Orient Lines Ltd 19,457
90,000 Overseas Union Bank Ltd (Foreign Registered) 338,680
900 Parkway Holdings Ltd 1,932
83,800 Robinson and Co Ltd 302,424
10,000 Shangri-La Hotel Ltd 16,533
920,000 Singapore Airlines Ltd (Foreign Registered) 6,810,611
206,000 Singapore Press Holdings (Foreign Registered) 2,948,304
121,000 Singapore Tech Industrial Corp 106,743
345,000 Straits Trading Co Ltd 378,840
9,000 Times Publishing Ltd 17,767
----------------
23,959,964
----------------
Spain - 3.4%
3,230 Acerinox SA 485,082
2,500 Azucarera de Espana SA 141,220
105,913 Banco Bilbao Vizcaya SA 4,834,389
34,400 Banco Popular Espanol 3,053,261
1,700 Compania Espanola de Petroleos SA 51,713
2,660 Cristaleria Espanola SA 213,297
34,250 Dragados & Construcciones SA 934,000
41,797 FENOSA SA 518,341
9,060 Fomento de Construcciones y Contratas SA 388,248
1,200 Grupo Anaya SA 27,504
73,196 Iberdrola SA 1,057,437
89,760 Repsol SA 3,998,011
99,558 Telefonica de Espana SA 3,419,549
----------------
19,122,052
----------------
Sweden - 4.5%
45,487 Assi Doman 1,119,222
86,000 Avesta Sheffield AB 537,070
14,838 Celsius Industrier AB Class B 274,284
44,300 Electrolux AB Class B 3,375,175
1,800 Euroc Industri AB Class A 71,942
6,328 Industrivarden AB Class A 403,878
1,884 Industrivarden AB Class C (Bearer) 116,715
9,900 Kinnevik Investment Class B 187,331
55,700 Marieberg Tidnings AB Class A 1,287,033
109,400 Mo Och Domsjo AB Class B 3,183,728
93,855 Skanska AB Class B 4,243,544
10,000 SKF AB Class B 206,710
35,800 Ssab Swedish Steel Class A 670,713
9,800 Ssab Swedish Steel Class B 183,603
230,950 Stora Kopparberg Bergslags Class A 3,360,521
51,850 Stora Kopparberg Bergslags Class B 747,978
133,900 Svenska Cellulosa Class B 3,043,790
73,900 Trelleborg AB Class B 1,043,003
23,350 Volvo AB Class A 621,197
45,650 Volvo AB Class B 1,234,416
----------------
25,911,853
----------------
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Switzerland - 7.8%
43,300 CS Holdings (Registered) 7,818,547
1,670 Holderbank Financiere Glarus AG (Registered) 326,581
70 Jelmoli (Bearer) 68,588
9,705 Nestle AG (Registered) 16,994,992
5,933 Novartis AG (Registered) 10,822,187
268 Roche Holdings (Participating Certificate) 3,137,258
370 Saurer Group Holdings (Registered) * 372,622
490 Swiss Reinsurance (Bearer) 1,032,686
7,410 Zurich Insurance 4,039,248
----------------
44,612,709
----------------
United Kingdom - 23.5%
157,500 Abbey National 3,228,581
155,590 AMEC 355,448
63,900 Anglian Water Plc 883,775
23,140 Arcadia Group * 187,928
254,000 Arjo Wiggins Appleton Plc 685,866
58,738 ASDA Group 194,632
26,100 Bank of Scotland 297,593
112,510 Barclays Plc 3,349,279
165,590 Barratt Development 766,129
260,500 BAT Industries 2,599,214
968,700 BG Plc * 4,860,654
81,531 Booker Plc 323,520
312,181 British Airways Plc 2,929,834
48,500 British Energy Plc * 357,752
118,500 British Land Co 1,434,060
323,200 British Steel Plc 775,607
175,200 British Telecom Plc 1,765,417
157,250 BTR 417,496
39,400 Cable & Wireless 430,751
358,182 Coats Viyella 489,490
124,300 Courtaulds Textiles Plc 691,751
46,280 Debenhams Plc * 318,516
68,700 Electrocomponents Plc 525,983
236,100 English China Clays Plc 948,522
40,000 Enterprise Oil 369,804
384,690 FKI 1,133,772
31,500 Great Portland Estates Plc 151,964
112,456 Greenalls Group Plc 767,483
48,300 Hammerson 400,016
279,012 Hazlewood Foods 854,471
583,944 Hillsdown Holdings 1,528,727
19,000 Hyder Plc 293,439
30,110 Imperial Chemical Industries Plc 549,551
27,100 Kingfisher 467,396
285,991 Ladbroke Group 1,440,906
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom - continued
44,500 Land Securities 833,438
551,600 Lasmo 2,508,919
82,675 Legal & General Group 927,007
607,600 Lloyds TSB Group 9,143,778
802,603 Lonrho 1,242,197
214,011 Marley 385,844
58,600 Meyer International 365,678
130,100 Mirror Group Plc 364,156
91,970 National Grid Group Plc * 519,400
489,093 National Power 5,069,311
25,700 Next 350,580
1,736,285 Norcros Plc 1,858,216
225,800 Northern Foods Plc 1,007,523
184,200 Peninsular & Oriental Steam Navigation Co 2,373,207
870,137 Pilkington 1,633,256
224,659 Powergen 3,138,610
28,740 Provident Financial Plc * 466,106
64,600 Prudential Corp 968,975
124,000 Railtrack Group Plc 1,888,536
231,500 Rentokil Plc 1,142,541
244,573 Reuters Holdings Plc * 2,462,446
70,460 RMC Group 1,074,275
21,500 Royal Bank of Scotland Group * 332,758
123,908 Safeway Plc 730,372
101,000 Sainsbury (J) 778,682
17,260 Schroders 652,207
193,616 Scottish Hydro-Electric Plc 1,736,602
368,442 Scottish Power Plc 3,142,394
798,712 Sears 690,417
276,400 Sedgwick Group 673,856
93,015 Severn Trent Plc 1,431,945
112,700 Slough Estates 746,881
772,828 Smithkline Beecham Plc 9,670,706
204,100 Smiths Industries Plc 3,054,700
255,089 Southern Electric Plc 2,152,521
30,900 Southwest Water 458,273
490,730 Storehouse Plc 2,092,686
213,500 T & N 889,365
1,116,340 Tarmac 1,847,244
432,766 Taylor Woodrow Plc 1,439,349
145,900 Thames Water 2,123,583
223,600 TI Group Plc 1,932,826
163,915 Transport Development Group 628,834
44,000 Unigate 473,072
443,412 Unilever Plc 4,015,428
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom - continued
221,452 United Biscuits 977,184
328,300 United Utilities 4,410,855
37,240 Viglen Technology Plc * 20,847
432,130 Vodafone Group Plc 3,842,111
135,800 Waste Management International * 402,470
164,270 Whitbread Plc Class A 2,650,611
561,269 Wilson (Connolly) Holdings 1,501,710
278,175 Wimpey (George) 563,359
202,688 Yorkshire Water 1,712,013
----------------
134,275,187
----------------
TOTAL STOCK AND EQUIVALENTS (Cost $546,015,700) 556,921,818
----------------
INVESTMENT FUNDS - 0.0%
Australia - 0.0%
54,100 Franked Income Fund 187,964
----------------
Netherlands - 0.0%
8,275 Schroders International Property Fund 15,221
----------------
TOTAL INVESTMENT FUNDS (Cost $188,572) 203,185
----------------
Par Value/
Shares DEBT OBLIGATIONS - 0.0%
United Kingdom - 0.0%
GBP 90,537 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 149,069
GBP 23,882 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 39,322
----------------
188,391
----------------
TOTAL DEBT OBLIGATIONS (Cost $99,516) 188,391
----------------
SHORT-TERM INVESTMENTS - 4.4%
Cash Equivalents - 2.2%
12,906,326 The Boston Global Investment Trust (b) 12,906,326
$ 100,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 100,000
----------------
13,006,326
----------------
U.S. Government - 2.2%
$ 12,850,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 12,280,520
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $25,297,573) 25,286,846
----------------
TOTAL INVESTMENTS - 102.1%
(Cost $571,601,361) 582,600,240
Other Assets and Liabilities (net) - -2.1% (12,118,595)
----------------
TOTAL NET ASSETS - 100.0% $ 570,481,645
================
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GBP British Pounds
(a) This security is held as collateral for open futures contracts.
(b) Represents investment of security lending collateral (Note 1).
* Non-income producing security. A dividend has not been declared
for the twelve months ended February 28, 1998.
20 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, industry sector diversification
of the Fund's equity investments was as follows:
Industry Sector (Unaudited)
Banking 11.7%
Consumer Goods 9.0
Utilities 7.6
Conglomerates 5.5
Services 4.9
Telecommunications 4.8
Health Care 4.7
Construction 4.7
Chemicals 4.5
Transportation 4.2
Electronic Equipment 4.0
Real Estate 3.9
Oil and Gas 3.6
Insurance 3.2
Paper and Allied Products 3.1
Automotive 2.7
Food and Beverage 2.6
Machinery 2.5
Retail Trade 2.4
Metals and Mining 2.0
Communications 1.8
Financial Services 1.0
Textiles 0.7
Aerospace 0.5
Computers 0.3
Miscellaneous 4.1
------------
100.0%
============
See accompanying notes to the financial statements. 21
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 28, 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $571,601,361) (Note 1) $ 582,600,240
Foreign currency, at value (cost $296,546) (Note 1) 297,228
Cash 32,016
Dividends and interest receivable 618,876
Foreign withholding taxes receivable 608,145
Receivable for open forward foreign currency contracts (Notes 1 and 6) 25,384,100
Receivable for expenses waived or borne by Manager (Note 2) 98,436
--------------
Total assets 609,639,041
--------------
Liabilities:
Payable for investments purchased 69,755
Payable for open forward foreign currency contracts (Notes 1 and 6) 25,017,163
Payable upon return of securities loaned (Note 1) 12,906,326
Payable for variation margin on open futures contracts (Notes 1 and 6) 498,421
Payable to affiliate for (Note 2):
Management fee 325,892
Shareholder service fee 48,699
Accrued expenses 291,140
--------------
Total liabilities 39,157,396
--------------
Net assets $ 570,481,645
==============
Net assets consist of:
Paid-in capital $ 528,193,303
Distributions in excess of net investment income (7,787,554)
Accumulated undistributed net realized gain 33,155,953
Net unrealized appreciation 16,919,943
--------------
$ 570,481,645
==============
Net assets attributable to:
Class III shares $ 207,653,004
==============
Class IV shares $ 362,828,641
==============
Shares outstanding:
Class III 17,425,016
==============
Class IV 30,435,120
==============
Net asset value per share:
Class III $ 11.92
==============
Class IV $ 11.92
==============
</TABLE>
22 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 28, 1998
- --------------------------------------------------------------------------------------
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $1,564,794) $ 14,287,074
Interest (including securities lending income of $222,696) 1,896,900
--------------
Total income 16,183,974
--------------
Expenses:
Management fee (Note 2) 4,457,931
Custodian fees 893,856
Audit fees 52,343
Transfer agent fees 29,295
Legal fees 12,410
Registration fees 9,500
Trustees fee (Note 2) 5,474
Miscellaneous 4,665
Stamp duties and transfer taxes 796
Fees waived or borne by Manager (Note 2) (2,255,760)
--------------
3,210,510
Shareholder service fee - (Note 2)
Class III 823,838
Class IV 40,570
--------------
Net expenses 4,074,918
--------------
Net investment income 12,109,056
--------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 43,241,077
Closed futures contracts 8,579,522
Closed swap contracts 978,030
Foreign currency, forward contracts and foreign currency
related transactions 34,769,811
--------------
Net realized gain 87,568,440
--------------
Change in net unrealized appreciation (depreciation) on:
Investments (12,894,473)
Open futures contracts 6,987,281
Foreign currency, forward contracts and foreign currency
related transactions (1,035,332)
--------------
Net unrealized loss (6,942,524)
--------------
Net realized and unrealized gain 80,625,916
--------------
Net increase in net assets resulting from operations $ 92,734,972
==============
</TABLE>
See accompanying notes to the financial statements. 23
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
Increase (decrease) in net assets: February 28, 1998 February 28, 1997
--------------------- -----------------------
<S> <C> <C>
Operations:
Net investment income $ 12,109,056 $ 11,550,285
Net realized gain 87,568,440 56,218,667
Change in net unrealized appreciation (depreciation) (6,942,524) 11,580,140
--------------------- -----------------------
Net increase in net assets resulting from operations 92,734,972 79,349,092
--------------------- -----------------------
Distributions to shareholders from:
Net investment income
Class III (12,103,195) (12,206,199)
Class IV - -
--------------------- -----------------------
Total distributions from net investment income (12,103,195) (12,206,199)
--------------------- -----------------------
Net realized gains
Class III (108,544,439) (18,177,235)
Class IV - -
--------------------- -----------------------
Total distributions from net realized gains (108,544,439) (18,177,235)
--------------------- -----------------------
(120,647,634) (30,383,434)
--------------------- -----------------------
Net share transactions - (Note 5)
Class III (313,055,281) 124,906,849
Class IV 330,350,503 -
--------------------- -----------------------
Increase in net assets resulting from net share transactions 17,295,222 124,906,849
--------------------- -----------------------
Total increase (decrease) in net assets (10,617,440) 173,872,507
Net assets:
Beginning of period 581,099,085 407,226,578
--------------------- -----------------------
--------------------- -----------------------
End of period (including distributions in excess of net
investment income of $(7,787,554) and accumulated
undistributed net investment income of $31,487,338,
respectively) $ 570,481,645 $ 581,099,085
===================== =======================
</TABLE>
24 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29
-----------------------------------------------
1998 1997 1996*
-------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.68 $ 11.54 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income 0.27+ 0.22 0.23
Net realized and unrealized gain 1.72 1.63 1.44
-------- -------- --------
Total from investment operations 1.99 1.85 1.67
-------- -------- --------
Less distributions to shareholders from:
Net investment income (0.27) (0.28) (0.06)
Net realized gains (2.48) (0.43) (0.07)
-------- -------- --------
Total distributions (2.75) (0.71) (0.13)
-------- -------- --------
Net asset value, end of period $ 11.92 $ 12.68 $ 11.54
======== ======== ========
Total Return (a) 17.98% 16.55% 16.66%
Ratios/Supplemental Data:
Net assets, end of period (000's) $207,653 $581,099 $407,227
Net expenses to average
daily net assets 0.69% 0.72%(c) 0.69%**
Net investment income to average
daily net assets 2.15% 2.25% 1.89%**
Portfolio turnover rate 96% 84% 7%
Average broker commission rate per equity share (b) $ 0.0086 $ 0.0067 N/A
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.05 $ 0.04 $ 0.05
</TABLE>
* Period from June 30, 1995 (commencement of operations) to February 29,
1996.
** Annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for
security trades on which commissions are charged. The average broker
commission rate will vary depending on the markets in which trades are
executed.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .03% of average daily net assets.
See accompanying notes to the financial statements. 25
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
-------------
<S> <C>
Net asset value, beginning of period $ 10.87
-------------
Income (loss) from investment operations:
Net investment income 0.01 +
Net realized and unrealized gain 1.04
-------------
Total from investment operations 1.05
-------------
Net asset value, end of period $ 11.92
=============
Total Return (a) 9.66%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 362,829
Net expenses to average
daily net assets 0.63% *
Net investment income to average
daily net assets 0.72% *
Portfolio turnover rate 96%
Average broker commission rate (b) $ 0.0086
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ 0.01
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the period shown.
(b) The average broker commission rate will vary depending on the markets in
which trades are executed.
26 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Currency Hedged International Core Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series into classes.
The Fund seeks maximum total return through investment in a portfolio of
common stocks of non-U.S. issuers and through management of the Fund's
foreign currency positions.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, Class IV commenced operations
and Class I and Class II shares ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
27
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is subsequently settled. Gains or losses are recognized but
not considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 6 for all open futures
contracts as of February 28, 1998.
28
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1998.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into equity swap agreements which
involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Equity swaps are marked to market daily based
upon quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
1998, there were no open swap agreements.
29
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $11,983,549 collateralized by cash in the amount of
$12,906,326, which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign interest and dividend income have been withheld
in accordance with the applicable country's tax treaty with the United
States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and passive foreign investment
company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
30
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
---------------------- ---------------------------- ----------------------
$(39,280,753) $39,280,753 -
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. Prior to June 1, 1996, the premium on cash purchases was .75% of
the amount invested. All purchase premiums are paid to and recorded by the
Fund as paid-in capital. These fees are allocated relative to each class'
net assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $95,602 in purchase premiums.
There is no premium for cash redemptions or reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and
31
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, .15%
for Class III shares, and .09% for Class IV shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees and extraordinary expenses) exceed .54% of average daily net
assets. Prior to June 1, 1996, a similar waiver existed for annual expenses
exceeding .69%; thus, the net annual expense ratio after the waiver for a
Class III shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $5,474. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$535,168,488 and $557,420,651, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
----------------------------- ----------------------------- -------------------------- ----------------------------
<S> <C> <C> <C>
$574,060,003 $77,004,229 $68,463,992 $8,540,237
</TABLE>
4. Principal shareholders
At February 28, 1998, 39% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund.
32
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Class III: Year Ended Year Ended
February 28, 1998 February 28, 1997
--------------------------------------------- ----------------------------------------------
Shares Amount Shares Amount
--------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Shares sold 8,582,791 $ 112,053,373 16,351,665 $ 195,574,666
Shares issued to
shareholders in
reinvestment of
distributions 10,291,607 116,658,063 2,179,223 26,037,897
Shares repurchased (47,260,509) (541,766,717) (7,998,316) (96,705,714)
--------------------- -------------------- --------------------- ---------------------
Net increase /
(decrease) (28,386,111) $ (313,055,281) 10,532,572 $ 124,906,849
===================== ==================== ===================== =====================
</TABLE>
<TABLE>
<CAPTION>
Period from January 9, 1998
(commencement of operations)
Class IV: to February 28, 1998
---------------------------------------------
Shares Amount
------------------ ------------------
<S> <C> <C>
Shares sold 31,203,675 $ 339,183,949
Shares issued to -
shareholders in
reinvestment
of distributions - -
Shares repurchased (768,555) (8,833,446)
================== ==================
Net increase 30,435,120 $ 330,350,503
================== ==================
</TABLE>
33
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------------- ----------------------- ----------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Buys
3/6/98 ATS 955,539,347 $ 74,850,877 $ (1,869,470)
7/16/98 ATS 486,606,944 38,397,291 (75,096)
4/17/98 AUD 25,425,134 17,336,128 71,221
3/6/98 BEF 1,472,252,440 39,308,441 (727,772)
7/16/98 BEF 631,152,927 16,976,516 (94,034)
4/17/98 CAD 37,300,196 26,237,189 (280,643)
3/6/98 CHF 225,541,095 153,741,550 (1,424,771)
7/16/98 CHF 17,730,700 12,292,712 (140,754)
3/6/98 DEM 327,862,361 180,698,163 (3,585,555)
7/16/98 DEM 76,079,089 42,256,477 135,400
3/6/98 DKK 115,267,641 16,663,899 (127,715)
7/16/98 DKK 5,186,232 754,578 (25)
3/6/98 ESP 2,941,219,734 19,098,298 (959,586)
7/16/98 ESP 2,647,250,574 17,268,713 (24,935)
3/6/98 FIM 54,923,288 9,969,285 (586,781)
7/16/98 FIM 49,423,287 9,042,610 (8,041)
3/6/98 FRF 466,461,505 76,617,849 (661,636)
7/16/98 FRF 77,077,451 12,757,366 (2,534)
3/6/98 GBP 181,932,441 299,508,099 (198,856)
7/16/98 GBP 11,944,681 19,534,302 5,942
4/17/98 HKD 235,137,594 30,336,910 459,761
3/6/98 IEP 26,962,816 36,762,917 (2,251,374)
7/16/98 IEP 12,689,015 17,290,052 (168,382)
3/6/98 ITL 107,653,204,006 60,157,490 (996,937)
4/17/98 JPY 5,219,508,890 41,593,026 (437,214)
</TABLE>
34
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Buys - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------------- ----------------------- ----------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
4/17/98 MYR 18,394,646 $ 4,990,578 $ (160,541)
3/6/98 NLG 97,276,693 47,533,681 (929,191)
7/16/98 NLG 20,160,115 9,929,807 7,439
3/6/98 NOK 457,061,132 60,395,395 (3,012,159)
7/16/98 NOK 178,656,585 23,749,866 (57,922)
4/17/98 NZD 31,007,423 18,119,033 (725,901)
3/6/98 PTE 1,381,590,000 7,436,256 (10,464)
3/6/98 SEK 445,326,606 55,626,540 (2,127,559)
7/16/98 SEK 179,766,820 22,543,414 35,705
4/17/98 SGD 10,612,425 6,544,013 (108,117)
-------------------
$ (21,038,497)
===================
Sales
3/6/98 ATS 955,539,347 74,850,877 $ 1,039,807
7/16/98 ATS 413,053,753 32,593,339 151,492
4/17/98 AUD 73,864,302 50,364,374 1,178,612
3/6/98 BEF 1,472,252,440 39,308,440 842,324
7/16/98 BEF 703,730,233 18,928,674 46,445
4/17/98 CAD 26,421,598 18,585,116 207,290
3/6/98 CHF 225,541,094 153,741,550 3,280,886
7/16/98 CHF 108,271,845 75,064,976 144,718
3/6/98 DEM 327,862,361 180,698,163 3,703,549
7/16/98 DEM 155,473,964 86,354,635 469,013
3/6/98 DKK 115,267,642 16,663,899 559,264
7/16/98 DKK 110,081,409 16,016,442 81,662
3/6/98 ESP 2,941,219,734 19,098,297 79,131
7/16/98 ESP 134,944,800 880,281 7,748
</TABLE>
35
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Sales - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------------- ----------------------- ----------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
3/6/98 FIM 54,923,287 $ 9,969,286 $ 50,582
7/16/98 FIM 5,500,000 1,006,294 8,747
3/6/98 FRF 466,461,504 76,617,849 1,658,654
7/16/98 FRF 175,760,408 29,090,736 225,219
3/6/98 GBP 181,932,440 299,508,099 (1,436,341)
7/16/98 GBP 110,459,760 180,645,615 (1,909)
4/17/98 HKD 604,331,680 77,969,478 (1,789,844)
3/6/98 IEP 26,962,815 36,762,917 1,097,807
7/16/98 IEP 271,250 369,605 331
3/6/98 ITL 107,653,204,006 60,157,491 1,556,717
7/16/98 ITL 37,523,272,854 20,963,864 49,953
4/17/98 JPY 17,140,897,085 136,591,737 2,268,107
4/17/98 MYR 111,167,918 30,160,523 1,953,300
3/6/98 NLG 97,276,694 47,533,681 1,058,500
7/16/98 NLG 57,333,161 28,239,285 238,689
3/6/98 NOK 457,061,132 60,395,395 839,383
7/16/98 NOK 6,062,060 805,865 7,212
4/17/98 NZD 37,037,971 21,642,953 1,433,322
3/6/98 PTE 1,381,590,000 7,436,256 123,744
7/16/98 PTE 1,381,590,000 7,471,487 5,459
3/6/98 SEK 445,326,606 55,626,540 (35,104)
7/16/98 SEK 340,894,037 42,749,354 7,740
4/17/98 SGD 71,527,119 44,106,258 293,225
-------------------
$ 21,405,434
===================
</TABLE>
36
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
- --------------------------------------------------------------------------------
Currency Abbreviations:
ATS Austrian Schilling HKD Hong Kong Dollar
AUD Australian Dollar IEP Irish Pound
BEF Belgian Franc ITL Italian Lira
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc MYR Malaysian Ringgit
DEM German Mark NLG Netherlands Guilder
DKK Danish Krona NOK Norwegian Kroner
ESP Spanish Peseta NZD New Zealand Dollar
FIM Finnish Markka PTE Portuguese Escudo
FRF French Franc SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
Futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
-------------- ---------------------- -------------------------------------------- --------------------
<S> <C> <C> <C> <C>
Buys
191 DAX March 1998 $ 49,535,280 $ 5,081,505
248 MIB 30 March 1998 40,254,872 6,486,408
14 TSE 35 March 1998 1,883,357 130,645
--------------------
$ 11,698,558
====================
Sales
274 ALL ORDS March 1998 $ 12,599,727 $ (588,698)
168 FTSE 100 March 1998 39,977,410 (3,239,967)
178 HANG SENG March 1998 13,276,719 (1,196,543)
161 IBEX 35 March 1998 9,355,907 (788,305)
23 MATIF CAC 40 March 1998 2,592,635 (172,606)
131 OMX STOCK March 1998 4,496,253 (99,298)
71 TOPIX March 1998 7,171,377 (32,150)
--------------------
$ (6,117,567)
====================
</TABLE>
At February 28, 1998, the Fund has cash and/or securities to cover any margin
requirements on open futures contracts.
37
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
22.54% of distributions as net capital gain dividends.
38
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
fifteen years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Currency Hedged International Core Fund returned
18.0% for the fiscal year ended February 28, 1998 as compared to 25.1% for the
GMO EAFE-Lite Hedged Index. Consistent with the Fund's investment objective and
policies, the Fund was invested substantially in common stocks throughout the
period.
Overseas markets were mixed during the fiscal year. Although a strong bull
market prevailed in Europe, the investment climate was difficult for investors
in the Far East. Poor economic conditions in Japan combined with the fallout
from the Asian currency crisis caused most stock markets in the Pacific Rim to
fall significantly. Hedging currency exposure back to the strong-performing
U.S. dollar added to the absolute performance of the fund.
Within Europe, ten of the fourteen EAFE markets returned in excess of 30% for
the year, led by strong performance of the largest international blue chip
companies. On the other hand, small European stocks performed poorly throughout
the region.
Weakness in the Pacific Rim countries offset the strong performance of the
European markets. Many of the Pacific Rim countries represented in the index
(Japan, Malaysia, Hong Kong and Singapore) were significantly affected by the
debt crisis in the Asian markets. Weakening currencies further depressed returns
for dollar-based investors. In the crisis environment pervading these markets,
both large and small stocks performed poorly in absolute terms, however, smaller
stocks were more drastically affected by the turn of events.
Impact of country selection
Country selection contributed negatively to the Fund's performance for the year,
primarily in some of the Asian countries where the Fund had slight overweights
in the latter part of the year. In Europe, where the Fund was underweight in
many of the expensive markets, including the Netherlands, Switzerland, and the
United Kingdom, performance was also negatively affected. These decisions were
somewhat offset by the Fund's overweighting of the Italian market, which was one
of the best performing EAFE markets for the year, as well as by underweighting
Japan.
<PAGE>
Impact of stock selection
Stock selection was negative for the year as the Fund's value orientation was
not rewarded in a market environment that favored the largest, growth-oriented
international stocks. This trend was perhaps best exemplified by the remarkable
spread between large and small stocks in the U.K., where the largest 20% of the
market outperformed the smallest 20% by a margin of twenty-seven percentage
points (27%). As a group, the largest multinational stocks are very expensive
relative to their historical levels, and the Fund maintained a significant
underweight in these stocks during the year. Our bias in favor of smaller, less
expensive companies, was not rewarded.
Current portfolio structure and outlook
Country selection. The International Core Fund remains underweight in Japan.
The Fund holds no weight in the Netherlands and we have increased our
underweight in the U.K. as the market (and the British pound) appear expensive
on all of our valuation measures. The Fund's largest overweight positions are in
Italy and Canada.
Stock selection. Small stocks in EAFE are now cheaper than they have been in
more than twenty years. Value stocks are also very attractive in many European
markets, following the strong run over the last several years in multinational
companies. While small stocks also appear attractive in a number of the Pacific
Rim countries, we are somewhat more cautious about their outlook given their
higher risk of bankruptcy in what will likely be a difficult economic
environment. Overall, the Fund remains about 20% overweight in smaller stocks
and 20% underweight in large, multinational stocks.
The Fund is very well positioned to outperform the benchmark over the next three
years. Although the restructuring craze in Europe may well provide support for
large companies in the short term, we believe large cap companies (whose
valuations are historically high) are susceptible to earnings disappointments,
and eventually, shrinking profit margins. We expect value and small stocks to do
well in many countries over the next several years.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Currency Hedged International Core Fund
Comparison of Change in Value of a $10,000 Investment in
GMO Currency Hedged International Core Fund Class III Shares and
the MSCI EAFE Index
As of February 28, 1997
------------------------------
Average Annual Total Return
------------------------------
Since
1 Year Inception
------------------------------
Class 6/30/95
III 17.3% 19.1%
------------------------------
Class 1/9/98
IV n/a 9.0%
------------------------------
[LINE GRAPH APPEARS HERE]
GMO Currency
Hedged
International MSCI EAFE-Lite MSCI
Date Core Fund Hedged Index EAFE Index
------- ------------- -------------- ----------
6/30/95 $9,940 $10,000 $10,000
2/29/96 $11,596 $12,010 $10,919
2/28/97 $13,515 $14,193 $11,273
2/28/98 $15,945 $17,756 $13,017
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset value of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvestment distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that had been offered by the Fund since inception. Performance for
Class IV shares may be different due to lower shareholder service fees. Past
performance is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Growth Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Growth Fund at February 28,
1998, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 95.8%
Advertising -- 0.3%
10,700 Interpublic Group Inc 583,150
---------------
Aerospace -- 0.3%
3,300 Teleflex Inc 133,856
4,000 Thiokol Corp 382,500
---------------
516,356
---------------
Automotive -- 0.9%
1,000 Bandag Inc 56,063
3,200 Borg Warner Automotive Inc 187,600
800 Breed Technologies Inc 17,400
16,600 Ford Motor Co 938,938
8,050 Genuine Parts Co 297,850
7,100 Lear Corp * 375,413
---------------
1,873,264
---------------
Banking and Financial Services -- 4.7%
10,200 Ahmanson (HF) & Co 636,863
150 Amsouth Bancorp 8,428
6,096 Bear Stearns Inc 284,233
4,800 Beneficial Corp 566,400
22,900 Charles Schwab & Co Inc 864,475
1,000 City National Corp 37,188
400 Countrywide Credit Industry Inc 17,775
9,000 Dime Bancorp Inc 274,500
3,000 Donaldson Lufkin & Jenrette 245,625
9,700 Edwards (AG) Inc 408,006
18,201 Franklin Resources Inc 928,231
3,300 Golden State Bancorp * 117,563
700 John Nuveen and Co Inc, Class A 24,719
750 Liberty Financial Cos 27,188
8,800 MGIC Investment Corp 648,450
13,200 Morgan Stanley Dean Witter Discover & Co 919,875
1,200 New England Investment Co, L.P. 42,000
2,600 Northfork Bancorp 88,888
3,650 Paine Webber Group Inc 153,300
100 Peoples Heritage Finance Group Inc 4,656
7,200 Raymond James Financial Corp 287,100
11,000 Rowe (T) Price & Associates Inc 730,125
36,145 Travelers Group Inc 2,015,083
1,200 Unionbancal Corp 111,750
---------------
9,442,421
---------------
See accompanying notes to the financial statements. 1
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Chemicals -- 0.5%
6,200 Great Lakes Chemical Corp 301,475
2,700 Lubrizol Corp 104,119
5,800 Morton International Inc 191,763
1,600 Praxair Inc 76,500
1,300 Scherer (RP) Corp * 79,056
7,600 Wellman Inc 163,400
---------------
916,313
---------------
Communications -- 0.2%
17,000 DSC Communications Corp * 333,625
---------------
Computer and Office Equipment -- 5.1%
52,700 Computer Associates International Inc 2,483,487
58,200 EMC Corp 2,226,149
17,700 Gateway 2000 Inc 778,800
21,400 HBO & Co 1,158,275
29,000 Hewlett Packard Co 1,942,999
10,400 Lexmark International Group Inc * 444,600
12,100 Micron Technology Inc * 401,569
7,100 Quantum Corp 178,388
29,400 Silicon Graphics Inc * 442,838
4,700 Stratus Computer Inc * 235,881
---------------
10,292,986
---------------
Construction -- 2.6%
400 Centex Corp 29,225
76,000 Home Depot Inc 4,849,749
3,500 Lowes Co Inc 204,531
4,900 McDermott International Inc 192,938
---------------
5,276,443
---------------
Consumer Goods -- 4.6%
642 Block Drug Co Inc, Class A 27,044
11,900 Colgate-Palmolive Co 966,131
2,800 Department 56 Inc * 92,225
11,100 Eastman Kodak Co 728,438
1,300 First Brands Corp 33,475
2 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Consumer Goods -- continued
10,200 Fortune Brands Inc 404,813
5,700 Hasbro Inc 206,981
1,700 Johnson Controls 94,456
9,300 Jones Apparel Group Inc * 511,500
5,800 Kohls Corp * 465,088
6,000 Lancaster Colony Corp 264,000
32,800 Mattel Co 1,387,849
3,500 Maytag Corp 157,500
7,300 Miller Herman Inc 447,125
7,800 Newell Co 357,825
1,000 Nine West Group Inc * 27,500
18,000 Procter and Gamble Co 1,528,874
5,000 Reebok International Ltd * 155,938
3,700 Russell Corp 100,363
10,700 Sunbeam Corp 442,713
5,300 Terra Industries Inc 62,938
6,600 Unifi Inc 242,550
13,200 VF Corp 629,475
500 Wallace Computer Services 18,188
--------------
9,352,989
--------------
Electronic Equipment -- 4.0%
13,100 Cypress Semiconductor Corp * 123,631
6,400 Dallas Semiconductor Corp 304,000
900 Integrated Device Technology Inc * 13,556
11,900 Linear Technology Corp 901,425
3,000 Litton Industries * 186,750
20,100 Maxim Integrated Products Inc 811,538
2,300 Microchip Technology Inc * 55,631
5,750 Molex Inc 173,938
52,100 Motorola Inc 2,904,574
18,100 Raytheon Co, Class B 1,064,506
10,400 Read Rite Corp * 148,200
21,100 Texas Instruments 1,221,163
2,300 Vicor Corp * 64,975
3,900 Vishay Intertechnology Inc 79,463
--------------
8,053,350
--------------
Environmental Control -- 0.1%
14,400 Wheelabrator Technology Inc 234,900
--------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Food and Beverage -- 4.0%
3,000 Anheuser Busch Cos Inc 140,625
4,800 Bestfoods 505,800
48,900 Coca Cola Co 3,358,818
32,800 Coca Cola Enterprises Inc 1,084,450
2,200 Dean Foods Co 121,000
8,300 IBP Inc 185,194
2,400 Kellogg Co 102,300
12,500 McDonald's Corp 684,375
5,500 Pepsico Inc 201,094
300 Quality Food Centers Inc * 25,088
8,300 Sara Lee Corp 468,950
4,500 Smithfield Foods Inc 142,313
11,200 Sysco Corp 527,100
1,900 Tootsie Roll Industries Inc 141,788
6,000 Unilever NV ADR 385,875
6,700 Whitman Corp 119,344
------------
8,194,114
------------
Health Care -- 8.4%
5,500 Bard (CR) 191,813
2,400 Beckman Instruments Inc 116,100
3,200 Becton Dickinson & Co 203,600
22,800 BioMet Inc 679,725
8,300 Boston Scientific Corp * 495,925
350 Cardinal Health Inc 28,656
58,200 Columbia HCA Healthcare Corp 1,578,674
4,400 Forest Laboratories Inc * 275,275
7,400 Health Care & Retirement * 324,675
1,800 Health Management Associates Inc 50,063
2,400 Hillenbrand Industries Inc 134,850
72,400 Johnson & Johnson 5,466,199
4,100 Laboratory Corporation of America Holdings 7,944
6,500 Lincare Holdings Inc * 421,890
8,400 Mallinckrodt Inc 326,025
1,900 Marquette Medical Systems, Class A * 52,250
11,800 McKesson Corp 615,075
57,000 Medtronic Inc 3,028,124
6,800 Novacare Corp * 95,200
9,200 Paragon Health Network Inc 171,350
9,100 Perrigo Co * 97,825
4 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Health Care -- continued
3,100 Safeskin Corp * 190,263
5,900 Sofamor Denek Group Inc * 443,975
9,000 Steris Corp * 532,688
4,200 Stryker Corp 171,938
4,100 Universal Health Services, Class B * 214,225
17,700 Wellpoint Health Network * 1,034,344
------------
16,948,671
------------
Insurance -- 3.6%
3,100 Aetna Life and Casualty Co 270,863
100 AFLAC Corp 6,144
3,500 AMBAC Inc 186,375
1,800 American Bankers Insurance Group 101,250
500 American International Group Inc 60,094
1,600 American National Insurance Co 155,200
100 CNA Financial Corp * 14,394
21,601 Conseco Inc 1,013,899
9,400 Foundation Health Systems Inc, Class A * 260,263
2,000 Fremont General Corp 117,375
2,400 Horace Mann Educators Corp 85,200
8,900 Loews Corp 892,781
7,200 MBIA Inc 526,950
3,400 Mercury General Corp 192,950
1,400 Ohio Casualty Corp 65,450
2,900 Orion Capital Corp 141,556
7,100 Progressive Corp 822,713
9,900 Reliastar Financial Corp 470,869
3,000 Safeco Corp 157,313
11,400 Saint Paul Cos Inc 1,010,325
11,000 Torchmark Corp 512,188
3,400 Transatlantic Holding Inc 257,125
------------
7,321,277
------------
Machinery -- 1.4%
64,800 Applied Materials Inc 2,385,449
5,400 Donaldson Co Inc 128,588
5,100 Kaydon Corp 189,656
1,600 Lam Research Corp * 45,400
1,000 Novellus System Inc 47,938
3,800 Oakley Inc * 45,838
------------
2,842,869
------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Manufacturing -- 2.4%
8,800 American Greetings Corp 401,500
11,700 Clayton Homes Inc 232,538
3,300 Crane Co 161,700
10,946 Gillette Co 1,180,800
20,100 International Game Technology 487,425
7,100 Leggett & Platt Inc 356,331
14,000 Owens Illinois Inc * 537,250
5,600 Trinity Industries Inc 281,400
24,200 Tyco International Ltd 1,228,150
---------------
4,867,094
---------------
Metals and Mining -- 0.1%
8,300 Timken Co 267,675
---------------
Oil and Gas -- 2.3%
18,600 Atlantic Richfield Co 1,446,149
4,200 BJ Services Co 144,375
100 FINA Inc, Class A 6,325
3,400 Occidental Petroleum Corp 86,913
2,300 Pennzoil Co 153,956
5,900 Santa Fe Energy Resources Inc 66,006
14,600 Schlumberger Ltd 1,100,475
20,900 Union Pacific Resources Group 467,638
4,200 Union Texas Petroleum Holdings Inc 84,788
32,600 USX - Marathon Group 1,126,738
400 Williams Co Inc 13,075
---------------
4,696,438
---------------
Paper and Allied Products -- 0.1%
4,500 Sonoco Products Co 174,094
---------------
Pharmaceuticals -- 6.9%
68,604 Abbott Laboratories 5,132,436
200 Barr Laboratories Inc 6,800
4,925 Bergen Brunswig Corp, Class A 221,625
2,500 Bristol Myers Squibb Co 250,469
7,700 ICN Pharmaceuticals Inc 444,675
11,900 Immnunex Corp * 703,588
3,630 Mark IV Industries Inc 84,398
6 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Pharmaceuticals -- continued
8,800 Merck & Co Inc 1,122,550
15,200 Mylan Laboratories Inc 309,700
25,612 Pfizer Inc 2,266,661
4,900 Rexall Sundown Inc 181,300
13,700 Schering Plough Corp 1,042,056
500 Sigma-Aldrich Corp 19,750
9,400 Warner Lambert Co 1,374,749
21,100 Watson Pharmaceutical Inc 756,963
---------------
13,917,720
---------------
Primary Materials -- 0.3%
6,600 Rubbermaid Inc 191,400
6,800 Tupperware Corp 182,750
2,000 Vulcan Materials Co 201,250
---------------
575,400
---------------
Printing and Publishing -- 0.2%
2,300 AH Belo Corp 125,925
1,100 Central Newspapers, Class A 78,581
600 Washington Post Co, Class B 296,100
---------------
500,606
---------------
Real Estate -- 0.0%
1,500 Lennar Corp 41,906
1,400 Newhall Land & Farming Co 45,238
---------------
87,144
---------------
Refining -- 0.3%
9,900 Sun Co Inc 395,381
6,000 Valero Energy Corp 213,000
---------------
608,381
---------------
Retail Trade -- 9.5%
27,800 Albertsons Inc 1,301,387
10,200 American Stores Co 256,913
18,300 Autozone Inc * 553,575
9,300 Barnes & Noble Inc 326,663
2,700 Best Buy Co Inc * 160,988
500 Blair Corp 10,688
2,700 Burlington Coat Factory Warehouse 41,006
5,600 CKE Restaurants Inc 237,650
11,887 Consolidated Stores Corp 488,853
See accompanying notes to the financial statements. 7
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Retail Trade -- continued
19,200 Costco Cos Inc * 938,400
700 Dayton Hudson Corp 54,119
11,900 Dillards Department Stores Inc 423,938
18,618 Dollar General Corp 858,755
2,500 Family Dollar Stores Inc 89,063
18,400 Food Products Lion Inc 181,700
3,670 Fred Meyer Inc 163,086
40,400 Gap Inc 1,805,374
15,100 General Nutrition Cos Inc * 600,225
2,000 Hannaford Brothers Co 84,375
2,500 Kmart Corp * 33,438
3,400 Kroger Co 143,650
700 Lands End Inc * 27,563
28,500 Limited Inc 826,500
1,300 Nordstrom Inc 74,547
14,700 Office Depot * 404,250
8,600 Outback Steakhouse Inc * 307,450
2,600 Pier 1 Imports Inc 69,550
11,400 Rite Aid Corp 369,075
30,726 Safeway Inc 1,071,569
800 Stanhome Inc 23,100
13,300 Tandy Corp 591,850
25,100 Toys R Us Inc * 658,875
1,800 Value City Department Stores Inc * 20,025
125,400 Wal Mart Stores Inc 5,807,587
6,000 Whole Foods Market Inc * 367,125
--------------
19,372,912
--------------
Services -- 4.4%
600 BHC Communications Inc, Class A 82,800
36,600 Cendant Corp * 1,372,499
3,800 Cintas Corp 161,500
1,000 Circus Circus Enterprises Inc * 22,000
6,300 Clear Channel Communications Inc * 570,938
27,601 Disney Walt Co 3,089,490
3,300 Fleming Cos Inc 58,781
13,100 Halliburton Company 609,150
16,100 Harrahs Entertainment Inc * 339,106
600 Kingworld Productions Inc 16,013
6,500 Oakwood Homes Corp 257,563
8 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Services -- continued
4,400 Omnicom Group 201,300
3,000 Paychex Inc 154,875
7,750 Robert Half International Inc 350,688
8,750 Servicemaster Company 237,344
8,600 Supervalu Inc 409,575
7,800 United Video Satellite Group Inc * 288,600
30,400 Waste Management Inc 760,000
--------------
8,982,222
--------------
Technology -- 19.9%
19,700 Adobe Systems Inc 870,494
16,500 Advanced Micro Devices Inc * 386,719
19,800 America Online Inc * 2,398,274
4,600 Autodesk Inc 217,925
17,900 Automatic Data Processing Inc 1,093,019
4,100 Avnet Inc 261,375
64,000 Bay Networks Inc * 2,167,999
9,100 BMC Software Inc * 696,150
3,700 Ceridian Corp * 172,281
5,700 Cognex Corp * 137,156
179,400 Compaq Computer Corp 5,752,012
3,400 Computer Horizons Corp 177,438
5,700 Computer Sciences Corp * 596,719
26,600 Compuware Corp 1,120,525
18,500 Dell Computer Corp 2,587,687
3,500 Fiserv Inc * 191,625
5,300 Grainger (WW) Inc 513,106
89,100 Intel Corp 7,991,155
7,700 Intuit Inc * 358,050
4,800 Keane Inc 223,200
11,400 KLA Instruments Corp * 526,181
120,600 Microsoft Corp 10,220,849
13,600 Platinum Technology Inc * 345,100
5,200 Policy Management System Corp * 376,350
2,400 Seagate Technology Corp * 58,350
5,000 Storage Technology Corp * 341,250
9,700 Symantec * 244,319
9,600 Teradyne Inc * 453,000
--------------
40,478,308
--------------
See accompanying notes to the financial statements. 9
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Telecommunications -- 5.0%
19,000 Airtouch Communications Inc * 853,813
37,800 AT & T Corp 2,301,074
2,200 Bell Atlantic Corp 197,450
4,900 Century Telephone Enterprises Inc 298,900
27,400 MCI Communications Corp 1,310,062
9,400 Mobile Telecommunications Technologies Corp * 211,500
29,700 Nextel Communications Inc, Class A * 878,006
5,200 Southern New England Telecommunications Corp 328,250
16,400 Sprint Corp 1,082,400
700 TCA Cable TV Inc 34,475
900 Telephone Data System 39,206
4,100 United States Cellular Corp * 123,769
12,800 US West Inc 666,400
2,300 Viacom Inc, Class B * 110,400
42,700 Worldcom Inc * 1,630,605
--------------
10,066,310
--------------
Tobacco -- 2.1%
97,584 Philip Morris Cos Inc 4,238,804
--------------
Transportation -- 1.5%
4,800 Airborne Freight Corp 173,700
12,500 Burlington Northern Santa Fe Railroad Co 1,245,312
6,600 Comair Holdings Inc 175,725
13,000 CSX Corp 727,188
4,400 FDX Corp * 280,225
1,600 Gatx Corp 124,000
6,700 Kansas City Southern Industries 249,156
2,900 Southwest Airlines Co 83,194
--------------
3,058,500
---------------
Utilities -- 0.1%
6,851 Citizens Utilities, Class B 64,228
1,100 Coastal Corp 69,988
1,800 MCN Corp 66,263
600 Natural Gas Clearinghouse 9,300
--------------
209,779
--------------
TOTAL COMMON STOCKS (COST $147,623,524) 194,284,115
--------------
10 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 12.1%
Cash Equivalents -- 6.4%
$ 3,880,310 BankBoston Eurodollar Time Deposit, 5.7875%
due 3/2/98/(a)/ 3,880,310
$ 615,162 First Union National Bank of North Carolina
Eurodollar Time Deposit, 5.6250% due 3/2/98/(a)/ 615,162
3,475,665 Merrimac Cash Fund Premium Class/(a)/ 3,475,665
$ 5,000,000 Prudential Securities Group Inc, Master Note,
5.8875% due 3/2/98/(a)/ 5,000,000
---------------
12,971,137
---------------
U.S. Government -- 0.2%
$ 400,000 U.S. Treasury Bill 5.165% due 5/28/98/(b)/ 394,992
---------------
Repurchase Agreements -- 5.5%
$10,295,052 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity
value of $10,299,401 and an effective yield of
5.07%, collateralized by a U.S. Treasury
Obligation with a rate of 8.875%, with a
maturity date of 8/15/17 and with a market
value of $10,500,953. 10,295,052
$ 931,831 Prudential Securities Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value
of $932,225 and an effective yield 5.07%,
collateralized by a U.S. Government Agency
Obligation with a rate of 8.50%, with a
maturity date of 10/01/26 and with a market
value of $950,472. 931,831
---------------
11,226,882
---------------
TOTAL SHORT-TERM INVESTMENTS (COST
$24,592,912) 24,593,012
---------------
TOTAL INVESTMENTS -- 107.9%
(COST $172,216,436) 218,877,127
Other Assets and Liabilities (net)--(7.9)% (15,953,633)
---------------
TOTAL NET ASSETS-- 100% $ 202,923,494
===============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
/(a)/Represents investments of security lending collateral (Note 1).
/(b)/Security has been segregated to cover margin requirements on
open financial futures contracts.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $172,216,436) (Note 1) $ 218,877,127
Receivable for investments sold 4,623,570
Dividends and interest receivable 127,030
Receivable for expenses waived or borne by Manager (Note 2) 30,895
-------------
Total assets 223,658,622
-------------
Liabilities:
Payable for investments purchased 4,194,233
Payable upon return of securities loaned (Note 1) 12,971,137
Payable for Fund shares repurchased 2,199,153
Payable to affiliate for (Note 2):
Management fee 76,921
Shareholder service fee 22,662
Payable for open swap contracts (Note 1 and 6) 1,216,499
Payable for variation margin on open futures contracts (Notes 1 and 6) 11,100
Accrued expenses 43,423
-------------
Total liabilities 20,735,128
-------------
Net assets $ 202,923,494
=============
Net assets consist of:
Paid-in capital $ 144,425,100
Accumulated undistributed net investment income 122,883
Accumulated undistributed net realized gain 12,599,278
Net unrealized appreciation 45,776,233
-------------
$ 202,923,494
=============
Net assets attributable to:
Class III shares $ 202,923,494
=============
Shares outstanding:
Class III 46,341,959
=============
Net asset value per share:
Class III $ 4.38
=============
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends $ 1,791,632
Interest (including securities lending income of $27,282) 777,966
-------------
Total income 2,569,598
-------------
Expenses:
Management fee (Note 2) 1,008,998
Custodian and transfer agent fees 72,661
Audit fees 35,364
Registration fees 6,654
Legal fees 2,836
Trustees fees (Note 2) 1,809
Miscellaneous 1,085
Fees waived or borne by Manager (Note 2) (463,468)
-------------
665,939
Shareholder service fee (Note 2)
Class III 302,285
-------------
Net expenses 968,224
-------------
Net investment income 1,601,374
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 40,050,840
Closed futures contracts 2,204,589
Closed swap contracts (1,894,000)
-------------
Net realized gain 40,361,429
-------------
Change in net unrealized appreciation (depreciation) on:
Investments 19,047,186
Open futures contracts 639,886
Open swap contracts 433,022
-------------
Net unrealized gain 20,120,094
-------------
Net realized and unrealized gain 60,481,523
-------------
Net increase in net assets resulting from operations $ 62,082,897
=============
See accompanying notes to the financial statements. 13
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,601,374 $ 3,964,241
Net realized gain 40,361,429 108,934,644
Change in net unrealized appreciation (depreciation) 20,120,094 (50,479,915)
---------------- -----------------
Net increase in net assets resulting from operations 62,082,897 62,418,970
---------------- -----------------
Distributions to shareholders from:
Net investment income
Class III (2,146,620) (4,363,604)
---------------- -----------------
Net realized gains
Class III (80,215,172) (77,849,380)
---------------- -----------------
(82,361,792) (82,212,984)
---------------- -----------------
Net share transactions: (Note 5)
Class III (20,981,043) (127,388,467)
---------------- -----------------
Decrease in net assets resulting from net share transactions (20,981,043) (127,388,467)
---------------- -----------------
Total decrease in net assets (41,259,938) (147,182,481)
Net assets:
Beginning of period 244,183,432 391,365,913
---------------- -----------------
End of period (including accumulated undistributed net investment
income of $122,883 and $668,129, respectively) $ 202,923,494 $ 244,183,432
================ =================
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 5.18 $ 5.65 $ 4.45 $ 4.14 $ 4.55
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.04 0.07 0.08 0.06 0.06
Net realized and unrealized gain 1.41 1.03 1.54 0.38 0.11
-------- -------- -------- -------- --------
Total from investment
operations 1.45 1.10 1.62 0.44 0.17
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.06) (0.08) (0.07) (0.06) (0.06)
From net realized gains (2.19) (1.49) (0.35) (0.07) (0.52)
-------- -------- -------- -------- --------
Total distributions (2.25) (1.57) (0.42) (0.13) (0.58)
-------- -------- -------- -------- --------
Net asset value, end of period $ 4.38 $ 5.18 $ 5.65 $ 4.45 $ 4.14
======== ======== ======== ======== ========
Total Return/(a)/ 36.37% 21.64% 37.77% 10.86% 4.13%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $202,923 $244,183 $391,366 $239,006 $230,698
Net expenses to average daily
net assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 0.79% 1.21% 1.54% 1.50% 1.38%
Portfolio turnover rate 60% 100% 76% 139% 57%
Average broker commission rate
per equity share/(c)/ $ 0.0263 $ 0.0281 N/A N/A N/A
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share amounts: $ 0.01 $ 0.01 (b) (b) (b)
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(c) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on
which commissions are charged.
See accompanying notes to the financial statements. 15
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series into classes.
The Fund seeks long-term growth of capital through investment of
substantially all of its assets in common stocks chosen from the Wilshire
5000 Index and primarily in the equity securities of companies chosen from
among the 1,200 companies with the largest equity capitalization whose
securities are listed on a United States national securities exchange.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus. Class
III shares are the continuation of the Trust's shares that existed prior
to June 1, 1996, and bear the same total operating expenses (after the
voluntary expense waiver) as those shares. Effective January 9, 1998,
Class I and Class II shares ceased to offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at
fair value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures
tends to increase the Fund's exposure to the underlying instrument.
Selling futures tends to decrease the Fund's exposure to the underlying
instrument or hedge other Fund instruments. Upon entering into a futures
contract, the Fund is required to deposit with its custodian, in a
segregated account in the name of the futures broker, an amount of cash or
U.S.
16
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
government obligations in accordance with the initial margin requirements
of the broker or exchange. Futures contracts are marked to market daily
and an appropriate payable or receivable for the change in value
("variation margin") is recorded by the Fund. The payable or receivable is
liquidated on the following business day. Gains or losses are recognized
but not considered realized until the contracts expire or are closed.
Futures contracts involve, to varying degrees, risk of loss in excess of
the variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument,
if there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 6 for all open
futures contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1998, the Fund loaned securities
having a market value of $12,535,438, collateralized by cash in the amount
of $12,971,137, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there is no liquid market for these
17
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. See Note 6
for a summary of all open swap agreements as of February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance
with the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Distributions in excess of tax basis
earnings and profits, if any, are reported in the Fund's financial
statements as a return of capital. Differences in the recognition or
classification of income for financial statement and tax purposes which
result in temporary over-distributions for financial statement purposes
are classified as distributions in excess of net investment income or
accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
18
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14 % of the amount
invested. Prior to June 1, 1996, the premium on cash purchases was .17% of
the amount invested. All purchase premiums are paid to and recorded by the
Fund as paid-in capital. This fee is allocated relative to each class' net
assets on the share transaction date. Purchased premiums are included as
part of each class' "shares sold", as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $1,573 in purchase premiums.
There is no premium for cash redemptions, reinvested distributions or
in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including
the management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .33% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .48%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $1,809. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$112,561,762 and $200,103,804, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ------------------ -----------------
$172,442,027 $50,083,865 $3,648,765 $46,435,100
19
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
4. Principal shareholders
At February 28, 1998, 75.8% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
----------------------------- ------------------------------
Shares Amount Shares Amount
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Shares sold 273,096 $ 1,305,596 2,041,337 $ 11,235,177
Shares issued to shareholders
in reinvestment of
distributions 19,976,847 82,093,391 15,334,132 78,162,104
Shares repurchased (21,043,724) (104,380,030) (39,536,755) (216,785,748)
------------ -------------- -------------- -------------
Net decrease (793,781) $ (20,981,043) (22,161,286) $(127,388,467)
============ ============== ============== =============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
------------ --------- ----------------- ---------------- ----------------
26 S&P 500 March 1998 $ 6,828,250 $ 332,041
================
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
20
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Swap agreements
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
---------------------- ------------- --------------------------------------------------------- ----------------
<S> <C> <C> <C>
$ 10,828,600/ 6/26/98 Agreement with Morgan Stanley Capital Services, Inc. $(261,703)
10,940,039 dated 6/23/97 to pay (receive) the notional amount
multiplied by the return on the Standard & Poor's 500
Index (including dividends) less the notional amount
multiplied by 6 month LIBOR adjusted by a specified
spread and to receive (pay) the counterparty's
notional amount multiplied by the return on the
Russell 2000 Index (including dividends) less the
notional amount multiplied by 6 month LIBOR adjusted
by a specific spread.
12,199,513/ 9/19/98 Agreement with Morgan Stanley Capital Services, Inc. (954,796)
11,355,830 dated 9/16/97 to pay (receive) the notional amount
multiplied by the return on the Standard & Poor's
500 Index (including dividends) less the notional
amount multiplied by 6 month LIBOR adjusted by a
specified spread and to receive (pay) the
counterparty's notional amount multiplied by the
return on the Russell 2000 Index (including
dividends) less the notional amount multiplied by 6
month LIBOR adjusted by a specified spread.
-----------------
Net unrealized depreciation $(1,216,499)
=================
</TABLE>
21
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 72.93% of distributions as net capital gain dividends.
22
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily
responsible for the day-to-day management of the Fund's portfolio. Each of
these individuals has been a portfolio manager at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Growth Fund returned 36.4% for the fiscal
year ended February 28, 1998, as compared to 35.0% for the S&P 500 and
36.0% for the Russell 1000 Growth Index. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
common stocks throughout the period.
Performance of the Fund was strong, both on an absolute basis and relative
to the Russell 1000 Growth benchmark. Contributing to strong performance
was the Fund's overweight of technology stocks. Technology stocks in the
Index, buoyed by good earnings growth, rose nearly 40% during the fiscal
year. Our technology stock holdings, which included Dell and Compaq,
produced exceptionally good returns for the Fund.
A second sector in which the Fund was overweighted was consumer
discretionary stocks, including retailers. Strong consumer spending,
encouraged by low unemployment and a good economy, propelled these stocks
to gains of more than 40%. Our stock selection within this sector also
contributed positively to Fund performance.
The Fund also maintained a modest overweight in financial service stocks
for most of the fiscal year. These stocks rose sharply (up 47%) due to the
declining interest rate environment and takeover activity. Our holding of
Dean Witter Discover produced strong returns for the Fund during the
fiscal year. On the other hand, our underweight of health care issues had
a negative impact on performance. These stocks were among the strongest
performing stocks in the Russell 1000 Growth Index, up 43% for the fiscal
year.
For the current fiscal year, we are maintaining positions in the
technology, consumer discretionary and services and financial sectors.
Because health care stocks continue to look overvalued by most of our
measures, the stocks are underweighted in the portfolio relative to the
benchmark. We are also emphasizing medium-sized companies within the
portfolio, as the largest stocks look expensive to us. Last, the Fund is
conservatively positioned relative to the benchmark, as demonstrated by
its lower price to book value (5.2 compared to 7.1) and lower
price/earnings ratio (22.8 compared to 24.9 for 1998 expected earnings).
We believe that these characteristics will enable the Fund to do well in
the event of market turbulence in the current fiscal year.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Growth Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
----------------------------------
Average Annual Total Return
----------------------------------
Since
Inception
1 Year 5 Year 12/31/88
----------------------------------
Class
III 36.2% 21.4% 20.1%
----------------------------------
[LINE GRAPH APPEARS HERE]
GMO Growth Fund
Class III Shares S & P 500 Index
---------------- ---------------
12/31/88 $9,986 $10,000
2/28/89 $10,476 $10,465
2/28/90 $13,130 $12,443
2/28/91 $16,314 $14,268
2/29/92 $19,652 $16,548
2/28/93 $20,380 $18,312
2/28/94 $21,221 $19,837
2/28/95 $23,528 $21,297
2/29/96 $32,415 $28,688
2/28/97 $39,429 $36,192
2/28/98 $53,770 $48,860
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Sector Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Sector Fund at February
28, 1998, the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------
MUTUAL FUNDS -- 99.9%
2,322,979 GMO Core Fund (Class III Shares) 46,436,357
759,240 GMO REIT Fund (Class III Shares) 9,809,377
592,495 GMO Small Cap Growth Fund (Class III Shares) 7,275,840
393,381 GMO Small Cap Value Fund (Class III Shares) 7,191,012
-----------
TOTAL MUTUAL FUNDS (COST $69,777,889) 70,712,586
-----------
COMMON STOCKS -- 0.2%
Oil and Gas -- 0.2%
2,100 Pennzoil Co 140,945
-----------
TOTAL COMMON STOCKS (COST $160,125) 140,945
-----------
SHORT-TERM INVESTMENTS -- 0.0%
Repurchase Agreements -- 0.0%
$ 14,677 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value
of $14,683 and an effective yield of 5.07%,
collateralized by a U.S. Treasury Obligation with
a rate of 8.875%, with a maturity date of 8/15/17
and with an aggregate market value of $14,970. 14,677
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $14,677) 14,677
-----------
TOTAL INVESTMENTS -- 100.1%
(COST $69,952,691) 70,868,208
Other Assets and Liabilities (net) -- (0.1)% (45,370)
-----------
TOTAL NET ASSETS -- 100% $70,822,838
===========
See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $69,952,691) (Note 1) $70,868,208
Dividends and interest receivable 543
Receivable for expenses waived or borne by Manager (Note 2) 24,193
-----------
Total assets 70,892,944
-----------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 34,095
Shareholder service fee 1,223
Accrued expenses 34,788
-----------
Total liabilities 70,106
-----------
Net assets $70,822,838
===========
Net assets consist of:
Paid-in capital $64,329,735
Accumulated undistributed net realized gain 5,577,586
Net unrealized appreciation 915,517
-----------
$70,822,838
===========
Net assets attributable to:
Class III shares $70,822,838
===========
Shares outstanding:
Class III 8,299,546
===========
Net asset value per share:
Class III $ 8.53
===========
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends from securities and investment company shares
(net of withholding taxes of $178) $ 3,916,875
Interest (including securities lending income of $2,957) 975,176
-----------
Total income 4,892,051
-----------
Expenses:
Management fee (Note 2) 853,670
Custodian and transfer agent fees 70,577
Audit fees 28,064
Legal fees 3,310
Trustees fees (Note 2) 1,635
Registration fees 617
Miscellaneous 1,240
Fees waived or borne by Manager (Note 2) (635,351)
-----------
323,762
Shareholder service fee (Note 2)
Class I 2,792
Class III 147,791
-----------
Net expenses 474,345
-----------
Net investment income 4,417,706
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 37,412,933
Closed futures contracts 2,520,325
Closed swap contracts (967,041)
Realized gain distributions from investment
company shares 14,793,171
-----------
Net realized gain 53,759,388
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (15,355,998)
Futures contracts (142,015)
Swap contracts 718,111
-----------
Net unrealized loss (14,779,902)
-----------
Net realized and unrealized gain 38,979,486
-----------
Net increase in net assets resulting from operations $43,397,192
===========
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February
1998 28, 1997
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 4,417,706 $ 4,631,135
Net realized gain 53,759,388 65,670,531
Change in net unrealized appreciation (depreciation) (14,779,902) (21,085,079)
------------- ------------
Net increase in net assets resulting from operations 43,397,192 49,216,587
------------- ------------
Distributions to shareholders from:
Net investment income
Class I (46,918) (8,397)
Class III (5,767,909) (3,967,362)
------------- ------------
Total distributions from net investment income (5,814,827) (3,975,759)
------------- ------------
In excess of net investment income
Class I (1,635) --
Class III (201,027) --
------------- ------------
Total distributions in excess of net investment
income (202,662) --
------------- ------------
Net realized gains
Class I (878,317) (85,607)
Class III (95,593,791) (51,735,148)
------------- ------------
Total distributions from net realized gains (96,472,108) (51,820,755)
------------- ------------
(102,489,597) (55,796,514)
------------- ------------
Net share transactions: (Note 5)
Class I (661,857) 1,245,516
Class III (97,490,425) 22,083,220
------------- ------------
Increase (decrease) in net assets resulting from net
share transactions (98,152,282) 23,328,736
------------- ------------
Total increase (decrease) in net assets (157,244,687) 16,748,809
Net assets:
Beginning of period 228,067,525 211,318,716
------------- ------------
End of period (including accumulated undistributed net
investment income of $0 and $1,418,165, respectively) $ 70,822,838 $228,067,525
============= ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from September 3, 1996
March 1, 1997 to (commencement of operations)
January 9, 1998 to February 28, 1997
--------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 13.03 $ 11.78
-------- --------
Income from investment operations:
Net investment income 0.27+ 0.12
Net realized and unrealized gain 1.78 2.10
-------- --------
Total from investment operations 2.05 2.22
-------- --------
Less distributions to shareholders:
From net investment income (0.39) (0.09)
In excess of net investment income (0.01) --
From net realized gains (6.99) (0.88)
-------- --------
Total distributions (7.39) (0.97)
-------- --------
Net asset value, end of period $ 7.69/(a)/ $ 13.03
======== ========
Total Return/(b)/ 16.80% 19.25%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 1,357
Net expenses to average daily net assets 0.38%* 0.61%*
Net investment income to average daily net
assets 2.67%* 1.97%*
Portfolio turnover rate 150% 104%
Average broker commission rate per equity
share $0.0474 $0.0270
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.04 $ 0.01
</TABLE>
+ Computed using average shares outstanding throughout the period.
/(a)/All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(b)/Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.03 $ 13.63 $ 11.06 $ 11.26 $ 10.38
------- -------- ------- -------- -------
Income from investment operations:
Net investment income 0.29+ 0.26 0.29 0.28 0.29
Net realized and unrealized gain 2.61 2.20 3.90 0.49 1.21
------- -------- ------- -------- -------
Total from investment operations 2.90 2.46 4.19 0.77 1.50
------- -------- ------- -------- -------
Less distributions to shareholders:
From net investment income (0.40) (0.22) (0.29) (0.27) (0.30)
In excess of net investment income (0.01) -- -- -- --
From net realized gains (6.99) (2.84) (1.33) (0.70) (0.32)
------- -------- ------- -------- -------
Total distributions (7.40) (3.06) (1.62) (0.97) (0.62)
------- -------- ------- -------- -------
Net asset value, end of period $ 8.53 $ 13.03 $ 13.63 $ 11.06 $ 11.26
======= ======== ======= ======== =======
Total Return/(a)/ 29.61% 20.88% 38.90% 7.56% 14.64%
Ratios/Supplemental Data:
Net assets, end of period (000's) $70,823 $226,711 $211,319 $207,291 $167,028
Net expenses to average
daily net assets 0.27% 0.48% 0.48% 0.48% 0.48%
Net investment income to
average daily net assets 2.53% 1.99% 2.27% 2.61% 2.56%
Portfolio turnover rate 150% 104% 84% 101% 53%
Average broker commission rate per
equity share/(b)/ $0.0474 $ 0.0270 N/A N/A N/A
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.04 $ 0.02 $ 0.01 $ 0.01 $ 0.01
</TABLE>
/(a)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
/(b)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment in common stocks either directly or
through investments in other Funds of the Trust. Subsequently all of its
assets will be invested in or exposed to equity securities chosen from the
Wilshire 5000 Index and primarily in common stocks chosen from among the
1,800 companies with the largest equity capitalization whose securities are
listed on a United States national securities exchange, and/or shares of
other domestic equity funds of the Trust. On August 20, 1997, the Fund
began to invest a substantial portion of its assets in other Funds of the
Trust.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bore the same total operating expenses (after the voluntary expense waiver)
as those shares. On August 20, 1997 the Fund revised its voluntary expense
waiver to include certain expenses incurred indirectly by the Fund through
investment in underlying funds (See Note 2).
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. 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. Unlisted securities for which market
quotations are readily available are valued at the most recent quoted bid
price. Short-term investments with a remaining maturity of sixty days or
less are valued at amortized cost which approximates market value. Other
assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Trustees.
7
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. At February 28, 1998, there
were no outstanding futures contracts.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund had no securities on loan.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the
8
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
counterparty, respectively. Equity swaps are marked to market daily based
upon quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions.
At February 28, 1998, there were no open swap agreements outstanding.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $391,666.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
------------------- --------------------------- ------------------
$181,618 $1,787,179 $(1,968,797)
9
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated prorata
among the classes of shares of the Fund based on the relative net assets of
each class. Shareholder service fees, which are directly attributable to a
class of shares, are charged to that class' operations. In addition, the
Fund will also incur fees and expenses indirectly as a shareholder in the
underlying funds. Because the underlying funds have varied expense and fee
levels and the Fund may own different proportions of underlying funds at
different times, the amount of fees and expenses indirectly incurred by the
Fund will vary. (See Note 2).
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .27% of the amount
invested. Prior to June 30, 1997, the premium on cash purchases was .14% of
the amount invested. All purchase premiums are paid to and recorded by the
Fund as paid-in capital. This fee is allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $20,558 in purchase premiums.
There is no premium for cash redemptions, reinvested distributions or
in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .49% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, and
.15% for Class III shares. The Fund will invest in Class III shares of each
underlying Fund being offered. Like the management fee (as described
below), the shareholder service fee of each class of the Fund's shares will
be waived (but not below zero) to the extent of the indirect shareholder
service fees paid in connection with the Fund's investment in shares of
underlying Funds.
10
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
GMO has agreed to waive a portion of its fee (but not below zero) and bear
other expenses until further notice to the extent that the Fund's annual
expenses (including the management fee but excluding brokerage commissions,
certain other transaction costs (including transfer taxes), shareholder
service fees and extraordinary expenses ("fund expenses")) plus the amount
of fees and expenses, excluding shareholder service fee and fund expenses
(as defined above) incurred indirectly by the Fund through investment in
underlying Funds exceed .33% of average daily net assets. Because GMO will
not waive the management fees below zero, and because the amount of fees
and expenses incurred indirectly by the Fund will vary, the operating
expenses (excluding shareholder service fees and fund expenses) incurred
indirectly by the Fund through investment in underlying Funds may exceed
0.33% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the six months ended February 28, 1998 was $1,635. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$224,242,899 and $352,556,219, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ----------------- ----------------
$70,439,317 $936,744 $507,853 $428,891
4. Principal shareholders
At February 28, 1998, 92.9% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
11
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from September 3,
1996 (commencement of
Class I: Period from March 1, 1997 operations)
to January 9, 1998 to February 28, 1997
---------------------------- ----------------------------
Shares Amount Shares Amount
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Shares sold 9,272 $ 102,631 97,467 $ 1,163,513
Shares issued to shareholders in
reinvestment of distributions 104,677 926,870 7,610 94,003
Shares repurchased (218,098) (1,691,358) (928) (12,000)
------------- ------------- -------------- ------------
Net increase/(decrease) (104,149) $ (661,857) 104,149 $ 1,245,516
============= ============= ============== ============
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
---------------------------- ----------------------------
Shares Amount Shares Amount
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Shares sold 1,374,373 $ 15,598,383 7,570,612 $ 96,850,986
Shares issued to shareholders in
reinvestment of distributions 10,762,767 97,835,045 3,069,555 37,653,043
Shares repurchased (21,232,535) (210,923,853) (8,749,092) (112,420,809)
============= ============== ============= =============
Net increase/(decrease) (9,095,395) $ (97,490,425) 1,891,075 $ 22,083,220
============= ============== ============= =============
</TABLE>
12
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
40.63% of distributions as net capital gain dividends.
13
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily
responsible for the day-to-day management of the Fund's portfolio. Each of
these individuals has been a portfolio manager at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO U.S. Sector Fund returned 29.6% for the
fiscal year ended February 28, 1998, as compared to 35.0% for the S&P 500.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
The Fund's performance shortfall was due to two sector strategies that
underperformed for the year. The first strategy involved overweighting
small capitalization stocks, in which the Fund maintained a 20% weight
throughout the year. This strategy is based on our view that these stocks
are more attractive relative to large capitalization stocks when valued
using Price/Sales, Price/Fair Value, Price/Book and Price/Cash Flow
measures. Although this strategy was not successful in the prior fiscal
year, small stocks are currently at their least expensive level in the past
twenty years. We continue to believe that these stocks will outperform
large capitalization stocks in the near- to mid-term.
The Fund's strategy of maintaining a 15% weight in Real Estate Investment
Trusts ("REITs") also detracted from relative performance. As with small
capitalization stocks, this position is based upon the attractive
valuations of the sector relative to large capitalization U.S. equities.
While real estate is trading at or about its replacement cost, U.S.
equities continue to trade at high premiums which we believe in many cases
to be unwarranted. REITs, as represented by the Morgan Stanley REIT Index,
underperformed the S&P 500 by 19.7%.
Within large capitalization stocks, the Fund's fair value and momentum
stock selection strategies worked successfully in identifying stocks for
inclusion in the Fund's portfolio. The Fund's technology stock holdings,
including Dell and Compaq, contributed positively to performance for the
portfolio. These strategies were also successful in selecting non-bank
financial stocks. The Fund's value added within this sector came primarily
from its overweight in large brokerage firms, which benefited from merger
activity and record market returns.
In August, the U.S. Sector Fund converted into a fund-of-funds by
exchanging its portfolio securities for GMO mutual funds shares of
equivalent value. The purpose of the conversion is to enable the Fund to
implement more effectively its investment strategies. The U.S. Sector Fund
currently invests in the GMO Core Fund, GMO REIT Fund, GMO Small Cap Growth
Fund and GMO Small Cap Value Fund. The conversion does not represent any
change in the investment strategies of the Fund, but only in the
implementation of these strategies.
Outlook
The Fund is typically overweight in high quality stocks as defined using a
GMO measure that focuses on high, stable return on equity and low debt
ratios. However, we are now underweight in this group as these stocks
appear to be overvalued. In particular the market is paying a premium for
high return on equity that we think is excessive. We continue to believe
that smaller stocks and REITs have more attractive valuation levels than
the largest stocks, and expect them to outperform large capitalization
stocks in the near- to mid-term.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO U.S. Sector Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
---------------------------------
Average Annual Total Return
---------------------------------
Since
1 Year 5 Year Inception
---------------------------------
Class 12/31/92
III 29.3% 21.7% 22.0%
---------------------------------
[LINE GRAPH APPEARS HERE]
GMO U.S. Sector Fund
Class III Shares S & P 500 Index
-------------------- ---------------
12/31/92 $9,973 $10,000
2/28/93 $10,352 $10,221
2/28/94 $11,868 $11,072
2/28/95 $12,765 $11,887
2/29/96 $17,730 $16,012
2/28/97 $21,432 $20,201
2/28/98 $27,778 $27,271
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 27 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Past performance
is not indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Short-Term Income Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Short-Term Income Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS -- 97.1%
Asset Backed Securities -- 50.3%
$ 412,049 Americredit Automobile Receivables Trust Series 96-B Class
A, 6.50%, due 1/12/02 413,981
3,195,719 Banc One Student Loan Trust 94-A Class A2,
Variable Rate, 1 mo. LIBOR + .30%, 5.93%, due 10/25/16 3,208,502
2,180,000 Brazos Student Loan Finance Corp Series 96-A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 5.78%,
due 12/01/02 2,171,484
463,100 Dilmun Capital Corp,
Variable Rate, 6 mo. LIBOR + .88%, 6.79%, due 11/15/03 463,100
1,000,000 National Premier Finance 95-2, 144A, 6.21%, due 6/01/99 1,000,000
5,500,000 National Premier Finance IX 96-1A, 144A, 7.20%, due 7/01/00 5,615,500
500,000 Premier Auto Trust 94-4 Certificates, 6.85%, due 5/02/99 502,500
3,463,122 Signet Student Loan Trust Series 96-A Class A-1,
Variable Rate, 1 mo. LIBOR + .09%, 5.72%, due 1/25/05 3,462,039
2,000,000 Starvest CBO-1 Class A,
Variable Rate, 6 mo. LIBOR + .19% 144A, 5.82%, due
7/30/11 1,976,000
-------------
18,813,106
-------------
U.S. Government -- 9.7%
3,500,000 U.S. Treasury Note, 7.75%, due 11/30/99 3,624,688
-------------
U.S. Government Agency -- 37.1%
U.S. Government Agency Bonds/Notes -- 27.1%
350,000 Agency for International Development Floater (Support of
Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40%,
5.64%, due 10/01/12 347,430
2,250,000 Agency for International Development Floater (Support of
C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill
+ .40%, 5.64%, due 10/01/12 2,241,914
2,333,663 Agency for International Development Floater (Support of
Honduras), Variable Rate, 3 mo. U.S. Treasury Bill
x 117%, 5.98%, due 10/01/11 2,331,111
101,836 Agency for International Development Floater (Support of
Peru), Variable Rate, 6 mo. U.S. Treasury Bill
+ .35%, 5.59%, due 5/01/14 101,151
5,071,625 Small Business Administration Pool #502320,
Variable Rate, Prime - 2.18%, 6.31%, due 8/25/18 5,096,983
-------------
10,118,589
-------------
Structured Notes -- 10.0%
750,000 Federal Home Loan Bank,
Variable Rate, ((.50 * 10YR CMT) + 1.25%), 4.42%, due
3/16/98 748,875
1,000,000 Federal National Mortgage Association,
Variable Rate, ((.50 * 2YR CMT) + 1.80%), 4.79%, due
3/10/98 997,500
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Schedule of Investments -- (continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Structured Notes -- continued
$2,000,000 Student Loan Marketing Association,
Variable Rate, (10.25% - 5YR DM SWAP), 5.23%, due 3/23/98 1,996,000
-----------
3,742,375
-----------
13,860,964
-----------
TOTAL DEBT OBLIGATIONS (COST $36,240,733) 36,298,758
-----------
SHORT-TERM INVESTMENT -- 1.8%
Repurchase Agreement -- 1.8%
$ 662,427 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $662,707 and
an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.875%, with a maturity
date of 8/15/17 and with a market value of $675,676. 662,427
-----------
TOTAL SHORT-TERM INVESTMENT (COST $662,427) 662,427
-----------
TOTAL INVESTMENTS -- 98.9%
(Cost $36,903,160) 36,961,185
Other Assets and Liabilities (net) -- 1.1% 415,567
-----------
TOTAL NET ASSETS -- 100% $37,376,752
===========
Notes to the Schedule of Investments:
CMT - Constant Maturity Treasury Index
DM SWAP - 5 year Deutsche Mark Constant Maturity Swap Rate
Variable rates - The rates shown on variable rate notes are
the current interest rates at February 28, 1998, which are
subject to change based on the terms of the security,
including varying reset dates.
144A - Securities exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $36,903,160) (Note 1) $36,961,185
Interest receivable 440,238
Receivable for expenses waived or borne by Manager (Note 2) 5,579
-----------
Total assets 37,407,002
-----------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 7,180
Shareholder service fee 4,326
Accrued expenses 18,744
-----------
Total liabilities 30,250
-----------
Net assets $37,376,752
===========
Net assets consist of:
Paid-in capital $37,012,186
Accumulated undistributed net investment income 310,608
Accumulated undistributed net realized loss (4,067)
Net unrealized appreciation 58,025
===========
$37,376,752
===========
Shares outstanding 3,810,783
===========
Net asset value per share $ 9.81
===========
See accompanying notes to the financial statements. 3
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest 2,779,582
----------
Total income 2,779,582
----------
Expenses:
Management fee (Note 2) 117,159
Audit fees 25,651
Custodian and transfer agent fees 8,698
Legal fees 1,027
Registration fees 786
Trustees fees (Note 2) 451
Miscellaneous 547
Fees waived or borne by Manager (Note 2) (130,911)
----------
23,408
Shareholder service fee (Note 2) 70,313
----------
Net expenses 93,721
----------
Net investment income 2,685,861
----------
Realized and unrealized gain:
Net realized gain on investments 13,827
----------
Change in net unrealized appreciation on investments 110,882
----------
Net realized and unrealized gain 124,709
----------
Net increase in net assets resulting from operations $2,810,570
==========
4 See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,685,861 $ 1,624,987
Net realized gain 13,827 76,160
Change in net unrealized appreciation (depreciation) 110,882 (75,627)
----------- -----------
Net increase in net assets resulting from operations 2,810,570 1,625,520
----------- -----------
Distributions to shareholders from:
Net investment income (2,703,434) (1,442,981)
----------- -----------
Fund share transactions: (Note 5)
Proceeds from sale of shares 40,588,732 94,033,050
Net asset value of shares issued to shareholders in
payment of distributions declared 1,868,584 1,044,258
Cost of shares repurchased (46,124,637) (65,388,935)
----------- -----------
Net increase (decrease) in net assets resulting from
Fund share transactions (3,667,321) 29,688,373
----------- -----------
Total increase (decrease) in net assets
(3,560,185) 29,870,912
Net assets:
Beginning of period 40,936,937 11,066,025
----------- -----------
End of period (including accumulated undistributed net
investment income of $310,608 and $328,181,
respectively) $37,376,752 $40,936,937
=========== ===========
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
--------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.78 $ 9.77 $ 9.56 $ 9.79 $ 10.05
------- -------- ------- ------ -------
Income from investment operations:
Net investment income 0.55 0.47 0.57 0.63 0.44
Net realized and unrealized
gain (loss) 0.03 0.06 0.20 (0.28) (0.09)
------- -------- ------- ------ -------
Total from investment
operations 0.58 0.53 0.77 0.35 0.35
------- -------- ------- ------ -------
Less distributions to shareholders:
From net investment income (0.55) (0.52) (0.56) (0.58) (0.46)
From net realized gains -- -- -- -- (0.15)
------- -------- ------- ------ -------
Total distributions (0.55) (0.52) (0.56) (0.58) (0.61)
------- -------- ------- ------ -------
Net asset value, end of period $ 9.81 $ 9.78 $ 9.77 $ 9.56 $ 9.79
======= ======== ======= ====== =======
Total Return/(a)/ 6.10% 5.62% 8.32% 3.78% 3.54%
Ratios/Supplemental Data:
Net assets, end of period (000's) $37,377 $ 40,937 $11,066 $8,193 $ 8,095
Net expenses to average daily
net assets 0.20% 0.20% 0.25% 0.25% 0.25%
Net investment income to
average daily net assets 5.73% 5.88% 6.49% 5.02% 4.35%
Portfolio turnover rate 50% 287% 139% 335% 243%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts: $ 0.03 $ 0.03 $ 0.03 $ 0.02 $ 0.02
</TABLE>
/(a)/ The total returns would have been lower had certain expenses not been
waived during the periods shown.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Short Term Income Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares.
The Fund seeks current income to the extent consistent with the
preservation of capital and liquidity through investment in a portfolio of
high quality short-term instruments.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. 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 other persons acting
at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. 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 by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. These prices may differ
from the value that would have been used had a broader market for the
securities existed and the differences could be material to the financial
statements.
7
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults, the value of
the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Distributions in excess of tax basis
earnings and profits, if any, are reported in the Fund's financial
statements as a return of capital. Differences in the recognition or
classification of income for financial statement and tax
8
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
purposes which result in temporary over-distributions for financial
statement purposes are classified as distributions in excess of net
investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts and amortization of premiums. In determining the net gain or loss
on securities sold, the cost of securities is determined on the identified
cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of the Fund at the
annual rate of .15%.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .05% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .20%;
thus, the net annual expense ratio after the waiver is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $451. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
----------------- -----------------
U.S. Government securities $ - $ 7,735,156
Investments (non-U.S. Government
securities) 22,011,715 14,455,257
9
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
----------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C>
$ 36,903,160 $ 100,692 $ 42,667 $ 58,025
</TABLE>
4. Principal shareholders
At February 28, 1998, 66.6% of the outstanding shares of the Fund were held
by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------ ------------------
<S> <C> <C>
Shares sold 4,145,609 9,668,234
Shares issued to shareholders in
reinvestment of distributions 192,315 108,123
Shares repurchased (4,714,947) (6,721,285)
------------------ ------------------
Net increase (decrease) (377,023) 3,055,072
Fund shares:
Beginning of period 4,187,806 1,132,734
------------------ ------------------
End of period 3,810,783 4,187,806
================== ==================
</TABLE>
10
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income.
At February 28, 1998 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------ ------
2006 $ 4,067
11
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
The Short-Term Income Fund returned 6.1% for the fiscal year ended February
28, 1998, as compared to 5.3% for the Salomon Brothers 3 Month Treasury
Bill Index. Consistent with the Fund's investment objectives and policies,
the Fund was substantially invested in high-quality, fixed income
instruments throughout the period.
Short-term interest rates fell modestly in the U.S. during the fiscal year
helping the Fund outperform its benchmark by 0.8%. This was due to the
Fund's longer-than-benchmark interest rate sensitivity, and to its holdings
of highly-rated asset-backed securities and higher-yielding government
agency issues.
At the fiscal year end approximately 50% of the Fund was invested in
highly-rated, floating rate, asset-backed securities, 12% in U.S. Treasury
notes and cash, and 38% in U.S. Government-backed bonds. The asset-backed
issues included issues backed by auto, truck, credit card and health care
receivables. The additional yield provided by these holdings plus the
capital gains due to its longer-than-benchmark maturity accounted for the
Fund's strong relative performance.
GMO believes that asset-backed securities will continue to offer attractive
opportunities to enhance the return of the Fund.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Short-Term Income Fund Class III Shares and
the Salomon Brothers 3 Month T-Bill Index
As of February 28, 1998
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 5 Year 6/30/91
--------------------------------
Class
III 6.1% 5.5% 5.9%
--------------------------------
[LINE GRAPH APPEARS HERE]
Salomon Brothers
GMO Short-Term 3 Month T-Bill
Date Income Fund Index
---- -------------- ----------------
6/30/91 $10,000 $10,000
2/29/92 $10,380 $10,331
2/28/93 $11,238 $10,686
2/28/94 $11,636 $11,014
2/28/95 $12,087 $11,505
2/29/96 $13,093 $12,158
2/28/97 $13,829 $12,794
2/28/98 $14,672 $13,468
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. Class III shares are a
redesignation of the single class of shares that has been offered by the Fund
since inception. The Fund operated as a money market fund from April 17, 1990 to
June 30, 1991. Subsequently, the Fund became a short-term income fund. Past
performance is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Small Cap Value Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Small Cap Value Fund at February 28, 1998, the results of its operations
for the year then ended, the changes in its net assets and the financial
highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at February 28, 1998 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.0%
Advertising -- 0.1%
1,800 Grey Advertising Inc 653,400
-----------
Aerospace -- 1.0%
19,200 Curtiss Wright Corp 718,800
28,600 Gencorp Inc 779,350
95,300 Kaman Corp, Class A 1,643,925
18,100 Teleflex Inc 734,181
38,200 Thiokol Corp 3,652,875
-----------
7,529,131
-----------
Automotive -- 1.7%
16,900 Bandag Inc 947,456
33,000 Borg Warner Automotive Inc 1,934,625
26,500 Breed Technologies Inc 576,375
55,300 Cooper Tire & Rubber Co 1,275,356
21,900 Echlin Inc 1,107,319
17,100 Mascotech Industries Inc 354,825
59,400 Modine Manufacturing Co 2,079,000
8,200 Paccar Inc 519,163
43,600 Smith (AO) Corp, Class B 1,896,600
3,900 SPX Corp 291,281
23,600 Superior Industries International Inc 733,075
37,300 Wabash National Corp 1,107,344
-----------
12,822,419
-----------
Banking and Financial Services -- 10.1%
31,900 Advanta Corp, Class A 751,644
11,900 Albank Financial Corp 578,638
23,200 Astoria Financial Corp 1,296,300
31,400 Baldwin and Lyons Inc, Class B 753,600
19,452 BOK Financial Corporation 955,580
11,100 CCB Financial Corp 1,205,738
35,100 Citizens Banking Corp Michigan 1,180,238
114,350 Comdisco Inc 4,766,967
30,435 Commerce Bancshares Inc 2,176,103
41,750 Compass Bancshares Inc 1,920,500
15,500 Corus Bancshares Inc 682,000
20,600 Dain Rauscher Corp 1,207,675
21,100 Deposit Guaranty Corp 1,169,731
27,371 Dime Bancorp Inc 834,816
30,000 Donaldson Lufkin & Jenrette 2,456,250
See accompanying notes to the financial statements. 1
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
25,635 Downey Financial Corp 749,824
28,300 Eaton Vance Corp 1,176,219
29,950 Edwards (AG) Inc 1,259,772
34,100 Financial Security Assurance Holdings Ltd 1,792,381
14,100 First Citizens Bancshares, Class A 1,635,600
8,400 First Commerce Corp 663,600
2,600 First Empire State Corp 1,227,200
24,500 First Federal Financial Corp* 989,188
35,300 First Hawaiian Inc 1,398,763
42,050 First Virginia Banks Inc 2,128,781
9,050 Firstbank of Illinois Co 410,078
29,600 Firstbank Puerto Rico 1,171,050
37,109 Fleet Financial Group Inc 2,924,679
17,880 Fulton Financial Corp 575,513
4,400 Greenpoint Financial Corp 326,700
27,000 Jefferies Group Inc 1,196,438
6,300 JSB Financial 339,019
28,600 Leucadia National Corp 1,079,650
59,200 Liberty Financial Cos 2,146,000
6,900 Long Island Bancorp Inc 415,294
44,100 Mercantile Bankshares 1,544,876
47,025 Morgan Keegan Inc 1,011,038
8,600 National Bancorp of Alaska Inc 1,040,600
14,550 Old Kent Financial Corp 561,084
20,000 Onbancorp Inc 1,452,500
8,175 One Valley Bancorp Inc 301,453
72,400 Pacific Century Financial Corp 1,561,125
8,750 Peoples Bank Bridgeport 328,672
79,900 Piper Jaffray Inc 2,936,325
21,700 PMI Group Inc 1,578,675
20,500 Popular Inc 1,071,765
65,150 Raymond James Financial Corp 2,597,856
21,500 Riggs National Corp 569,750
9,000 Rowe (T) Price & Associates Inc 597,375
58,200 Ryland Group Inc 1,625,963
26,200 SEI Investments Co 1,545,800
77,380 Sovereign Bancorp Inc 1,499,238
10,762 St. Paul Bancorp Inc 285,193
17,300 Student Loan Group 834,725
28,700 Trustmark Corp 1,259,213
20,610 UMB Financial Corp 1,174,770
13,500 Union Planters Corp 834,469
2 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
13,900 United Asset Management Corp 369,219
61,700 United Cos Financial Corp 967,919
18,300 Value Line Inc 768,600
46,932 Washington Federal Inc 1,296,483
42,600 Wilmington Trust Corp 2,635,875
-----------
77,792,090
-----------
Chemicals -- 1.1%
26,200 Albemarle Corp 638,625
23,300 Cabot Corporation 821,325
26,500 Crompton & Knowles Corp 798,313
15,200 Cytec Industries Inc* 742,900
14,750 Ferro Corp 397,328
7,700 Fuller (HB) Co 437,938
17,900 Geon Co 358,000
20,500 Hanna (MA) Co 475,344
36,800 Kaiser Aluminum Corp* 361,100
32,000 Mississippi Chemical Corp 592,000
18,600 Olin Corp 852,113
34,900 Stepan Co 972,838
60,400 Wellman Inc 1,298,600
-----------
8,746,424
-----------
Communications -- 0.2%
62,200 DSC Communications Corp* 1,220,675
-----------
Computer and Office Equipment -- 2.0%
21,600 Banctec Inc 554,850
9,900 Everex Systems Inc/(a)/ --
56,500 Exabyte Corp 452,000
32,800 Infocus Systems Inc* 1,309,950
49,000 Intergraph Corp* 477,750
79,500 Lexmark International Group Inc* 3,398,625
60,600 Quantum Corp 1,522,575
30,300 Sequent Computer Inc* 641,981
42,100 Sterling Software Inc* 2,218,144
36,800 Stratus Computer Inc* 1,846,900
92,100 Unisys Corp* 1,646,288
49,500 Western Digital Corp 903,375
20,200 Zebra Technologies Corp 583,275
-----------
15,555,713
-----------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Construction -- 2.1%
36,200 Bridge & Toll Road Brothers Inc 1,086,000
41,000 Centex Corp 2,995,563
21,600 Foster Wheeler Corp 577,800
33,100 Granite Construction Inc 877,150
46,200 Horton (DR) Inc 1,077,038
107,900 Kaufman & Broad Home Corp 2,791,913
49,100 McDermott International Inc 1,933,313
44,300 MEMC Electronic Materials 747,563
34,200 Pulte Corp 1,556,100
91,500 Standard Pacific Corp 1,584,094
20,300 Texas Industries Inc 1,146,950
-----------
16,373,484
-----------
Consumer Goods -- 3.8%
27,700 Alberto Culver Co, Class B 843,119
22,700 Bassett Furniture Industries Inc 703,700
16,919 Block Drug Co Inc, Class A 712,713
92,100 Burlington Industries Inc 1,525,406
28,100 Callaway Golf Co 906,225
34,100 Coleman Co Inc 703,313
112,100 Compucom Systems Inc 987,881
45,800 Department 56 Inc* 1,508,538
45,700 Fastenal Co 2,005,088
28,700 First Brands Corp 739,025
41,900 Furniture Brands International Inc* 1,147,013
6,000 Jones Apparel Group Inc* 330,000
79,200 Justin Industries 1,029,600
46,300 Kimball International, Class B 966,513
27,300 La-z-boy Chair Co 1,308,694
48,515 Lancaster Colony Corp 2,134,660
94,800 Moore Corp Ltd 1,487,175
8,400 National Service Industries 465,675
30,600 Nine West Group Inc* 841,500
57,750 Oneida LTD 1,544,813
51,700 Osh Kosh B Gosh, Class A 2,029,225
17,250 Patterson Dental Company 521,813
40,700 Russell Corp 1,103,988
16,500 Technology Data Corp* 767,250
136,500 Terra Industries Inc 1,620,938
6,000 Timberland Co* 435,000
10,100 Unifi Inc 371,175
23,000 US Industries Inc 641,125
-----------
29,381,165
-----------
4 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Electronic Equipment -- 4.4%
87,300 American Power Conversion Corp* 2,531,700
83,400 Antec Corp 985,163
76,200 CTS Corp 2,452,688
65,700 Cypress Semiconductor Corp* 620,044
41,700 Dallas Semiconductor Corp 1,980,750
30,200 Federal Signal Corp 709,700
8,500 Franklin Electric Inc 576,938
22,700 Harman International Industries 1,055,550
38,400 Hutchinson Technology Inc* 888,000
82,900 Integrated Device Technology Inc* 1,248,681
21,800 Jabil Circuit Inc 1,147,225
14,200 Kemet Corp 301,750
53,500 Komag Inc 769,063
14,800 Lattice Semiconductor Corp* 792,725
18,800 Litton Industries* 1,170,300
16,400 Magnetek Inc* 291,100
34,100 Marshall Industries 999,556
31,400 Methode Electronics, Class A 443,525
250,500 Oak Technology Inc* 1,753,500
73,300 Pioneer Standard Electronics Inc 1,209,450
12,200 Pittway Corp, Class A 866,200
44,600 Read Rite Corp* 635,550
65,000 SCI Systems Inc 2,925,000
30,000 Sensormatic Electronics Corp 558,750
58,900 Silicon Valley Group Inc* 1,605,025
23,600 Stewart & Stevenson Services Corp 576,725
17,000 Tech Corp 448,375
14,001 Thomas & Betts Corp 793,679
54,405 Vishay Intertechnology Inc 1,108,502
24,400 VLSI Technology* 471,225
30,300 Watkins Johnson 819,994
49,000 Zilog Inc 976,938
-----------
33,713,371
-----------
Food and Beverage -- 3.5%
41,200 Bob Evans Farms Inc 847,175
65,300 Chiquita Brands International Inc 877,469
42,000 Coors (Adolph) Co 1,312,500
See accompanying notes to the financial statements. 5
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Food and Beverage -- continued
271,600 Darden Restaurants Inc 3,666,600
20,000 Dean Foods Co 1,100,000
6,100 Farmer Brothers Co 1,055,300
49,600 Great Atlantic & Pacific Tea Co 1,509,700
20,200 Hormel (Geo A) and Co 749,925
33,800 IBP Inc 754,163
50,100 International Multifoods Corp 1,399,669
70,500 Interstate Bakeries Corp 2,361,750
27,000 Luby's Cafeteria Inc 469,125
77,200 Michael Foods Inc 1,958,950
33,800 Pilgrims Pride Corp 363,350
14,100 Quality Food Centers Inc* 1,179,113
106,300 Ryans Family Steak House 880,292
1,600 Seaboard Corp 659,200
47,900 Smithfield Foods Inc 1,514,838
13,200 Triarc Companies* 331,650
55,025 Universal Foods Corp 2,476,125
68,200 Wendy's International Inc 1,479,088
-----------
26,945,982
-----------
Health Care -- 6.2%
68,000 Apria Healthcare Group 926,500
23,700 Arrow International Inc. 927,263
48,400 Ballard Medical Products 1,216,050
45,600 Bard (CR) 1,590,300
28,000 Bausch & Lomb Inc. 1,254,750
28,200 Beckman Instruments Inc 1,364,175
120,400 Beverly Enterprises Inc* 1,828,575
58,800 Bindley Western Industries Inc 1,947,750
81,900 BioMet Inc 2,441,644
23,400 Dentsply International Inc 725,400
26,100 Express Scripts Inc, Class A 2,035,800
42,600 First Health Group Corp* 2,122,013
16,200 Forest Laboratories Inc* 1,013,513
17,600 Genesis Health Ventures Inc 510,400
68,100 Haemonetics Corp* 1,136,419
26,400 Health Care & Retirement* 1,158,300
41,000 Integrated Health Services Inc 1,391,438
468,200 Laboratory Corporation of America Holdings 907,138
52,200 Lincare Holdings Inc* 3,388,104
81,500 Marquette Medical Systems, Class A* 2,241,250
92,600 Mid Atlantic Medical Services Inc 1,088,050
6 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Health Care -- continued
159,600 Novacare Corp* 2,234,400
84,300 Paragon Health Network Inc 1,570,088
168,400 Perrigo Co* 1,810,300
29,100 Quorum Health Group Inc 806,614
47,200 Rightchoice Managed Care, Class A 507,400
22,600 Sierra Health Services Inc 827,725
36,400 Sofamor Denek Group Inc* 2,739,100
40,400 Spacelabs Medical Inc 878,700
57,300 Sunrise Medical Inc 855,919
57,400 Sybron International Corp 1,567,738
28,500 United States Surgical Corp 872,813
19,500 Universal Health Services, Class B* 1,018,875
19,700 Varian Associates Inc 1,142,600
-----------
48,047,104
-----------
Insurance -- 9.4%
6,457 Alleghany Corp 2,201,837
55,500 Allied Group Inc 1,748,250
52,600 American Bankers Insurance Group 2,958,750
21,300 American Financial Group Inc 861,319
29,749 American Heritage Life Investments 1,206,694
16,900 American National Insurance Co 1,639,300
25,900 Argonaut Group Inc 932,400
45,500 Berkley (WR) Corp 2,075,938
25,100 Capital Re Corp 1,554,631
52,300 Citizens Corp 1,745,513
12,700 CMAC Investment Corp 850,900
50,700 Commerce Group Inc 1,774,500
27,690 Delphi Financial Group Inc 1,218,360
23,000 Enhance Financial Services Group Inc 1,427,438
46,400 Everest Re Holdings Inc 1,711,000
45,300 Fidelity National Financial Inc 1,325,025
33,250 First American Financial Corp 1,982,531
162,110 Foundation Health Systems Inc, Class A* 4,488,422
51,915 Fremont General Corp 3,046,762
15,800 Gallagher (Arthur J) and Co 652,738
47,200 Harleysville Group Inc 1,150,500
47,500 Horace Mann Educators Corp 1,686,250
37,900 John Alden Financial Corp 850,381
18,400 Kansas City Life Insurance Co 1,697,400
27,000 Liberty Corp 1,392,188
29,200 Life Re Corp 1,857,850
See accompanying notes to the financial statements. 7
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Insurance -- continued
57,500 Life USA Holdings 884,063
56,800 Mercury General Corp 3,223,400
27,600 NAC Re Corp 1,419,675
47,200 Ohio Casualty Corp 2,206,600
10,850 Old Republic International Corp 457,734
43,000 Orion Capital Corp 2,098,938
43,100 Penncorp Financial Group Inc 1,497,725
50,400 Presidential Life Corp 1,096,200
18,700 Protective Life Corp 1,292,638
83,434 Provident Cos Inc 3,003,624
5,550 Reinsurance Group of America 254,259
71,100 Reliance Group Holdings Inc 1,208,700
31,078 Reliastar Financial Corp 1,478,147
20,175 RLI Corp 1,051,622
54,300 Selective Insurance Group 1,489,856
49,600 TIG Holdings Inc 1,317,500
30,400 Transatlantic Holding Inc 2,299,000
15,350 Trenwick Group Inc 560,275
16,400 Twentieth Century Industries 438,700
13,200 UICI* 424,050
22,400 USF & G Corp 547,400
-----------
72,286,983
-----------
Machinery -- 3.4%
75,300 Agco Corporation 2,117,813
36,500 Cincinnati Milacron Inc 1,126,938
24,600 Cummins Engine Inc 1,423,725
63,500 Detroit Diesel Corp 1,365,250
105,200 Donaldson Co Inc 2,505,075
19,400 Federal Mogul Corp 951,813
28,100 Harnischfeger Industries Inc 994,038
14,100 Kennametal Inc 742,013
25,200 Kulicke & Soffa Industries* 699,300
62,900 Lam Research Corp* 1,784,788
55,100 Mohawk Industries Inc 1,446,375
26,700 Nordson Corp 1,298,288
63,700 Novellus System Inc 3,053,619
100,200 Oakley Inc* 1,208,663
21,400 Starrett (LS) Co, Class A 858,675
42,500 Tecumseh Products Co, Class B 2,135,625
15,500 Toro Co 621,938
39,000 Ultratech Stepper Inc 887,250
29,400 York International Corp 1,291,763
-----------
26,512,949
-----------
8 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Manufacturing -- 4.1%
71,000 ACX Technologies Inc* 1,695,125
20,900 Aeroquip-Vickers Inc 1,213,506
9,200 Alliant Techsystems Inc 577,875
160,400 Amcast Industrial Corp 3,548,850
52,400 Applied Power Inc, Class A 1,886,400
34,100 Ball Corp 1,112,513
42,600 Barnes Group Inc 1,256,700
36,800 Champion Enterprises Inc 924,600
82,050 Clayton Homes Inc 1,630,744
45,300 Crane Co 2,219,700
11,400 CSS Industries Inc* 401,850
38,600 Gibson Greetings Inc 849,200
32,000 Global Industrial Technologies Inc 502,000
11,400 Greif Brothers Corp 413,250
95,700 Griffon Corp* 1,573,069
19,700 Harsco Corp 824,938
23,700 International Game Technology 574,725
56,300 Lafarge Corp 1,889,569
17,400 Lydall Inc 305,588
10,400 Mine Safety Appliances 644,800
19,900 Sequa Corp, Class A 1,496,231
32,200 Standex International Corp 1,000,213
7,050 Tredegar Industries 493,500
73,900 Trinity Industries Inc 3,713,476
20,900 Watts Industries Inc, Class A 628,306
10,700 West Co Inc 339,056
-----------
31,715,784
-----------
Metals and Mining -- 1.4%
72,200 Arch Coal Inc 1,895,250
100,100 Asarco Inc 2,214,713
18,100 Cleveland Cliffs Inc 929,888
29,200 Commercial Metals Co 934,400
69,600 Cyprus Amax Minerals Co 1,139,700
15,300 Nacco Inds Inc, Class A 1,989,956
59,000 Timken Co 1,902,750
-----------
11,006,657
-----------
See accompanying notes to the financial statements. 9
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Oil and Gas -- 1.4%
5,500 El Paso Natural Gas Co 365,063
53,400 Equitable Resources Inc 1,682,100
29,400 FINA Inc, Class A 1,859,550
32,900 KCS Energy Inc 583,975
21,800 Mitchell Energy, Class B 598,138
30,800 Oryx Energy Co 783,475
24,400 Peoples Energy Corp 881,450
46,700 Pogo Producing Co 1,310,519
76,600 Santa Fe Energy Resources Inc 856,963
31,700 Seagull Energy Corp 534,938
67,300 Union Texas Petroleum Holdings Inc 1,358,619
-----------
10,814,790
-----------
Paper and Allied Products -- 2.7%
61,500 Boise Cascade Corp 2,048,719
63,700 Bowater Inc 3,153,150
54,900 Chesapeake Corp 1,863,169
61,100 Jefferson Smurfit Corp* 912,681
16,400 Longview Fibre Co 253,175
44,500 Media General Inc, Class A 2,091,500
21,900 Pentair Inc 902,006
34,400 Potlatch Corp 1,489,950
51,100 Rayonier Inc 2,165,363
53,400 Rock-Tenn Co, Class A 1,011,263
55,300 Shorewood Packaging Corp 1,354,850
128,500 Stone Container Corp* 1,445,625
26,800 TJ International Inc 804,000
26,300 Zurn Industries Inc 1,153,913
-----------
20,649,364
-----------
Pharmaceuticals -- 1.5%
22,100 Allergan Inc 773,500
12,100 Amerisource Health Corp* 707,850
55,475 Bergen Brunswig Corp, Class A 2,496,375
72,900 ICN Pharmaceuticals Inc 4,209,976
65,475 Mark IV Industries Inc 1,522,294
50,800 Watson Pharmaceutical Inc 1,822,450
-----------
11,532,445
-----------
Primary Materials -- 1.5%
20,400 Ameron Inc 1,222,725
21,200 Carpenter Technology Corp 1,003,025
58,700 Florida Rock Industries 1,533,538
10 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Primary Materials -- continued
34,100 Martin Marietta Materials Inc 1,297,931
14,600 Medusa Corp 690,763
90,600 Premark International Inc 2,819,925
11,700 Southdown Inc 748,800
33,400 USG Corp* 1,824,475
-----------
11,141,182
-----------
Primary Processing -- 2.2%
65,700 AK Steel Holding Corp 1,227,769
71,400 Alumax Inc* 2,646,263
183,600 Bethlehem Steel Corp* 1,950,750
43,500 Birmingham Steel Corp 763,969
60,100 Inland Steel Industries Inc 1,239,563
121,700 LTV Corp 1,468,006
70,600 Lukens Inc 2,118,000
6,700 Maxxam Inc 356,775
6,900 Mueller Industries Inc 380,363
87,600 National Steel Corp, Class B 1,357,800
22,200 NCH Corp 1,352,813
38,100 Oregon Steel Mills Inc 766,763
21,300 Quanex Corp 705,563
39,400 Rouge Industries Inc, Class A 581,150
-----------
16,915,547
-----------
Printing and Publishing -- 0.4%
9,500 AH Belo Corp 520,125
22,600 American Business Products Inc 514,150
59,000 Hollinger International Inc 947,688
10,699 Pulitzer Publishing Co 898,716
-----------
2,880,679
-----------
Real Estate -- 0.5%
50,000 Lennar Corp 1,396,875
53,100 Price Enterprises Inc 1,055,363
33,600 Webb (D) Corp 1,075,200
-----------
3,527,438
-----------
Refining -- 0.6%
20,000 Holly Corp 541,250
37,500 Lyondell Petro Chemical Co 1,021,875
30,792 Ultramar Diamond Shamrock Corp 1,098,890
62,200 Valero Energy Corp 2,208,100
-----------
4,870,115
-----------
See accompanying notes to the financial statements. 11
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Retail Trade -- 8.6%
41,100 AnnTaylor Stores Corp* 583,106
26,600 Barnes & Noble Inc 934,325
65,400 Bed, Bath & Beyond Inc* 2,824,463
49,400 Best Buy Co Inc* 2,945,475
26,300 Borders Group Inc 876,119
51,200 Brinker International Inc 1,068,800
23,300 Brown Group Inc 346,588
13,000 Brunos Inc 24,375
98,340 Burlington Coat Factory Warehouse 1,493,539
34,000 Casey's General Stores Inc 512,125
60,600 Cash American Investments Inc 727,200
122,800 Charming Shoppes Inc 548,756
29,900 Claire's Stores Inc 538,200
30,900 CompUSA Inc* 1,081,500
79,800 Cone Mills Corp* 653,363
18,236 Consolidated Stores Corp 749,956
32,900 CPI Corp 793,713
87,700 Dress Barn Inc* 2,559,744
12,000 Eagle Hardware & Garden Inc 227,250
54,350 Family Dollar Stores Inc 1,936,219
117,200 Fingerhut Cos Inc 2,908,025
26,700 Foodmaker Inc* 485,606
77,586 Fred Meyer Inc 3,447,728
49,300 Goodys Family Clothing Inc* 1,848,750
29,700 Hannaford Brothers Co 1,252,969
62,400 Heilig Meyers Co 967,200
156,200 Homebase Inc 1,093,400
61,100 Ingles Markets Inc 763,750
30,000 Lands End Inc* 1,181,250
58,300 Lone Star Steakhouse and Saloon 1,227,944
44,500 Longs Drug Stores Corp 1,410,094
36,100 Mercantile Stores 2,375,831
75,500 Michaels Stores Inc* 2,567,000
90,500 Micro Warehouse Inc* 1,244,375
10,000 Microage Inc* 128,750
35,800 Neiman Marcus Group Inc 1,331,313
77,400 NPC International Inc 890,100
93,100 Officemax Inc* 1,553,606
35,900 Outback Steakhouse Inc* 1,283,425
54,700 Phillips Van Heusen 711,100
29,450 Pier 1 Imports Inc 787,788
12 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Retail Trade -- continued
51,225 Proffitts Inc 1,735,247
32,600 Richfood Holdings Inc 927,063
55,400 Ross Stores Inc 2,181,375
53,400 Ruby Tuesday Inc 1,395,075
47,400 Ruddick Corp 859,125
317,100 Service Merchandise Co 733,294
65,200 Shopko Stores Inc* 1,715,575
340,000 Southland Corp 658,750
91,900 Spiegel Inc, Class A 413,550
31,600 Stanhome Inc 912,450
121,600 Value City Department Stores Inc* 1,352,800
39,700 Viking Office Products Inc 873,400
23,700 Weismarkets Inc 833,944
28,400 Zale Corp 789,875
-----------
66,266,343
-----------
Services -- 6.3%
13,900 Amerco 389,200
44,600 Anixter International Inc 769,350
103,425 Arctic Cat Inc 1,034,250
158,600 Aztar Corp 1,348,100
58,350 Banta Corp 1,735,913
31,200 Berlitz International Inc 809,250
29,300 Bowne and Co Inc 1,241,588
128,400 Buffetts Inc 1,356,225
12,200 Carmike Cinemas Inc, Class A 372,863
22,200 Catalina Marketing Corp 1,072,538
11,800 Chemed Corp 466,100
12,438 Chris Craft Industries Inc 694,189
41,200 Circus Circus Enterprises Inc* 906,400
191,500 Dames and Moore Inc 2,465,563
24,800 Devon Group Inc 1,587,200
31,400 Electro Rental Corp 1,271,700
73,200 Fleming Cos Inc 1,303,875
48,500 Franklin Covey Co 1,182,188
108,500 Grand Casinos Inc 1,654,625
71,000 Handleman Co* 479,250
74,100 Harrahs Entertainment Inc* 1,560,731
17,900 Interim Services Inc 519,100
62,200 Interpool Inc 886,350
32,000 Jacobs Engineering Group 958,000
41,900 Kellwood Co 1,359,131
See accompanying notes to the financial statements. 13
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Services -- continued
40,600 Kelly Services 1,446,375
77,200 Kingworld Productions Inc 2,060,275
20,050 Marcus Corp 342,103
154,600 Nash Finch Co 2,995,375
11,200 Norrell Corp 261,800
29,500 Oakwood Homes Corp 1,168,938
41,200 Ogden Corp 1,133,000
92,200 Olsten Corp 1,486,725
16,500 Primark Corp 708,469
36,700 Rollins Truck Leasing Corp 731,706
38,000 Sbarro Inc 1,121,000
62,900 Spelling Entertainment Group Inc 566,100
67,900 Station Casinos Inc 959,088
9,900 Stone & Webster Inc 408,994
85,700 Sun Healthcare Group Inc 1,687,219
45,300 Supervalu Inc 2,157,413
29,900 United Video Satellite Group Inc* 1,106,300
25,648 United Water Resources Inc 503,342
-----------
48,267,901
-----------
Technology -- 2.6%
25,400 Advanced Micro Devices Inc* 595,313
23,100 Autodesk Inc 1,094,363
85,400 Broderbund Software Inc 2,113,650
23,300 Cirrus Logic Corp 257,756
38,300 Cognex Corp* 921,594
31,900 Cohu Inc 1,475,375
37,800 Data General Corp* 779,625
9,800 Dionex Corp 572,075
36,000 EG & G Inc 969,750
121,000 Electroglas Inc 2,238,500
28,200 Esterline Corp 1,110,375
14,700 Fluke Corp 357,394
23,000 G TECH Holdings Corp* 812,188
13,600 KLA Instruments Corp* 627,724
57,600 MTS Systems Inc 939,600
14,500 National Computer System Inc 578,188
11,200 Storage Technology Corp* 764,400
21,700 Synopsys Inc 758,144
27,750 Tektronix Inc 1,238,344
46,000 Teradyne Inc* 2,170,625
-----------
20,374,983
-----------
14 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Telecommunications -- 0.4%
27,800 Century Telephone Enterprises Inc 1,695,800
49,500 Comsat Corp 1,655,156
-----------
3,350,956
-----------
Textiles -- 1.0%
4,200 Crystal Brands Inc/(a)/ --
50,850 Guilford Mills 1,442,869
45,600 Interface Flooring Systems Inc 1,744,200
81,600 Shaw Industries 969,000
36,700 Springs Industries Inc, Class A 2,052,906
23,700 Westpoint Stevens Inc* 1,264,988
-----------
7,473,963
-----------
Transportation -- 3.7%
83,800 Airborne Freight Corp 3,032,513
34,650 Airline Express International Corp 970,200
17,400 Alaska Airline Group Inc 958,088
40,700 American West Holdings Corp, Class B* 1,009,869
25,400 ASA Holdings Inc 1,022,350
54,400 CNF Transportation Inc 2,128,400
64,000 Comair Holdings Inc 1,704,000
29,200 FDX Corp* 1,859,675
38,100 Fleetwood Enterprises Inc 1,785,938
43,300 Gatx Corp 3,355,750
24,300 Heartland Express Inc 613,575
44,500 Hunt (JB) Transportation Services Inc 1,190,375
22,100 Illinois Central Corp 857,756
56,200 Navistar International Corp* 1,707,075
15,200 US Freightways Corp 531,050
57,500 USAir Group Inc* 3,640,469
52,000 Viad Corp 1,257,750
25,200 Yellow Corp* 530,775
-----------
28,155,608
-----------
Utilities -- 9.1%
42,500 American Water Works Co 1,275,000
115,400 Atlantic Energy Inc 2,351,207
91,900 Boston Edison Co 3,566,869
23,400 Central Hudson Gas & Electric 950,625
18,900 Central Louisiana Electric Inc 614,250
111,400 Central Maine Power Co 1,858,988
8,800 Cilcorp Inc 408,100
See accompanying notes to the financial statements. 15
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Utilities -- continued
85,033 Citizens Utilities, Class B 797,184
87,900 Commonwealth Energy Systems 3,169,894
84,300 Delmarva Power and Light Co 1,817,719
15,400 Eastern Enterprises 682,413
54,300 Eastern Utilities Associates 1,299,806
136,100 El Paso Electric Company 927,181
17,600 Energen Corp 683,100
29,200 Hawaiian Electric Industry Inc 1,182,600
80,500 Illinova Corp 2,233,875
29,700 Keyspan Energy Corp 1,056,206
16,600 LES Industries Inc 600,713
42,900 Mapco Inc 2,308,556
107,482 Midamerican Energy Holding Co 2,230,252
14,200 Minnesota Power & Light Co 574,213
96,500 Montana Power Co 3,088,000
36,900 Natural Gas Clearinghouse 571,950
89,600 Nevada Power Co 2,223,200
112,200 New York State Electric and Gas Corp 4,214,514
237,600 Niagara Mohawk Power Corp* 3,044,250
204,900 Northeast Utilities 2,561,250
38,700 Nui Corporation 1,023,131
47,600 Oneok Inc 1,666,000
28,600 Orange and Rockland Utilities 1,256,613
103,200 Public Services Co of New Mexico 2,405,850
55,800 Puget Sound Power and Light Co 1,513,575
72,400 Rochester Gas and Electric Corp 2,257,975
29,300 Sierra Pacific Resources 1,051,138
30,500 Southwest Natural Gas Corp 617,625
48,700 TNP Enterprises Inc 1,564,488
41,940 UniSource Energy Corp Holding Co 715,601
44,500 United Illuminating Co 2,049,781
69,600 Utilicorp United Inc 2,505,600
30,600 Washington Gas Light Co 824,288
25,600 Washington Water Power 585,600
74,500 Western Gas Resources Inc 1,275,813
45,400 Western Resources Inc 1,861,400
26,500 Wisconsin Power & Light Holding Co 844,688
------------
70,311,081
------------
TOTAL COMMON STOCKS (COST $629,772,452) 746,835,726
------------
16 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Par Value ($)/
Shares Description Value($)
- --------------------------------------------------------------------------------
RIGHTS AND WARRANTS -- 0.0%
Printing and Publishing -- 0.0%
550 American Satellite Network Warrants expires
06/30/99 (Cost $0)/(a)/* --
------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
------------
SHORT-TERM INVESTMENTS -- 12.9%
Cash Equivalents -- 9.7%
$16,242,322 BankBoston Eurodollar Time Deposit, 5.7875%
due 3/2/98/(b)/ 16,242,322
$3,549,685 First Union National Bank of North Carolina
Eurodollar Time Deposit, 5.6250% due 3/2/98/(b)/ 3,549,685
20,055,728 Merrimac Cash Fund Premium Class/(b)/ 20,055,728
$35,000,000 Prudential Securities Group Inc, Master Note,
5.8875% due 3/2/98/(b)/ 35,000,000
------------
74,847,735
------------
U.S. Government -- 0.1%
$500,000 U.S. Treasury Bill, 5.165%, due 5/28/98/(c)/ 493,741
------------
Repurchase Agreements -- 3.1%
$23,700,028 Salomon Smith Barney Inc. Repurchase
Agreement, dated 2/27/98, due 3/2/98,
with a maturity value of $23,710,041,
and an effective yield of 5.07%,
collateralized by U.S. Treasury Obligation
with a rate of 8.875%, with a maturity date
of 8/15/17 and with a market value of
$24,174,028. 23,700,028
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $99,041,379) 99,041,504
------------
TOTAL INVESTMENTS -- 109.9%
(COST $728,813,831) 845,877,230
Other Assets and Liabilities (net) -- (9.9)% (76,264,944)
------------
TOTAL NET ASSETS-- 100% $769,612,286
============
Notes to the Schedule of Investments:
* Non-income producing security.
(a) Bankrupt issuer.
(b) Represents investments of security lending collateral (Note 1).
(c) Security has been segregated to cover margin requirements on
open financial futures contracts.
See accompanying notes to the financial statements. 17
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $728,813,831) (Note 1) $845,877,230
Receivable for investments sold 14,305,491
Dividends and interest receivable 770,240
Receivable for expenses waived or borne by Manager (Note 2) 135,788
------------
Total assets 861,088,749
------------
Liabilities:
Payable for investments purchased 12,270,511
Payable upon return of securities loaned (Note 1) 74,847,735
Payable for Fund shares repurchased 3,838,220
Payable to affiliate for (Note 2):
Management fee 288,722
Shareholder service fee 83,038
Payable for variation margin on open futures contracts (Notes 1 52,431
and 6)
Accrued expenses 95,806
------------
Total liabilities 91,476,463
------------
Net assets $769,612,286
============
Net assets consist of:
Paid-in capital $604,912,461
Accumulated undistributed net investment income 1,408,321
Accumulated undistributed net realized gain 46,112,677
Net unrealized appreciation 117,178,827
============
$769,612,286
============
Net assets attributable to:
Class III shares $769,612,286
============
Shares outstanding:
Class III 42,096,585
============
Net asset value per share:
Class III $ 18.28
============
18 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of withholding taxes of $4,377) $ 8,962,415
Interest (including securities lending income of $172,450) 5,584,484
------------
Total income 14,546,899
------------
Expenses:
Management fee (Note 2) 3,650,580
Custodian and transfer agent fees 222,570
Registration fees 70,289
Audit fees 39,750
Legal fees 18,111
Trustees fees (Note 2) 6,695
Miscellaneous 4,828
Fees waived or borne by Manager (Note 2) (1,603,440)
------------
2,409,383
Shareholder service fee (Note 2)
Class I 4,260
Class III 1,089,290
------------
Net expenses 3,502,933
------------
Net investment income 11,043,966
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 90,146,041
Closed futures contracts 27,478,494
------------
Net realized gain 117,624,535
------------
Change in net unrealized appreciation (depreciation) on:
Investments 87,364,127
Open futures contracts 2,114,958
------------
Net unrealized gain 89,479,085
------------
Net realized and unrealized gain 207,103,620
------------
Net increase in net assets resulting from operations $218,147,586
============
See accompanying notes to the financial statements. 19
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 11,043,966 $ 8,393,192
Net realized gain 117,624,535 48,217,450
Change in net unrealized appreciation (depreciation) 89,479,085 7,279,028
------------ ------------
Net increase in net assets resulting from operations 218,147,586 63,889,670
------------ ------------
Distributions to shareholders from:
Net investment income
Class I (26,599) --
Class III (11,940,475) (6,723,900)
------------ ------------
Total distributions from net investment income (11,967,074) (6,723,900)
------------ ------------
Net realized gains
Class I (323,423) --
Class III (97,888,562) (9,617,877)
------------ ------------
Total distributions from net realized gains (98,211,985) (9,617,877)
------------ ------------
(110,179,059) (16,341,777)
------------ ------------
Net share transactions: (Note 5)
Class I (1,301,006) 1,343,250
Class III 6,180,752 376,339,439
------------ ------------
Increase in net assets resulting from net
share transactions 4,879,746 377,682,689
------------ ------------
Total increase in net assets 112,848,273 425,230,582
Net assets:
Beginning of period 656,764,013 231,533,431
------------ ------------
End of period (including accumulated
undistributed net investment income of
$1,408,321 and $2,331,429, respectively) $769,612,286 $656,764,013
============ ============
</TABLE>
20 See accompanying notes to t he financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from January 2, 1997
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $15.89 $15.34
------ ------
Income from investment operations:
Net investment income 0.22+ 0.05
Net realized and unrealized gain 3.00 0.50
------ ------
Total from investment operations 3.22 0.55
------ ------
Less distributions to shareholders:
From net investment income (0.27) --
From net realized gains (2.44) --
------ ------
Total distributions (2.71) --
------ ------
Net asset value, end of period $ 16.40(c) $15.89
====== ======
Total Return (a) 20.55% 3.52%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $1,391
Net expenses to average daily net
assets 0.61%* 0.61%*
Net investment income to average
daily net assets 1.45%* 1.87%*
Portfolio turnover rate 56% 58%
Average broker commission rate per
equity share $0.0305 $0.0271
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.03 (b)
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 21
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 15.89 $ 13.89 $ 13.61 $ 14.31 $ 12.68
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.27 0.28 0.23 0.20 0.21
Net realized and unrealized gain 4.85 2.32 3.20 0.34 2.14
-------- -------- -------- -------- --------
Total from investment operations 5.12 2.60 3.43 0.54 2.35
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.29) (0.27) (0.23) (0.20) (0.22)
From net realized gains (2.44) (0.33) (2.92) (1.04) (0.50)
-------- -------- -------- -------- --------
Total distributions (2.73) (0.60) (3.15) (1.24) (0.72)
-------- -------- -------- -------- --------
Net asset value, end of period $ 18.28 $ 15.89 $ 13.89 $ 13.61 $ 14.31
======== ======== ======== ======== ========
Total Return/(a)/ 34.43% 19.12% 27.18% 4.48% 18.97%
Ratios/Supplemental Data:
Net assets, end of period (000's) $769,612 $655,373 $231,533 $235,781 $151,286
Net expenses to average daily
net assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to
average daily net assets 1.51% 2.15% 1.67% 1.55% 1.66%
Portfolio turnover rate 56% 58% 135% 54% 30%
Average broker commission rate
per equity share/(b)/ $ 0.0305 $ 0.0271 N/A N/A N/A
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts: $ 0.04 $ 0.03 $ 0.02 $ 0.01 $ 0.02
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
22 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Small Cap Value Fund (the "Fund"), formerly named the GMO Core II
Secondaries Fund, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund is advised and
managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO").
The Trust was established as a Massachusetts Business Trust under the laws
of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of
Trust permits the Trustees to create an unlimited number of series
("Funds"), each of which issues a separate series of shares, and to
subdivide a series into classes.
The Fund seeks long-term growth of capital through investment primarily in
companies whose equity capitalization ranks in the lower two-thirds of the
1,800 companies with the largest equity capitalization whose securities are
listed on a United States national securities exchange.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates market value. Other assets and securities
for which no quotations are readily available are valued at fair value as
determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its
23
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the initial
margin requirements of the broker or exchange. Futures contracts are marked
to market daily and an appropriate payable or receivable for the change in
value ("variation margin") is recorded by the Fund. The payable or
receivable is liquidated on the following business day. Gains or losses are
recognized but not considered realized until the contracts expire or are
closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 6 for all open futures
contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain member firms of the New York
Stock Exchange. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. As with other extensions of credit, the Fund may bear
the risk of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. The Fund receives
compensation for lending its securities. At February 28, 1998, the Fund
loaned securities having a market value of $71,864,971, collateralized by
cash in the amount of $74,847,735, which was invested in short-term
instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the equity
markets. A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The Fund enters
into equity swap agreements which involve a commitment by one party in the
agreement to pay interest in exchange for a market linked return based on a
notional amount. To the extent that the total return of the security or
index underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. Equity swaps are marked to market
daily based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations. Payments
received or made at the end of the measurement period are recorded as
realized gain or loss in the Statement of Operations. Entering into these
agreements involves, to varying degrees, elements of credit and market risk
in excess of the amounts recognized on the Statement of Assets and
Liabilities.
24
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Such risks involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. There were no open
swap agreements as of February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income have been withheld in accordance
with the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Distributions in excess of tax basis
earnings and profits, if any, are reported in the Fund's financial
statements as a return of capital. Differences in the recognition or
classification of income for financial statement and tax purposes which
result in temporary over-distributions for financial statement purposes are
classified as distributions in excess of net investment income or
accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the net
gain or loss on securities sold, the cost of securities is determined on the
identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated pro-rata
among the classes of shares of the Fund based on the relative net assets of
each class. Shareholder service fees, which are directly attributable to a
class of shares, are charged to that class' operations.
25
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .50%
of the amount invested or redeemed. Prior to June 1, 1996, the premium on
cash purchases and fee on redemptions was .75% of the amount invested or
redeemed. All purchase premiums and redemption fees are paid to and recorded
by the Fund as paid-in capital. These fees are allocated relative to each
class' net assets on the share transaction date. Purchase premiums are
included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 28, 1998, the Fund
received $679,933 in purchase premiums and $902,897 in redemption fees.
There is no premium for reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder service
fee for client and shareholder service, reporting, and other support.
Pursuant to the Shareholder Service Plan, the shareholder service fee is
calculated based on the average daily net assets of each class at the annual
rate of .28% for Class I shares, .22% for Class II shares, and .15% for
Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .33% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .48%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees
during the year ended February 28, 1998 was $6,695. No remuneration is paid
to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$471,338,413 and $344,355,517, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments were as
follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
------------------- ------------------- ------------------- ----------------
$ 729,905,587 $ 138,569,497 $ 22,597,854 $ 115,971,643
26
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
4. Principal shareholders
At February 28, 1998, 22.4% of the outstanding shares of the Fund were held
by two shareholders each holding in excess of 10% of the Fund's oustanding
shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from January 2, 1997
Period from (commencement of
March 1, 1997 operations)
Class I: to January 9, 1998 to February 28, 1997
---------------------- ------------------------
Shares Amount Shares Amount
---------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold 55,930 $ 1,050,044 87,565 $1,343,250
Shares issued to shareholders
in reinvestment of distributions 20,915 350,022 - -
Shares repurchased (164,410) (2,701,072) - -
--------- ----------- -------- ----------
Net increase (decrease) (87,565) $(1,301,006) 87,565 $1,343,250
========= =========== ======== ==========
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
------------------------- ------------------------
Shares Amount Shares Amount
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 8,025,013 $137,024,478 36,443,463 $557,963,243
Shares issued to shareholders
in reinvestment of distributions 6,187,157 103,690,318 846,111 12,460,382
Shares repurchased (13,350,357) (234,534,044) (12,721,369) (194,084,186)
----------- ------------ ---------- ------------
Net increase 861,813 $ 6,180,752 24,568,205 $376,339,439
=========== ============ ========== ============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Net
Number of Unrealized
Contracts Type Expiration Date Contract Value Appreciation
------------- ------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C>
42 Russell 2000 March 1998 $9,717,750 $115,428
==========
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
27
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 52.40% of distributions as net capital gain dividends.
28
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible
for the day-to-day management of the Fund's portfolio. Each has been a
portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Small Cap Value Fund returned 34.4% for the
fiscal year ended February 28, 1998, as compared to 35.0% for the S&P 500.
The Russell 2000 Value Index returned 33.9% for the same period. Consistent
with the Fund's investment objectives and policies, the Fund was primarily
invested in common stocks throughout the period.
In the fiscal year that just ended, small stocks rose significantly.
However, in a continuation of a market trend that has persisted for three
years, large capitalization stocks recorded even better gains. In this
environment, the performance of the GMO Small Cap Value Fund was excellent:
it outperformed the Russell 2000 Value Index and only marginally trailed the
S&P 500.
Strong performing sectors in the Russell 2000 Value Index included consumer
stocks, which benefited from the strong economy and low unemployment.
Utility and financial stocks also performed well in an environment of
declining interest rates. On the other hand, technology and health care
stocks posted smaller gains. These more speculative issues declined sharply
during the fall of 1997 in the wake of events in the Far East. In a "flight
to quality," investors adjusted their portfolios to increase their holdings
of the stocks of larger companies with more stable earnings.
The primary reason for good performance in the Fund during the fiscal year
was good stock selection. The GMO Small Cap Value Fund selects stocks based
on four strategies: price to fair value, price to book, price to sales and
price to cash flow. Using these strategies, we favor the stocks of companies
with relatively low prices. These strategies allowed us to realize superior
returns from our holdings in utilities, health care and insurance.
Our sector emphasis marginally offset strong stock selection. Overweights in
health care and technology issues detracted from returns, as these sectors
underperformed the rest of the index. Our underweight in the
strong-performing Financial Services sector also lowered returns relative to
the benchmark.
Outlook
Since 1983, small capitalization stocks have lagged their larger
counterparts. At the current time, they look increasingly attractive
relative to large capitalization stocks on a number of measures --
price-to-book, price-to-cash flow, price-to-sales and price-to-fair value.
Although not as cheap as they were in the mid-1970's (prior to their
legendary rise through 1983), today small-cap stocks are at their cheapest
relative price since the late 1970's when institutions began to treat
small-cap stocks as a separate asset class. We believe that this bodes well
for the relative returns of small cap stocks over the next few years.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Small Cap Value Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
------------------------------------------
Average Annual Total Return
------------------------------------------
Since
1 Year 5 Year Inception
------------------------------------------
Class 12/31/91
III
33.1% 20.2% 21.2%
------------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Small Cap Value Fund
Class III Shares S & P 500 Index
------------------------ ---------------
12/31/91 $9,950 $10,000
2/29/92 $11,065 $9,941
2/28/93 $12,888 $11,000
2/28/94 $15,333 $11,916
2/28/95 $16,021 $12,794
2/29/96 $20,376 $17,233
2/28/97 $24,272 $21,741
2/28/98 $32,465 $29,350
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Class III shares
are a redesignation of the single class of shares that has been offered by the
Fund since inception. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Core Fund at February 28, 1998, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 91.3%
Advertising -- 0.4%
289,800 Interpublic Group Inc 15,794,100
--------------
Aerospace -- 0.4%
21,200 Northrop Grumman Corp 2,946,800
134,900 Textron Inc 10,109,069
--------------
13,055,869
--------------
Automotive -- 3.0%
8,600 Bandag Inc 482,138
1,558,800 Ford Motor Co 88,169,624
278,400 General Motors Corp 19,192,200
102,200 Genuine Parts Co 3,781,400
--------------
111,625,362
--------------
Banking and Financial Services -- 11.3%
381,100 Ahmanson (HF) & Co 23,794,931
124,100 Amsouth Bancorp 6,972,869
434,170 Banc One Corp 24,530,605
36,600 Bank of New York Inc 2,143,388
255,400 BankBoston Corp 25,460,188
172,600 Bankers Trust New York Corp 20,409,950
217,799 Bear Stearns Inc 10,154,878
75,200 Beneficial Corp 8,873,600
302,750 Charles Schwab & Co Inc 11,428,813
322,008 Chase Manhattan Corp 39,949,117
43,600 Citicorp 5,777,000
168,800 Countrywide Credit Industry Inc 7,501,050
386,000 Dime Bancorp Inc 11,773,000
52,700 Donaldson Lufkin & Jenrette 4,314,813
235,200 Edwards (AG) Inc 9,893,100
72,600 First Bank of America Corp 5,640,113
269,100 Franklin Resources Inc 13,724,100
83,700 Golden West Financial Corp 7,470,225
118,800 Greenpoint Financial Corp 8,820,900
133,400 Hibernia Corporation, Class A 2,668,000
90,100 Lehman Brothers Holding Inc 5,681,931
512,400 Merrill Lynch 36,668,624
19,500 MGIC Investment Corp 1,436,906
403,812 Morgan Stanley Dean Witter Discover & Co 28,140,648
348,144 Nationsbank Corp 23,847,864
See accompanying notes to the financial statements. 1
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
282,400 Paine Webber Group Inc 11,860,800
315,800 PNC Bank Corp 17,526,900
15,200 Providian Financial Corp 862,600
4,800 Republic New York Corp 580,800
119,900 Summit Bancorp 5,957,531
324,107 Travelers Group Inc 18,068,965
43,600 U.S. Bancorp 5,016,725
146,470 Washington Mutual Inc 9,831,799
-------------
416,782,733
-------------
Chemicals -- 0.6%
99,700 Eastman Chemical Co 6,530,350
131,500 Great Lakes Chemical Corp 6,394,188
59,200 Lubrizol Corp 2,282,900
183,400 Union Carbide Corp 8,516,638
-------------
23,724,076
-------------
Computer and Office Equipment -- 1.5%
18,100 Computer Associates International Inc 852,963
455,800 EMC Corp 17,434,350
43,300 Gateway 2000 Inc 1,905,200
172,100 Lexmark International Group Inc * 7,357,275
583,100 Micron Technology Inc * 19,351,631
56,900 Pitney Bowes Inc 2,667,188
300,700 Unisys Corp * 5,375,013
73,300 Western Digital Corp 1,337,725
-------------
56,281,345
-------------
Construction -- 1.5%
220,900 Georgia-Pacific Corp 12,964,069
675,800 Home Depot Inc 43,124,487
-------------
56,088,556
-------------
Consumer Goods -- 4.4%
95,600 Callaway Golf Co 3,083,100
34,100 Colgate-Palmolive Co 2,768,494
310,500 Eastman Kodak Co 20,376,563
397,200 Fortune Brands Inc 15,763,875
136,300 Hasbro Inc 4,949,394
95,000 Jones Apparel Group Inc * 5,225,000
2,800 Liz Claiborne Inc 140,000
2 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Consumer Goods -- continued
545,000 Mattel Co 23,060,313
387,900 Maytag Corp 17,455,500
53,300 Moore Corp Ltd 836,144
156,800 Newell Co 7,193,200
495,600 Procter and Gamble Co 42,095,024
124,200 Reebok International Ltd * 3,873,488
163,900 Sunbeam Corp 6,781,363
216,500 VF Corp 10,324,344
--------------
163,925,802
--------------
Electronic Equipment -- 1.7%
23,700 Arrow Electronics Inc 789,506
37,900 Cooper Industries Inc 2,127,138
31,500 Harris Corp 1,596,656
88,400 Litton Industries * 5,502,900
309,900 Motorola Inc 17,276,925
51,800 National Semiconductor Corp * 1,236,725
334,400 Raytheon Co, Class B 19,666,900
238,900 Texas Instruments 13,826,338
--------------
62,023,088
--------------
Environmental Control -- 0.1%
180,800 Wheelabrator Technology Inc 2,949,300
--------------
Food and Beverage -- 4.7%
470,700 Anheuser Busch Cos Inc 22,064,063
404,167 Archer Daniels Midland Co 9,068,497
338,400 Bestfoods 35,658,899
470,700 Coca Cola Enterprises Inc 15,562,519
36,150 Dean Foods Co 1,988,250
200 Hormel (Geo A) and Co 7,425
170,900 IBP Inc 3,813,206
255,100 Kellogg Co 10,873,638
588,600 Sara Lee Corp 33,255,899
262,400 Seagrams Co Ltd 9,971,200
1,400 Sysco Corp 65,888
406,300 Unilever NV ADR 26,130,168
12,000 Universal Foods Corp 540,000
157,300 Whitman Corp 2,801,906
17,900 Wrigley (William Jr) Co 1,367,113
--------------
173,168,671
--------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Health Care -- 2.8%
17,600 Becton Dickinson & Co 1,119,800
107,100 Columbia HCA Healthcare Corp 2,905,088
46,100 Hillenbrand Industries Inc 2,590,244
657,400 Johnson & Johnson 49,633,699
151,500 Mallinckrodt Inc 5,880,094
212,800 McKesson Corp 11,092,200
156,600 Medtronic Inc 8,319,375
205,000 Pharmacia & Upjohn Inc 8,110,313
97,700 United States Surgical Corp 2,992,063
154,600 Wellpoint Health Network * 9,034,438
--------------
101,677,314
--------------
Insurance -- 3.7%
65,300 AMBAC Inc 3,477,225
15,200 Cincinnati Financial Corp 2,052,000
18,000 CNA Financial Corp * 2,590,875
494,100 Conseco Inc 23,191,819
133,600 Foundation Health Systems Inc, Class A * 3,699,050
176,000 Loews Corp 17,655,000
33,500 MBIA Inc 2,451,781
41,900 Mercury General Corp 2,377,825
74,700 Old Republic International Corp 3,151,406
96,400 Progressive Corp 11,170,350
113,800 Reliastar Financial Corp 5,412,613
188,600 Safeco Corp 9,889,713
175,900 Saint Paul Cos Inc 15,589,138
433,500 Torchmark Corp 20,184,844
96,509 Transamerica Corp 11,237,267
37,400 Transatlantic Holding Inc 2,828,375
--------------
136,959,281
--------------
Machinery -- 1.5%
1,212,200 Applied Materials Inc 44,624,112
63,900 Cummins Engine Inc 3,698,213
43,000 FMC Corp * 3,112,125
45,900 Parker-Hannifin Corp 2,140,088
43,100 Smith International Inc * 2,295,075
--------------
55,869,613
--------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Manufacturing -- 2.8%
338,700 General Electric Co 26,333,924
483,300 IBM Corp 50,474,643
271,200 International Game Technology 6,576,600
80,000 Leggett & Platt Inc 4,015,000
413,400 Owens Illinois Inc * 15,864,225
19,800 Temple Inland Inc 1,180,575
---------------
104,444,967
---------------
Oil and Gas -- 6.4%
40,300 Apache Corp 1,370,200
621,900 Atlantic Richfield Co 48,352,724
85,400 BJ Services Co 2,935,625
65,900 Chevron Corp 5,346,138
46,300 Columbia Energy Group 3,533,269
100 Ensco International Inc 2,913
871,200 Exxon Corp 55,647,899
1,600 FINA Inc, Class A 101,200
47,700 Mobil Corp 3,455,269
75,100 Nabors Industries Inc * 1,717,913
254,300 Occidental Petroleum Corp 6,500,544
59,900 Pennzoil Co 4,009,556
210,500 Phillips Petroleum Co 10,314,500
514,800 Schlumberger Ltd 38,803,049
334,200 Texaco Inc 18,652,538
436,800 Union Pacific Resources Group 9,773,400
189,200 Unocal Corp 7,130,475
607,000 USX - Marathon Group 20,979,438
---------------
238,626,650
---------------
Paper and Allied Products -- 1.0%
151,900 Champion International Corp 7,756,394
75,400 Fort James Corp 3,421,275
226,300 Mead Corp 7,736,631
191,600 Sonoco Products Co 7,412,525
166,200 Westvaco Corp 5,401,500
116,500 Willamette Industries Inc 4,303,219
---------------
36,031,544
---------------
Pharmaceuticals -- 5.9%
1,075,100 Abbott Laboratories 80,430,918
52,400 Allergan Inc 1,834,000
720,300 Bristol Myers Squibb Co 72,165,055
154,500 Merck & Co Inc 19,708,406
See accompanying notes to the financial statements. 5
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- -------------------------------------------------------------------------------
Pharmaceuticals -- continued
150,600 Schering Plough Corp 11,455,013
186,700 Warner Lambert Co 27,304,874
201,300 Watson Pharmaceutical Inc 7,221,638
--------------
220,119,904
--------------
Primary Materials -- 0.2%
65,300 EVI Inc 3,203,781
41,800 Rubbermaid Inc 1,212,200
33,300 Vulcan Materials Co 3,350,813
--------------
7,766,794
--------------
Primary Processing -- 0.1%
117,200 USX-US Steel Group Inc 4,116,650
--------------
Printing and Publishing -- 0.1%
20,800 A.H. Belo Corp 1,138,800
6,200 Washington Post Co, Class B 3,059,700
--------------
4,198,500
--------------
Refining -- 0.7%
10,000 Murphy Oil Corp 499,375
377,000 Royal Dutch Petroleum 20,475,813
112,700 Sun Co Inc 4,500,956
--------------
25,476,144
--------------
Retail Trade -- 6.5%
429,000 Albertsons Inc 20,082,563
221,300 American Stores Co 5,573,994
298,300 Autozone Inc * 9,023,575
440,100 Costco Cos Inc * 21,509,888
250,000 Dayton Hudson Corp 19,328,125
227,000 Dillards Department Stores Inc 8,086,875
140,025 Dollar General Corp 6,458,653
36,800 Family Dollar Stores Inc 1,311,000
222,500 Fred Meyer Inc 9,887,344
10,500 Fruit of the Loom Inc * 337,313
571,450 Gap Inc 25,536,672
1,432,800 Kmart Corp * 19,163,700
443,700 Limited Inc 12,867,300
252,400 Rite Aid Corp 8,171,450
304,400 Tandy Corp 13,545,800
26,700 Toys R Us Inc * 700,875
6 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Retail Trade -- continued
1,186,900 Wal Mart Stores Inc 54,968,305
103,900 Winn-Dixie Stores Inc 5,604,106
--------------
242,157,538
--------------
Services -- 0.5%
13,300 BHC Communications Inc, Class A 1,835,400
47,900 Cendant Corp * 1,796,250
4,200 Fleming Cos Inc 74,813
157,500 Halliburton Company 7,323,750
113,200 Supervalu Inc 5,391,150
--------------
16,421,363
--------------
Technology -- 11.7%
295,200 Advanced Micro Devices Inc * 6,918,750
163,200 America Online Inc * 19,767,600
87,700 Avnet Inc 5,590,875
690,500 Bay Networks Inc * 23,390,688
2,151,400 Compaq Computer Corp 68,979,262
15,400 Computer Sciences Corp * 1,612,188
335,900 Dell Computer Corp 46,984,012
50,000 Grainger (WW) Inc 4,840,625
1,177,900 Intel Corp 105,642,905
1,393,600 Microsoft Corp 118,107,599
142,600 Teradyne Inc * 6,728,938
291,700 Xerox Corp 25,870,143
--------------
434,433,585
--------------
Telecommunications -- 7.7%
329,500 Ameritech Corp 13,736,031
1,161,600 AT & T Corp 70,712,399
493,357 Bell Atlantic Corp 44,278,790
15,700 Bellsouth Corp 957,700
130,400 CBS Corp 4,034,250
134,400 Century Telephone Enterprises Inc 8,198,400
293,900 GTE Corp 15,907,338
376,500 MCI Communications Corp 18,001,406
337,600 Nextel Communications Inc, Class A * 9,980,300
361,501 SBC Communications 27,338,499
82,100 Southern New England Telecommunications Corp 5,182,563
494,800 Sprint Corp 32,656,799
583,800 US West Inc 30,394,087
85,700 Worldcom Inc * 3,272,669
--------------
284,651,231
--------------
See accompanying notes to the financial statements. 7
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Tobacco -- 1.3%
1,102,400 Philip Morris Cos Inc 47,885,499
---------------
Transportation -- 2.0%
371,100 Burlington Northern Santa Fe Railroad Co 36,970,837
134,900 CSX Corp 7,545,969
163,100 FDX Corp * 10,387,431
208,600 Kansas City Southern Industries 7,757,313
95,700 UAL Corp * 8,146,463
49,400 USAir Group Inc * 3,127,638
---------------
73,935,651
---------------
Utilities -- 6.8%
389,300 AES Corp 17,129,200
187,200 Allegheny Energy Inc 5,721,300
20,800 Ameren Corp * 799,500
277,400 American Electric Power Inc 13,315,200
270,400 Baltimore Gas and Electric Co 8,534,500
275,200 Carolina Power and Light Co 11,489,600
354,900 Cinergy Corp 12,354,956
123,510 Citizens Utilities, Class B 1,157,904
160,100 CMS Energy Corp 7,084,425
119,200 Coastal Corp 7,584,100
207,400 Dominion Resources Inc 8,270,075
281,050 DPL Inc 5,111,597
139,800 DQE Inc 4,639,613
249,700 Duke Power Co 13,873,956
661,900 Edison International 18,284,988
654,300 Entergy Corp 18,933,806
196,100 Florida Progress Corp 7,586,619
314,900 FPL Group Inc 18,283,881
250,700 General Public Utilities Inc 10,075,006
83,900 LG&E Energy Corp 2,008,356
192,100 Long Island Lighting Co 5,955,100
69,500 New Century Energies Inc 3,240,438
54,600 New England Electric System 2,300,025
169,000 Nipsco Industries Inc 4,341,188
69,900 Northern States Power Co 3,840,131
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities -- continued
388,600 Pacificorp 9,399,263
219,600 Pinnacle West Capital Corp 8,962,425
113,300 Southern Co 2,797,094
128,400 Teco Energy Inc 3,378,525
1,900 Texas Utilities Co 76,831
92,500 Western Resources Inc 3,792,500
420,700 Wisconsin Energy Corp 11,464,075
--------------
251,786,177
--------------
TOTAL COMMON STOCKS (COST $2,600,089,696) 3,381,977,307
--------------
SHORT-TERM INVESTMENTS -- 16.0%
Cash Equivalents -- 5.5%
$60,252,826 BankBoston Eurodollar Time Deposit, 5.7875% due 60,252,826
3/2/98/(a)/
$11,874,192 First Union National Bank of North Carolina Eurodollar
Time Deposit, 5.6250% due 3/2/98/(a)/ 11,874,192
65,539,336 Merrimac Cash Fund Premium Class/(a)/ 65,539,336
$66,000,000 Prudential Securities Group Inc, Master Note, 5.8875%
due 3/2/98/(a)/ 66,000,000
--------------
203,666,354
--------------
U.S. Government -- 0.4%
$14,500,000 U.S. Treasury Bill 5.165% due 5/28/98/(b)/ 14,318,475
--------------
Repurchase Agreements -- 10.1%
$186,621,376 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of
$186,700,224 and an effective yield of 5.07%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.875%, with a maturity date of 8/15/17 and
with a market value of $190,353,803. 186,621,376
$186,621,376 Prudential Securities, Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value of
$186,700,224 and an effective yield of 5.07%,
collateralized by U.S. Government Agency Obligations
with rates ranging from 3.75% to 16.00%, with
maturity dates ranging from 4/01/99 to 5/01/36 and
with an aggregate market value of $190,354,593. 186,621,376
--------------
373,242,752
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $591,223,955) 591,227,581
--------------
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Value ($)
--------------
TOTAL INVESTMENTS -- 107.3%
(COST $3,191,313,651) 3,973,204,888
Other Assets and Liabilities (net) -- (7.3)% (268,608,747)
--------------
TOTAL NET ASSETS -- 100% $3,704,596,141
==============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
/(a)/ Represents investments of security lending collateral (Note 1).
/(b)/ Security has been segregated to cover margin requirements on open
financial futures contracts.
10 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $3,191,313,651) (Note 1) $3,973,204,888
Cash 145,986
Receivable for investments sold 61,842,948
Dividends and interest receivable 5,738,625
Receivable for expenses waived or borne by Manager (Note 2) 553,745
Receivable for Fund shares sold 198,483
--------------
Total assets 4,041,684,675
--------------
Liabilities:
Payable for investments purchased 91,605,848
Payable upon return of securities loaned (Note 1) 203,666,354
Payable for Fund shares repurchased 23,116,917
Payable to affiliate for (Note 2):
Management fee 1,449,570
Shareholder service fee 355,180
Payable for open swap contracts (Notes 1 and 6) 16,243,628
Payable for variation margin on open futures contracts (Notes 1 and 6) 436,188
Accrued expenses 214,849
--------------
Total liabilities 337,088,534
--------------
Net assets $3,704,596,141
==============
Net assets consist of:
Paid-in capital $2,664,608,403
Accumulated undistributed net investment income 10,889,309
Accumulated undistributed net realized gain 247,086,657
Net unrealized appreciation 782,011,772
--------------
$3,704,596,141
==============
Net assets attributable to:
Class II shares $ 16,958,086
==============
Class III shares $2,317,103,212
==============
Class IV shares $1,370,534,843
==============
Shares outstanding:
Class II 848,657
==============
Class III 115,934,929
==============
Class IV 68,573,281
==============
Net asset value per share:
Class II $ 19.98
==============
Class III $ 19.99
==============
Class IV $ 19.99
==============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $60,437) $ 58,225,704
Interest (including securities lending income of $225,885) 14,364,147
--------------
Total income 72,589,851
--------------
Expenses:
Management fee (Note 2) 17,753,329
Custodian and transfer agent fees 463,406
Legal fees 63,335
Audit fees 47,505
Trustees fees (Note 2) 30,032
Miscellaneous 22,407
Fees waived or borne by Manager (Note 2) (7,220,779)
--------------
11,159,235
Shareholder service fee (Note 2)
Class I 27,562
Class II 94,994
Class III 4,736,058
Class IV 169,387
--------------
Net expenses 16,187,236
--------------
Net investment income 56,402,615
--------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 570,569,034
Closed futures contracts 39,040,817
Closed swap contracts 2,482,273
--------------
Net realized gain 612,092,124
--------------
Change in net unrealized appreciation (depreciation) on:
Investments 372,658,308
Open futures contracts 17,735,137
Open swap contracts (10,316,192)
--------------
Net unrealized gain 380,077,253
--------------
Net realized and unrealized gain 992,169,377
--------------
Net increase in net assets resulting from operations $1,048,571,992
==============
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 56,402,615 $ 56,560,600
Net realized gain 612,092,124 857,162,171
Change in net unrealized appreciation (depreciation) 380,077,253 (272,499,847)
------------- --------------
Net increase in net assets resulting from operations 1,048,571,992 641,222,924
------------- --------------
Distributions to shareholders from:
Net investment income
Class I (154,654) (60,981)
Class II (635,110) (622,038)
Class III (50,102,134) (60,383,941)
------------- --------------
Total distributions from net investment income (50,891,898) (61,066,960)
------------- --------------
In excess of net investment income
------------- --------------
Total distributions in excess of net investment
income -- --
------------- --------------
Net realized gains
Class I (3,363,020) (574,148)
Class II (12,616,955) (6,542,685)
Class III (918,932,927) (430,596,024)
------------- --------------
Total distributions from net realized gains (934,912,902) (437,712,857)
------------- --------------
(985,804,800) (498,779,817)
------------- --------------
Net share transactions: (Note 5)
Class I (7,566,242) 8,598,090
Class II (50,419,336) 65,659,589
Class III (643,189,534) (270,803,491)
Class IV 1,217,792,446 --
------------- --------------
Increase (decrease) in net assets resulting from net
share transactions 516,617,334 (196,545,812)
------------- --------------
Total increase (decrease) in net assets 579,384,526 (54,102,705)
Net assets:
Beginning of period 3,125,211,615 3,179,314,320
------------- --------------
End of period (including accumulated undistributed
net investment income of $10,889,309 and
$5,378,592, respectively) $3,704,596,141 $3,125,211,615
============== ==============
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from July 2, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ --------------------------
<S> <C> <C>
Net asset value, beginning of period $ 20.12 $ 18.97
-------- --------
Income from investment operations:
Net investment income 0.27+ 0.20
Net realized and unrealized gain 3.60 2.88
-------- --------
Total from investment operations 3.87 3.08
-------- --------
Less distributions to shareholders:
From net investment income (0.28) (0.19)
From net realized gains (6.05) (1.74)
-------- --------
Total distributions (6.33) (1.93)
-------- --------
Net asset value, end of period $ 17.66/(a)/ $ 20.12
======== ========
Total Return/(b)/ 20.54% 16.84%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 9,104
Net expenses to average daily net assets 0.61%* 0.61%*
Net investment income to average daily net
assets 1.56%* 1.55%*
Portfolio turnover rate 60% 107%
Average broker commission rate per equity
share $0.0299 $0.0297
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.04 $ 0.02
</TABLE>
+ Computed using average shares outstanding throughout the period.
/(a)/ All Class I shares of the Fund were exchanged for Class II shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(b)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
14 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from June 7, 1996
Period from Period from (commencement of
January 9, 1998 March 1, 1997 operations)
to February 28, 1998 to November 17, 1997 to February 28, 1997
--------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 17.65 $20.10 $20.12
-------- -------- --------
Income from investment operations:
Net investment income 0.04+ 0.24+ 0.25
Net realized and unrealized gain 2.29 3.99 2.92
-------- -------- --------
Total from investment operations 2.33 4.23 3.17
-------- -------- --------
Less distributions to shareholders:
From net investment income 0.00 (0.22) (0.30)
From net realized gains 0.00 (3.90) (2.89)
-------- -------- --------
Total distributions 0.00 (4.12) (3.19)
-------- -------- ------
Net asset value, end of period $ 19.98 $ 20.21 $ 20.10
======== ======== ========
Total Return /(a)/ 13.20% 23.00% 17.46%
Ratios/Supplemental Data:
Net assets, end of period (000's) $16,958 $ 2,037 $64,763
Net expenses to average daily net assets 0.55%* 0.55%* 0.55%*
Net investment income to average daily net 1.53%* 1.66%* 1.63%*
assets
Portfolio turnover rate 60% 60% 107%
Average broker commission rate per equity $0.0299 $0.0299 $0.0297
share
Fees and expenses voluntarily waived or
borne by the Manager consisted of the $ 0.01 $ 0.03 $ 0.03
following per share amounts:
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
See accompanying notes to the financial statements. 15
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 15.73
---------- ---------- ---------- ---------- ---------
Income from investment
operations:
Net investment
income 0.35 0.36 0.41 0.41 0.42
Net realized and
unrealized gain 5.89 3.58 5.49 0.66 1.59
---------- ---------- ---------- ---------- ---------
Total from
investment
operations 6.24 3.94 5.90 1.07 2.01
---------- ---------- ---------- ---------- ---------
Less distributions to
shareholders:
From net
investment
income (0.32) (0.39) (0.42) (0.39) (0.43)
From net realized
gains (6.05) (2.89) (1.47) (1.01) (1.53)
---------- ---------- ---------- ---------- ---------
Total
distributions (6.37) (3.28) (1.89) (1.40) (1.96)
---------- ---------- ---------- ---------- ---------
Net asset value, end
of period $ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 15.78
========== ========== ========== ========== =========
Total Return /(a)/ 36.69% 22.05% 39.08% 7.45% 13.36%
Ratios/Supplemental Data:
Net assets, end of
period (000's) $2,317,103 $3,051,344 $3,179,314 $2,309,248 $1,942,005
Net expenses to
average daily
net assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment
income to
average daily
net assets 1.67% 1.78% 2.25% 2.63% 2.56%
Portfolio turnover
rate 60% 107% 77% 99% 40%
Average broker
commission rate
per equity
share /(b)/ $ 0.0299 $ 0.0297 N/A N/A N/A
Fees and expenses
voluntarily
waived or borne
by the Manager
consisted of
the following
per share
amounts: $ 0.05 $ 0.04 $ 0.01 $ 0.01 $ 0.01
</TABLE>
/(a)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
/(b)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
16 See accompanying notes to the financial statements.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
----------------------------
<S> <C>
Net asset value, beginning of period $ 17.65
----------
Income from investment operations:
Net investment income 0.04+
Net realized and unrealized gain 2.30
----------
Total from investment operations 2.34
----------
Net asset value, end of period $ 19.99
==========
Total Return/(a)/ 13.26%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,370,535
Net expenses to average daily net assets 0.435%*
Net investment income to average daily net assets 1.67%*
Portfolio turnover rate 60%
Average broker commission rate per equity share $ 0.0299
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount: $ 0.01
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/ Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
See accompanying notes to the financial statements. 17
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund
is registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment of substantially all of its assets in
common stocks chosen from the Wilshire 5000 Index and primarily in common
stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II, and Class III. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus. Class III
shares are the continuation of the Trust's shares that existed prior to
June 1, 1996, and bear the same total operating expenses (after the
voluntary expense waiver) as those shares.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class II shares. Additionally, Class IV commenced
operations on January 9, 1998.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge
18
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
other Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the name
of the futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $197,497,578, collateralized by cash in the amount of
$203,666,354, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized
19
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
gain or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. See Note 6
for a summary of all open swap agreements as of February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $4,775,920.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
----------------------- --------------------------- ---------------------
-- $(4,645,123) $4,645,123
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
20
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14% of the amount
invested. Prior to June 1, 1996, the premium on cash purchases was .17% of
the amount invested. All purchase premiums are paid to and recorded by the
Fund as paid-in capital. This fee is allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold", as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $432,617 in purchase premiums.
There is no premium for cash redemptions, reinvested distributions or
in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .525% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, .15%
for Class III shares, and .105% for Class IV shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .33% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .48%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $30,032. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
21
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$1,871,066,435 and $2,426,519,336, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and deprecation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
------------------- ------------------- -------------------- ---------------------
<S> <C> <C> <C>
$3,194,311,426 $809,808,505 $30,915,043 $778,893,462
</TABLE>
4. Principal shareholder
At February 28, 1998, 11.2% of the outstanding shares of the Fund was held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from July 2, 1996
Period from March 1, 1997 (commencement of operations)
Class I: to January 9, 1998 to February 28, 1997
-------------------------------- ---------------------------------
Shares Amount Shares Amount
------------ --------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares sold 99,736 $ 2,066,431 422,178 $ 8,023,942
Shares issued to shareholders
in reinvestment of
distributions 185,582 3,406,784 30,330 574,148
Shares repurchased (737,826) (13,039,457) -- --
------------ --------------- --------------- --------------
Net increase (decrease) (452,508) $ (7,566,242) 452,508 $ 8,598,090
============ =============== =============== ==============
</TABLE>
22
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Share transactions -- (continued)
<TABLE>
<CAPTION>
Period from March 1,1997 to
November 17, 1997 and from Period from June 7, 1996
January 9, 1998 to (commencement of operations)
Class II: February 28, 1998 to February 28, 1997
---------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares sold 848,657 $ 15,209,664 2,843,284 $ 58,494,866
Shares issued to shareholders
in reinvestment of
distributions 715,803 13,252,065 378,119 7,164,723
Shares repurchased (3,937,206) (78,881,065) -- --
=============== =============== =============== ==============
Net increase (decrease) (2,372,746) $ (50,419,336) 3,221,403 $ 65,659,589
=============== =============== =============== ==============
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
--------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 24,696,860 $ 486,032,574 15,209,862 $ 294,136,127
Shares issued to shareholders
in reinvestment of
distributions 51,611,877 948,323,899 24,657,273 468,161,533
Shares repurchased (112,049,490) (2,077,546,007) (51,595,821) (1,033,101,151)
=============== =============== =============== ================
Net decrease (35,740,753) $ (643,189,534) (11,728,686) $ (270,803,491)
=============== =============== =============== ================
<CAPTION>
Period from January 9, 1998
(commencement of operations)
Class IV: to February 28, 1998
---------------------------------
Shares Amount
--------------- ---------------
<S> <C> <C>
Shares sold 68,811,049 $ 1,222,405,143
Shares issued to shareholders
in reinvestment of
distributions - -
Shares repurchased (237,768) (4,612,697)
=============== ===============
Net increase 68,573,281 $ 1,217,792,446
=============== ===============
</TABLE>
23
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
--------------- --------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
1059 S&P 500 March 1998 $278,119,875 $16,364,163
================
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
24
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description (Depreciation)
------------------- ------------ ----------------------------------------- -----------------
<C> <C> <S> <C>
$ 141,596,739/ 5/11/98 Agreement with NatWest Securities $ (1,193,267)
136,397,686 Limited dated 5/6/97 to pay (receive)
the notional amount multiplied by the
change in market value of a basket of
selected securities (including
dividends) less the counterparty's
notional amount multiplied by 6 month
LIBOR adjusted by a specified spread
and to receive (pay) the notional
amount multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread.
9,120,856/ 5/11/98 Agreement with NatWest Securities (76,863)
8,785,963 Limited dated 8/19/97 to pay (receive)
the notional amount multiplied by the
change in market value of a basket of
selected securities (including
dividends) less the counterparty's
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread
and to receive (pay) the notional
amount multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread.
118,932,934/ 5/16/98 Agreement with Morgan Stanley Capital (5,196,205)
128,298,774 Services, Inc. dated 5/13/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread and to receive (pay)
the change in market value of a basket
of selected securities (including
dividends) less the counterparty's
notional amount multiplied by 6 month
LIBOR adjusted by a specified spread.
</TABLE>
25
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description (Depreciation)
------------------- ------------ ----------------------------------------- -----------------
<C> <C> <S> <C>
$ 17,079,448/ 8/24/98 Agreement with Morgan Stanley Capital $ (89,522)
15,754,742 Services, Inc. dated 2/19/98 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread and to receive (pay)
the counterparty's notional amount
multiplied by the return on the Russell
2000 Index (including dividends) less
the notional amount multiplied by 6
month LIBOR adjusted by a specified
spread
124,994,797/ 9/11/98 Agreement with Morgan Stanley Capital (5,672,041)
132,407,286 Services, Inc. dated 9/08/97 to receive
(pay) the notional amount multiplied by
the return on the Standard & Poor's 500
Index (including dividends) less the
notional amount multiplied by 6 month
LIBOR adjusted by a specified spread
and to receive (pay) the change in
market value of a basket of selected
securities (including dividends) less
the counterparty's notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread.
12,200,000/ 9/23/98 Agreement with NatWest Securities (953,252)
12,200,000 Limited dated 9/16/97 to pay (receive)
the notional amount multiplied by the
return on the Standard & Poor's 500
Index (including dividends) less the
notional amount multiplied by 6 month
LIBOR adjusted by a specified spread
and to receive (pay) the counterparty's
notional amount multiplied by the
return on the Russell 2000 Index
(including dividends) less the notional
amount multiplied by 6 month LIBOR
adjusted by a specified spread.
</TABLE>
26
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description (Depreciation)
------------------- ------------ ----------------------------------------- -----------------
<S> <C> <C> <C>
$ 35,664,100/ 10/07/98 Agreement with Morgan Stanley Capital $ (3,062,478)
33,043,847 Services, Inc. dated 10/02/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread and to receive (pay)
the counterparty's notional amount
multiplied by the return on the Russell
2000 Index (including dividends) less
the notional amount multiplied by 6
month LIBOR adjusted by a specified
spread.
---------------
Net unrealized depreciation $ (16,243,628)
===============
</TABLE>
27
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
Federal Tax Information-- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
72.87% of distributions as net capital gain dividends.
28
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily
responsible for the day-to-day management of the Fund's portfolio. Each of
these individuals has been a portfolio manager at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Core Fund returned 36.7% for the fiscal
year ended February 28, 1997, as compared to 35.0% for the S&P 500.
Consistent with the Fund's investment objective and policies, the Fund was
invested substantially in common stocks throughout the period.
The Fund's outperformance of the benchmark is attributed to strong stock
selection, especially within the technology and non-bank financial sectors.
Sector selection strategies posted neutral results for the year, as the
losses from the Fund's overweights in electric utilities and small
capitalization stocks were offset by the gains from the Fund's overweight
in long distance telephone companies and underweight in defensive, high
growth stocks.
During the year, the Fund's fair value and momentum stock selection
strategies worked successfully in identifying stocks for inclusion in the
Fund's portfolio. The Fund's technology stock holdings, including Dell and
Compaq, contributed to strong performance for the portfolio. Dell was
selected for inclusion in the portfolio based on its attractive valuation
by the momentum strategy, while Compaq earned inclusion based on positive
valuations on both the fair value and momentum strategies. These strategies
were also successful in selecting non-bank financial stocks. The Fund's
value added within this sector came primarily from its overweight in large
brokerage firms, which benefited from merger activity and record market
returns.
With respect to sector selection, the Fund employed a strategy of
overweighting electric utilities. These stocks appeared significantly
undervalued relative to their historic levels. This strategy worked against
the Fund during the year's record setting returns, as utilities
significantly underperformed for the majority of the year. Some early
losses were partially offset in the fourth quarter of 1997, as electric
utilities strongly outperformed the market during the flight to quality
following October's market turbulence. The Fund's strategy of overweighting
small capitalization stocks also detracted from performance. Small
capitalization stocks, as represented by the Russell 2000 index,
underperformed the S&P 500 by 5.1% during the year.
These losses were partially offset by gains from the Fund's strategy of
overweighting long distance telephone companies, including AT&T and MCI,
which significantly outperformed during the period. The Fund also benefited
from its strategy of underweighting defensive, high growth companies such
as Coca-Cola and Gillette. Since the beginning of the fiscal year, these
stocks have looked overvalued, and we continue to underweight them in the
portfolio.
<PAGE>
GMO Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
The risk control enhancements that we implemented in 1996 contributed
positively to performance in 1997, by limiting our sector under- or
overweights. These control features limited our overweight in technology
stocks in a volatile year for the sector. We expect to continue to benefit
from the enhanced controls going into another volatile year.
Outlook
The Fund is typically overweight in high quality stocks as defined using a
GMO measure that focuses on high, stable return on equity and low debt
ratios. However, we are now about 1% underweight in this group as these
stocks appear to be overvalued. In particular the market is paying a
premium for high return on equity that we feel is excessive.
The Fund's overweight in utility stocks, which is in companies with good
fundamental prospects in the continuing deregulatory environment, remains
unchanged. We continue to believe that smaller stocks have more attractive
valuation levels than the largest stocks. We have moved from a 5%
underweight to an 8% underweight in the largest 100 stocks, and continue to
maintain a weighting of 7% to 8% in small, value stocks.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Core Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
--------------------------------------------
Average Annual Total Return
--------------------------------------------
Since
1 Year 5 Year 10 Year Inception
--------------------------------------------
Class
III 36.5% 23.1% 19.0% n/a
--------------------------------------------
Class 6/7/96
II* 36.4% n/a n/a 31.4%
--------------------------------------------
Class 1/9/98
IV n/a n/a n/a 13.1%
--------------------------------------------
[LINE GRAPH APPEARS HERE]
GMO CORE FUND S&P 500 INDEX
------------- -------------
2/29/88 $9,986 $10,000
2/28/89 $11,134 $11,189
2/28/90 $13,492 $13,304
2/28/91 $15,722 $15,255
2/29/92 $17,856 $17,693
2/28/93 $19,749 $19,579
2/28/94 $22,387 $21,210
2/28/95 $24,057 $22,771
2/29/96 $33,459 $30,672
2/28/97 $40,837 $38,696
2/28/98 $55,820 $50,840
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Performance for
Class IV and Class II shares may vary due to different shareholder service fees.
Past performance is not indicative of future performance. Information is
unaudited.
*Class II performance includes Class III performance for the period November 17,
1997 to January 9, 1998, during which no Class II shares were outstanding.
33
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Value Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Value Fund at February 28, 1998, the results of its operations for the
year then ended, the changes in its net assets and the financial
highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at February 28, 1998 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value($)
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 93.2%
Aerospace -- 0.3%
2,100 Allied Signal Inc 89,381
1,400 Lockheed Martin Corp 163,363
500 Northrop Grumman Corp 69,500
5,000 Sundstrand Corp 302,500
2,200 Textron Inc 164,863
1,100 TRW Inc 60,294
-------------
849,901
-------------
Automotive -- 3.5%
700 Bandag Inc 39,244
26,100 Chrysler Corp 1,016,269
700 Eaton Corp 67,244
20,600 Electronic Data Systems Corp 902,538
40,800 Ford Motor Co 2,307,750
76,601 General Motors Corp 5,280,629
2,400 Genuine Parts Co 88,800
1,400 Goodyear Tire & Rubber Co 96,775
1,800 Harley Davidson Inc 52,200
700 Lear Corp * 37,013
75,000 Mascotech Industries Inc 1,556,250
800 Paccar Inc 50,650
-------------
11,495,362
-------------
Banking and Financial Services -- 11.6%
2,900 Advanta Corp, Class A 68,331
1,000 Ahmanson (HF) & Co 62,438
21,600 American Express Co 1,945,350
6,284 American General Corp 365,258
2,650 Amsouth Bancorp 148,897
13,060 Banc One Corp 737,890
400 Bank of New York Inc 23,425
23,200 BankAmerica Corp 1,798,000
500 BankBoston Corp 49,844
2,800 Bankers Trust New York Corp 331,100
900 BB&T Corporation 55,856
6,255 Bear Stearns Inc 291,656
1,800 Beneficial Corp 212,400
87,500 Block (HR) Inc 4,117,969
1,000 Capital One Financial Corp 67,188
45,600 Chase Manhattan Corp 5,657,250
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
41,499 Citicorp 5,498,618
1,500 Comdisco Inc 62,531
1,100 Comerica Inc 110,894
2,355 Commerce Bancshares Inc 168,383
1,850 Compass Bancshares Inc 85,100
1,600 Corestates Financial Corp 135,100
3,500 Countrywide Credit Industry Inc 155,531
2,400 Donaldson Lufkin & Jenrette 196,500
6,800 Edwards (AG) Inc 286,025
3,500 Federal Home Loan Mortgage Corp 165,375
19,900 Federal National Mortgage Associates 1,269,869
1,100 First Bank of America Corp 85,456
10,000 First Chicago NBD Corp 821,875
100 First Empire State Corp 47,200
2,100 First Hawaiian Inc 83,213
1,800 First Security Corp 41,738
30,760 First Union Corp (NE) 1,620,668
1,650 First Virginia Banks Inc 83,531
1,600 Firstar Corp 66,900
1,300 Fleet Financial Group Inc 102,456
4,300 Franklin Resources Inc 219,300
3,300 Green Tree Financial Corp 75,694
2,900 Greenpoint Financial Corp 215,325
800 Household International Inc 103,900
2,000 Key Corp 140,125
5,100 Lehman Brothers Holding Inc 321,619
4,250 Liberty Financial Cos 154,063
5,375 MBNA Corp 192,492
1,050 Mercantile Bank Corp 58,406
3,500 Mercantile Bankshares 122,609
4,100 Merrill Lynch 293,406
2,500 MGIC Investment Corp 184,219
1,900 Morgan Jersey Co Inc 227,050
18,985 Morgan Stanley Dean Witter Discover & Co 1,323,017
2,400 National City Corp 156,600
16,462 Nationsbank Corp 1,127,647
5,200 Norwest Corp 212,875
1,460 Old Kent Financial Corp 56,301
8,800 Pacific Century Financial Corp 189,750
4,650 Paine Webber Group Inc 195,300
1,000 PMI Group Inc 72,750
2 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- -------------------------------------------------------------------------------
Banking and Financial Services -- continued
27,100 PNC Bank Corp 1,504,050
2,100 Popular Inc 109,791
7,700 Providian Financial Corp 436,975
1,900 Regions Financial Corp 75,525
1,500 Republic New York Corp 181,500
1,100 Rowe (T) Price & Associates Inc 73,013
2,150 SLM Holding Corp 88,822
2,850 Southtrust Corp 116,494
36,964 Travelers Group Inc 2,060,743
900 Union Planters Corp 55,631
1,700 Unionbancal Corp 158,313
1,919 Wachovia Corp 152,561
3,993 Washington Federal Inc 110,307
2,170 Washington Mutual Inc 145,661
1,200 Wells Fargo & Co 386,400
1,000 Wilmington Trust Corp 61,875
-------------
38,379,924
-------------
Chemicals -- 0.4%
1,700 Eastman Chemical Co 111,350
17,500 Engelhard Corp 317,188
3,200 Great Lakes Chemical Corp 155,600
20,000 Millenium Chemicals Inc 516,250
2,100 Morton International Inc 69,431
1,900 Sherwin Williams Co 63,531
2,500 Union Carbide Corp 116,094
5,000 Wellman Inc 107,500
-------------
1,456,944
-------------
Computer and Office Equipment -- 0.9%
3,900 Apple Computer Inc * 92,138
5,200 Concord EFS Inc * 161,850
5,200 Gateway 2000 Inc 228,800
5,700 Hewlett Packard Co 381,900
125,000 Intergraph Corp * 1,218,750
2,000 Lexmark International Group Inc * 85,500
6,000 Micron Technology Inc * 199,125
2,300 Pitney Bowes Inc 107,813
2,300 Quantum Corp 57,788
20,000 Silicon Graphics Inc * 301,250
2,800 Sterling Software Inc * 147,525
-------------
2,982,439
-------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- -------------------------------------------------------------------------------
Construction -- 0.2%
900 Centex Corp 65,756
1,600 Georgia-Pacific Corp 93,900
25,000 Hanson PLC ADR 632,812
------------
792,468
------------
Consumer Goods -- 3.1%
1,800 Black and Decker Corp 90,675
2,600 Callaway Golf Co 83,850
2,600 CVS Corp 192,563
71,100 Eastman Kodak Co 4,665,938
1,200 Fastenal Co 52,650
1 Footstar Inc * 30
4,400 Fortune Brands Inc 174,625
2,350 Hasbro Inc 85,334
1,000 Jones Apparel Group Inc * 55,000
50,000 Jostens Inc 1,175,000
2,000 Lancaster Colony Corp 88,000
800 Liz Claiborne Inc 40,000
5,800 Mattel Co 245,413
50,000 Maytag Corp 2,250,000
13,900 Moore Corp Ltd 218,056
1,500 Newell Co 68,813
3,100 Nike Inc, Class B 136,013
3,300 Procter and Gamble Co 280,294
1,300 Reebok International Ltd * 40,544
1,800 Russell Corp 48,825
2,100 Terra Industries Inc 24,938
2,300 Unifi Inc 84,525
3,000 VF Corp 143,063
1,400 Whirlpool Corp 93,538
------------
10,337,687
------------
Electronic Equipment -- 1.4%
3,200 American Power Conversion Corp * 92,800
1,500 Amp Inc 66,281
2,900 Arrow Electronics Inc 96,606
1,200 Cooper Industries Inc 67,350
2,500 Emerson Electric 159,531
4 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Electronic Equipment -- continued
4,100 General Instrument Corp * 68,419
1,700 Harris Corp 86,169
35,000 International Rectifier Corp * 509,688
1,300 Linear Technology Corp 98,475
1,300 Litton Industries * 80,925
1,300 LSI Logic * 30,794
1,900 Maxim Integrated Products Inc 76,713
4,500 Motorola Inc 250,875
83,100 National Semiconductor Corp * 1,984,013
16,200 Raytheon Co, Class B 952,769
1,600 Texas Instruments 92,600
3,395 Vishay Intertechnology Inc 69,173
900 Xilinx Inc * 39,488
-------------
4,822,669
-------------
Environmental Control -- 0.9%
180,000 Wheelabrator Technology Inc 2,936,250
-------------
Food and Beverage -- 4.1%
122,700 Anheuser Busch Cos Inc 5,751,563
20,191 Archer Daniels Midland Co 453,036
1,900 Bestfoods 200,213
3,200 Coca Cola Enterprises Inc 105,800
1,800 ConAgra Inc 54,000
29,200 Darden Restaurants Inc 394,200
700 Dean Foods Co 38,500
1,900 Heinz (HJ) Co 106,994
3,700 IBP Inc 82,556
1,700 McDonald's Corp 93,075
19,500 Pepsico Inc 712,969
1,000 Quaker Oats Company 53,875
82,200 RJR Nabisco Holdings Corp 2,841,038
5,500 Sara Lee Corp 310,750
6,900 Seagrams Co Ltd 262,200
3,400 Tyson Food Inc, Class A 66,300
23,600 Unilever NV ADR 1,517,775
25,000 Wendy's International Inc 542,188
2,500 Whitman Corp 44,531
800 Wrigley (William Jr) Co 61,100
-------------
13,692,663
-------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Health Care -- 1.7%
2,100 Bard (CR) 73,238
1,100 Bausch & Lomb Inc. 49,294
1,300 Becton Dickinson & Co 82,713
71,600 Beverly Enterprises Inc * 1,087,425
3,400 BioMet Inc 101,363
14,100 Columbia HCA Healthcare Corp 382,463
2,000 DENTSPLY International Inc 62,000
900 First Health Group Corp * 44,831
1,300 Hillenbrand Industries Inc 73,044
28,900 Johnson & Johnson 2,181,950
800 Lincare Holdings Inc * 51,925
1,400 Mallinckrodt Inc 54,338
1,600 McKesson Corp 83,400
5,600 Medtronic Inc 297,500
10,600 Pharmacia & Upjohn Inc 419,363
6,875 Quest Diagnostics Inc * 106,563
5,000 Tenet Healthcare Corp * 186,563
4,200 United Healthcare Corp 254,888
1,100 Varian Associates Inc 63,800
1,500 Wellpoint Health Network * 87,656
------------
5,744,317
------------
Insurance -- 4.7%
2,400 Aetna Life and Casualty Co 209,700
1,300 AFLAC Corp 79,869
21,283 Allstate Corp 1,984,640
4,900 AMBAC Inc 260,925
900 American Bankers Insurance Group 50,625
2,200 American Financial Group Inc 88,963
3,900 American National Insurance Co 378,300
1,800 Chubb Corp 143,663
1,800 Cigna Corp 343,800
600 Cincinnati Financial Corp 81,000
2,600 CNA Financial Corp * 374,238
6,764 Conseco Inc 317,485
2,800 Equitable Companies Inc 146,475
1,500 Everest Re Holdings Inc 55,313
4,130 Foundation Health Systems Inc, Class A * 114,349
700 General Re Corp 149,100
3,000 Hartford Financial Services Group 294,750
3,000 Lincoln National Corp 251,250
6 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Insurance -- continued
5,500 Loews Corp 551,719
1,100 Marsh & McLennan Cos Inc 95,356
2,300 MBIA Inc 168,331
1,300 Mercury General Corp 73,775
10,000 Nationwide Financial Service, Class A 440,000
4,800 Ohio Casualty Corp 224,400
5,000 Old Republic International Corp 210,938
17,600 Oxford Health Plans Inc * 302,500
1,404 Pacificare Health Systems, Class B * 87,750
800 Progressive Corp 92,700
2,034 Provident Cos Inc 73,224
125,000 Reliance Group Holdings Inc 2,125,000
7,600 Reliastar Financial Corp 361,475
4,900 Safeco Corp 256,944
3,800 Saint Paul Cos Inc 336,775
151,600 TIG Holdings Inc 4,026,875
6,800 Torchmark Corp 316,625
1,900 Transamerica Corp 221,231
1,600 Transatlantic Holding Inc 121,000
1,600 USF & G Corp 39,100
------------
15,450,163
------------
Machinery -- 1.3%
2,500 Agco Corporation 70,313
6,400 Applied Materials Inc 235,600
10,000 Baker Hughes Inc 409,375
1,400 Brunswick Corp 44,450
2,500 Case Corp 162,656
2,600 Caterpillar Inc 142,025
75,000 Cincinnati Milacron Inc 2,315,625
3,400 Cummins Engine Inc 196,775
6,300 FMC Corp * 455,963
10,000 Pall Corp 209,375
2,700 Tecumseh Products Co, Class B 135,675
1,300 York International Corp 57,119
------------
4,434,951
------------
Manufacturing -- 6.6%
20,200 American Greetings Corp 921,625
39,400 Clayton Homes Inc 783,075
110,000 Corning Inc 4,468,750
See accompanying notes to the financial statements. 7
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Manufacturing -- continued
1,500 Crane Co 73,500
28,500 General Electric Co 2,215,875
1,900 Harsco Corp 79,563
42,300 IBM Corp 4,417,706
2,300 International Game Technology 55,775
16,900 Lafarge Corp 567,206
2,500 Minnesota Mining And Manufacturing Co 213,281
75,000 Owens Corning 2,315,625
6,899 Rockwell International Corp 417,410
300 Temple Inland Inc 17,888
62,500 Tenneco Inc 2,570,313
2,900 Trinity Industries Inc 145,725
30,900 United Technologies Corp 2,759,756
-------------
22,023,073
-------------
Metals and Mining -- 1.7%
46,200 Alcan Aluminum Ltd 1,435,088
12,200 Asarco Inc 269,925
28,500 Cyprus Amax Minerals Co 466,688
47,500 Inco Ltd 840,156
5,000 Newmont Mining Corp 144,688
5,000 Pegasus Gold* 500
6,200 Phelps Dodge Corp 393,700
20,000 Pittston Minerals Group 175,000
24,300 Reynolds Metals Co 1,514,194
4,500 Timken Co 145,125
300 Wesco Financial Corp 109,200
-------------
5,494,264
-------------
Oil and Gas -- 6.4%
18,400 Amerada Hess Corp 1,091,350
3,000 Amoco Corp 255,000
7,100 Atlantic Richfield Co 552,025
20,000 Cabot Oil & Gas Corp, Class A 420,000
800 Chevron Corp 64,900
1,500 Columbia Energy Group 114,469
800 Consolidated Natural Gas Co 46,000
74,975 EEX Corp* 641,973
900 El Paso Natural Gas Co 59,738
50,000 Enron Oil & Gas 1,068,750
12,500 Exxon Corp 798,438
8 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Oil and Gas -- continued
700 FINA Inc, Class A 44,275
25,000 Mitchell Energy, Class B 685,938
21,000 Mobil Corp 1,521,188
149,700 Occidental Petroleum Corp 3,826,706
1,700 Phillips Petroleum Co 83,300
8,800 Questar Corp 374,000
23,100 Texaco Inc 1,289,269
5,100 Union Pacific Resources Group 114,113
92,500 Union Texas Petroleum Holdings Inc 1,867,344
66,800 Unocal Corp 2,517,525
77,000 USX - Marathon Group 2,661,313
50,000 Westcoast Energy Inc 1,262,500
-------------
21,360,114
-------------
Paper and Allied Products -- 2.5%
25,000 Abitibi-Consolidated Inc 357,813
1,600 Bemis Company Inc 72,100
17,800 Boise Cascade Corp 592,963
1,000 Bowater Inc 49,500
13,900 Champion International Corp 709,769
57,200 Fort James Corp 2,595,450
400 Georgia-Pacific Timber Group 9,125
42,800 International Paper Co 1,995,550
2,800 Kimberly Clark Corp 155,925
2,100 Louisiana Pacific Corp 46,069
2,100 Mead Corp 71,794
1,400 Pentair Inc 57,663
1,800 Plum Creek Timber Co Limited Partnership 60,525
900 Potlatch Corp 38,981
1,600 Rayonier Inc 67,800
1,700 Sonoco Products Co 65,769
4,000 Stone Container Corp * 45,000
1,300 Union Camp Corp 77,675
2,100 Westvaco Corp 68,250
23,000 Weyerhaeuser Co 1,148,563
1,900 Willamette Industries Inc 70,181
-------------
8,356,465
-------------
Pharmaceuticals -- 2.3%
25,600 Abbott Laboratories 1,915,200
9,100 Allergan Inc 318,500
3,300 American Home Products Corp 309,375
See accompanying notes to the financial statements. 9
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Pharmaceuticals -- continued
7,600 Amgen Inc 403,750
1,300 Bergen Brunswig Corp, Class A 58,500
4,300 Bristol Myers Squibb Co 430,806
20,000 Lilly (Eli) & Co 1,316,250
25,000 Medpartners Inc * 300,000
1,500 Merck & Co Inc 191,344
87,500 Mylan Laboratories Inc 1,782,813
30,720 PharMerica Inc * 399,360
1,500 Schering Plough Corp 114,094
-------------
7,539,992
-------------
Primary Materials -- 0.1%
5,500 Premark International Inc 171,188
1,800 USG Corp * 98,325
900 Vulcan Materials Co 90,563
-------------
360,076
-------------
Primary Processing -- 0.7%
2,000 Alumax Inc * 74,125
6,800 Dow Chemical Co 622,200
4,000 Du Pont (EI) De Nemours & Co 245,250
50,400 LTV Corp 607,950
19,300 USX-US Steel Group Inc 677,913
4,100 Worthington Industries 70,213
-------------
2,297,651
-------------
Printing and Publishing -- 0.2%
2,200 Dun and Bradstreet Corp 73,700
25,000 News Corporation Ltd ADR 635,938
-------------
709,638
-------------
Real Estate -- 2.2%
10,000 Equity Residential Properties Trust 479,375
50,000 JP Realty Inc 1,256,250
2,112 Starwood Hotels & Resorts 119,481
125,000 Summit Properties Inc 2,531,250
125,000 United Dominion Realty Trust 1,750,000
50,000 Walden Residential Properties Inc 1,237,500
-------------
7,373,856
-------------
10 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- -------------------------------------------------------------------------------
Refining -- 0.2%
22,500 Quaker State Corp 340,313
2,000 Ultramar Diamond Shamrock Corp 71,375
5,000 Valero Energy Corp 177,500
-------------
589,188
-------------
Retail Trade -- 5.3%
7,800 Albertsons Inc 365,138
4,000 American Stores Co 100,750
3,100 Autozone Inc * 93,775
1,600 Bed, Bath & Beyond Inc * 69,100
25,000 Cone Mills Corp * 204,688
1,900 Costco Cos Inc * 92,863
2,300 Dayton Hudson Corp 177,819
14,000 Dillards Department Stores Inc 498,750
79,000 Federated Department Stores * 3,703,125
5,500 Food Products Lion Inc 54,313
1,700 Fruit of the Loom Inc * 54,613
7,300 Gap Inc 326,219
1,000 General Nutrition Cos Inc * 39,750
14,500 Kmart Corp * 193,938
27,700 Limited Inc 803,300
2,300 May Department Stores Co 139,725
5,200 Mercantile Stores 342,225
1,600 MSC Industrial Direct Co Inc * 76,500
5,300 Officemax Inc * 88,444
3,500 Penney (JC) Co Inc 247,406
3,600 Safeway Inc 125,550
10,000 Saks Holdings Inc * 261,250
62,400 Sears Roebuck & Co 3,311,100
2,300 Tandy Corp 102,350
80,000 Toys R Us Inc * 2,100,000
1,250 Tricon Global Restaurants * 35,469
80,000 Wal Mart Stores Inc 3,705,000
6,000 Weismarkets Inc 211,125
1,400 Winn-Dixie Stores Inc 75,513
2,000 Woolworth (FW) Co * 47,500
-------------
17,647,298
-------------
See accompanying notes to the financial statements. 11
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Services -- 3.5%
800 BHC Communications Inc, Class A 110,400
3,109 Chris Craft Industries Inc 173,521
3,500 Circus Circus Enterprises Inc * 77,000
3,900 Harrahs Entertainment Inc * 82,144
50,000 Hilton Hotels Corp 1,490,625
1,400 Kelly Services 49,875
5,400 Kingworld Productions Inc 144,113
35,000 Manpower Inc 1,476,563
2,000 Meredith Corp 85,875
3,100 Olsten Corp 49,988
3,600 Servicemaster Company 97,650
3,900 Supervalu Inc 185,738
272,500 Waste Management Inc 6,812,500
150,000 Waste Management International PLC ADR * 909,375
-------------
11,745,367
-------------
Technology -- 6.4%
2,000 Adobe Systems Inc 88,375
22,500 Advanced Micro Devices Inc * 527,344
4,100 Autodesk Inc 194,238
1,400 Avnet Inc 89,250
2,300 Bay Networks Inc * 77,913
2,800 BMC Software Inc * 214,200
11,900 Cabletron Systems Inc * 184,450
16,450 Cisco Systems Inc 1,083,644
68,676 Compaq Computer Corp 2,201,924
500 Computer Sciences Corp * 52,344
25,000 Data General Corp * 515,625
49,400 Digital Equipment Corp * 2,812,713
1,900 Electronic Arts * 83,838
900 Grainger (WW) Inc 87,131
31,700 Intel Corp 2,843,094
58,400 Microsoft Corp 4,949,400
40,600 Novell Inc * 426,933
4,400 Seagate Technology Corp * 106,975
59,500 Storage Technology Corp * 4,060,875
1,000 Teradyne Inc * 47,188
5,900 Xerox Corp 523,256
-------------
21,170,710
-------------
12 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Telecommunications -- 7.4%
1,500 Ameritech Corp 62,531
61,500 AT & T Corp 3,743,813
4,256 Bell Atlantic Corp 381,976
5,500 Bellsouth Corp 335,500
75,000 CBS Corp 2,320,313
700 Century Telephone Enterprises Inc 42,700
22,500 Comsat Corp 752,344
1,300 Frontier Corp 35,994
78,500 GTE Corp 4,248,813
19,500 MCI Communications Corp 932,344
2,600 Nextel Communications Inc, Class A * 76,863
44,601 SBC Communications 3,372,918
6,000 Sprint Corp 396,000
2 Telecom-TCI Ventures 31
1,700 United States Cellular Corp * 51,319
77,700 US West Inc 4,045,256
108,100 US West Media Group * 3,479,469
3,600 Viacom Inc, Class B * 172,800
2,100 Worldcom Inc * 80,194
-------------
24,531,178
-------------
Tobacco -- 0.9%
5,000 Gallaher Group Plc ADR 115,625
75,000 Imperial Tobacco Group Plc ADR 1,039,755
42,900 Philip Morris Cos Inc 1,863,469
-------------
3,018,849
-------------
Transportation -- 2.7%
1,800 Alexander & Baldwin Inc 50,850
15,000 American West Holdings Corp, Class B * 372,188
6,200 AMR Corp * 784,688
4,600 Burlington Northern Santa Fe Railroad Co 458,275
87,500 Canadian Pacific 2,499,219
4,500 CSX Corp 251,719
1,200 Delta Air Lines Inc 135,675
1,000 FDX Corp * 63,688
1,200 Gatx Corp 93,000
1,800 Norfolk Southern Corp 61,988
5,000 Ryder System Inc 183,438
25,000 Sabre Group Holding Inc * 825,000
900 UAL Corp * 76,613
47,500 USAir Group Inc * 3,007,360
-------------
8,863,701
-------------
See accompanying notes to the financial statements. 13
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- -------------------------------------------------------------------------------
Utilities -- 10.0%
1,500 AES Corp 66,000
1,100 American Electric Power Inc 52,800
5,300 American Water Works Co 159,000
2,600 Baltimore Gas and Electric Co 82,063
2,400 Boston Edison Co 93,150
35,000 Calenergy Inc * 938,438
35,000 Calpine Corp * 555,625
5,400 Central & South West Corp 144,788
30,000 Cinergy Corp 1,044,375
12,136 Citizens Utilities, Class B 113,775
1,600 CMS Energy Corp 70,800
2,100 Coastal Corp 133,613
9,200 Consolidated Edison Inc 391,000
2,500 Delmarva Power and Light Co 53,844
2,200 Dominion Resources Inc 87,725
30,000 DPL Inc 545,625
800 DQE Inc 26,550
7,100 DTE Energy Co 260,925
20,000 Duke Power Co 1,111,250
13,000 Edison International 359,125
35,000 Energy Group PLC ADR 1,800,313
2,400 Enova Corp 61,200
81,300 Entergy Corp 2,352,619
34,922 Firstenergy Corp 1,010,555
1,700 Florida Progress Corp 65,769
1,800 FPL Group Inc 104,513
4,900 General Public Utilities Inc 196,919
40,100 Houston Industries Inc 1,037,588
53,300 Illinova Corp 1,479,075
6,000 Long Island Lighting Co 186,000
3,100 Midamerican Energy Holding Co 64,325
2,300 Montana Power Co 73,600
2,500 New England Electric System 105,313
3,500 New York State Electric and Gas Corp 131,469
195,000 Niagara Mohawk Power Corp * 2,498,438
5,400 Northeast Utilities 67,500
900 Northern States Power Co 49,444
14 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Par Value ($)/
Shares Description Value($)
- --------------------------------------------------------------------------------
Utilities -- continued
27,900 Pacificorp 674,831
11,500 Peco Energy Co 227,125
67,500 PG & E Corp 2,037,656
1,800 Pinnacle West Capital Corp 73,463
5,800 PP & L Resources Inc 129,775
35,500 Public Service Enterprise Group Inc 1,144,875
1,500 Puget Sound Power and Light Co 40,688
32,900 Southern Co 812,219
176,600 Texas Utilities Co 7,141,264
25,000 TransCanada Pipeline Ltd 564,063
85,500 Unicom Corp 2,741,344
1,600 Western Resources Inc 65,600
-----------
33,228,014
-----------
TOTAL COMMON STOCKS (COST $242,384,672) 309,685,172
-----------
PREFERRED STOCKS -- 1.2%
Insurance -- 0.0%
2,500 Aetna Inc 6.25% Convertible 208,438
-----------
Metals and Mining -- 0.1%
7,500 Freeport McMoran Corp $0.34 166,875
-----------
Real Estate -- 0.2%
25,000 Crescent Real Estate 6.75% * 618,750
-----------
Refining -- 0.5%
30,000 Unocal Corp Convertible 6.25% 144A 1,661,250
-----------
Transportation -- 0.4%
23,900 Navistar International Corp $6.00 1,211,431
-----------
TOTAL PREFERRED STOCKS (COST $3,671,990) 3,866,744
-----------
SHORT-TERM INVESTMENTS -- 10.7%
Cash Equivalents -- 4.9%
$ 162,640 BankBoston Eurodollar Time Deposit, 5.7875% due
3/2/98/(a)/ 162,640
$ 773,265 First Union National Bank of North Carolina
Eurodollar Time Deposit, 5.6250% due 3/2/98/(a)/ 773,265
1,368,945 Merrimac Cash Fund Premium Class/(a)/ 1,368,945
14,000,000 Prudential Securities Group Inc, Master Note,
5.8875% due 3/2/98/(a)/ 14,000,000
-----------
16,304,850
-----------
See accompanying notes to the financial statements. 15
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government -- 0.1%
$ 400,000 U.S. Treasury Bill, 5.165% due 5/28/98/(b)/ 394,992
-------------
Repurchase Agreements -- 5.7%
$16,597,883 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $16,604,895
and an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.125% with a maturity
date of 8/15/21 and with a market value of $16,929,840. 16,597,883
$ 2,205,642 Prudential Securities Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $2,206,574
and an effective yield of 5.07%, collateralized by a U.S.
Government Agency Obligation with a rate of 8.50%, with a
maturity date of 10/01/26 and with a market value of
$2,249,764. 2,205,642
-------------
18,803,525
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $35,503,267) 35,503,367
--------------
TOTAL INVESTMENTS -- 105.1%
(COST $281,559,929) 349,055,283
Other Assets and Liabilities (net)-- (5.1)% (16,951,961)
-------------
TOTAL NET ASSETS-- 100% $ 332,103,322
=============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally to
qualified institutional investors.
* Non-income producing security.
/(a)/ Represents investments of security lending collateral (Note 1).
/(b)/ Security has been segregated to cover margin requirements on
open financial futures contracts.
</TABLE>
16 See accompanying notes to financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $281,559,929) (Note 1) $349,055,283
Receivable for investments sold 4,763,189
Dividends and interest receivable 663,472
Receivable for expenses waived or borne by Manager (Note 2) 50,301
------------
Total assets 354,532,245
------------
Liabilities:
Payable for investments purchased 4,586,409
Payable upon return of securities loaned (Note 1) 16,304,850
Payable for Fund shares repurchased 571,465
Payable to affiliate for (Note 2):
Management fee 175,506
Shareholder service fee 36,034
Payable for open swap contracts (Notes 1 and 6) 699,419
Payable for variation margin on open futures contracts (Notes 1 and 6) 8,271
Accrued expenses 46,969
------------
Total liabilities 22,428,923
------------
Net assets $332,103,322
============
Net assets consist of:
Paid-in capital $235,894,017
Accumulated undistributed net investment income 73,634
Accumulated undistributed net realized gain 29,235,527
Net unrealized appreciation 66,900,144
------------
$332,103,322
============
Net assets attributable to:
Class III shares $332,103,322
============
Shares outstanding:
Class III 23,178,490
============
Net asset value per share:
Class III $ 14.33
============
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of withholding taxes of $33,224) $ 8,684,197
Interest (including securities lending income of $38,120) 1,124,410
------------
Total income 9,808,607
------------
Expenses:
Management fee (Note 2) 2,742,196
Custodian and transfer agent fees 105,128
Audit fees 37,514
Registration fees 35,494
Legal fees 9,449
Trustees fees (Note 2) 3,748
Miscellaneous 2,584
Fees waived or borne by Manager (Note 2) (1,134,088)
------------
1,802,025
Shareholder service fee (Note 2)
Class III 586,036
------------
Net expenses 2,388,061
------------
Net investment income 7,420,546
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 87,186,933
Closed futures contracts 3,492,360
Closed swap contracts 663,985
------------
Net realized gain 91,343,278
------------
Change in net unrealized appreciation (depreciation) on:
Investments 8,243,983
Open futures contracts 329,824
Open swap contracts (544,630)
------------
Net unrealized gain 8,029,177
------------
Net realized and unrealized gain 99,372,455
------------
Net increase in net assets resulting from operations $106,793,001
============
18 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 7,420,546 $ 7,642,847
Net realized gain 91,343,278 62,774,750
Change in net unrealized appreciation (depreciation) 8,029,177 (1,146,140)
------------- ------------
Net increase in net assets resulting from operations 106,793,001 69,271,457
------------- ------------
Distributions to shareholders from:
Net investment income
Class III (8,678,684) (7,540,588)
------------- ------------
Net realized gains
Class III (95,748,520) (44,759,234)
------------- ------------
(104,427,204) (52,299,822)
------------- ------------
Net share transactions: (Note 5)
Class III (139,853,837) 135,007,878
------------- ------------
Increase (decrease) in net assets resulting from net share transactions (139,853,837) 135,007,878
------------- ------------
Total increase (decrease) in net assets (137,488,040) 151,979,513
Net assets:
Beginning of period 469,591,362 317,611,849
------------- ------------
End of period (including accumulated undistributed net investment
income of $73,634 and $1,263,932, respectively) $ 332,103,322 $469,591,362
============== ============
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 14.85 $ 14.25 $ 12.05 $ 13.48 $ 13.50
---------- ---------- ---------- ---------- ----------
Income from investment
operations:
Net investment income 0.31 0.31 0.39 0.41 0.43
Net realized and unrealized
gain 3.81 2.47 3.71 0.32 1.27
---------- ---------- ---------- ---------- ----------
Total from investment
operations 4.12 2.78 4.10 0.73 1.70
---------- ---------- ---------- ---------- ----------
Less distributions to
shareholders:
From net investment income (0.35) (0.32) (0.39) (0.45) (0.40)
From net realized gains (4.29) (1.86) (1.51) (1.71) (1.32)
---------- ---------- ---------- ---------- ----------
Total distributions (4.64) (2.18) (1.90) (2.16) (1.72)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 14.33 $ 14.85 $ 14.25 $ 12.05 $ 13.48
========== ========== ========== ========== ==========
Total Return /(a)/ 31.54% 21.26% 35.54% 6.85% 13.02%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $ 332,103 $ 469,591 $ 317,612 $ 350,694 $ 679,532
Net expenses to average
daily net assets 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income to
average daily net assets 1.89% 2.17% 2.66% 2.86% 2.70%
Portfolio turnover rate 40% 84% 65% 77% 35%
Average broker commission
rate per equity share /(b)/ $ 0.0561 $ 0.0457 N/A N/A N/A
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the
following per share
amounts: $ 0.05 $ 0.04 $ 0.02 $ 0.02 $ 0.02
</TABLE>
/(a)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
/(b)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
20 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- -------------------------------------------------------------------------------
1. Significant accounting policies
GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment of substantially all of its assets in
common stocks chosen from the Wilshire 5000 Index and primarily in common
stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, Class I and Class II shares
ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge
21
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
other Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the name
of the futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $15,781,802, collateralized by cash in the amount of
$16,304,850, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
22
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
credit and market risk in excess of the amounts recognized on the Statement
of Assets and Liabilities. Such risks involve the possibility that there is
no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform, or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. See Note 6 for a summary of all open swap agreements as of
February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for return of capital dividends and redemptions
in-kind. Gains resulting from such in-kind transactions amounted to
$452,043.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
--------------------- --------------------------- ---------------------
$67,840 $(410,978) $343,138
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
23
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14% of the amount
invested. Prior to June 1, 1996, the premium on cash purchases was .15% of
the amount invested. All purchase premiums are paid to and recorded by the
Fund as paid-in capital. This fee is allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold", as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $14,513 in purchase premiums.
There is no premium for cash redemptions, reinvested distributions or
in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .70% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .46% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .61%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $3,748. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
24
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$146,261,600 and $351,694,001, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
--------------- ---------------- ---------------- --------------
$283,064,824 $73,674,503 $7,684,044 $65,990,459
4. Principal shareholder
At February 28, 1998, 38.4% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
--------------------------- -----------------------
Shares Amount Shares Amount
----------- -------------- ---------- ------------
Shares sold 681,641 $ 10,600,108 9,674,742 $141,074,274
Shares issued to
shareholders
in reinvestment
of distributions 7,181,148 99,150,661 3,486,567 48,679,629
Shares repurchased (16,313,781) (249,604,606)(3,824,235) (54,746,025)
----------- -------------- ---------- ------------
Net increase (decrease) (8,450,992) $ (139,853,837) 9,337,074 $135,007,878
=========== ============== ========== ============
25
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
---------- ------- --------------- --------------- -------------
20 S&P 500 March 1998 $ 5,252,500 $ 104,209
=============
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
Swap agreements
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
--------------------- ------------ ----------------------------------------- ----------------
<S> <C> <C> <C>
$ 11,739,113/ 5/16/98 Agreement with Morgan Stanley Capital $ (512,884)
12,663,555 Services, Inc. dated 5/13/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread and to receive
(pay) the change in market value of a
basket of selected securities
(including dividends) less the
counterparty's notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread.
</TABLE>
26
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
--------------------- ------------ ----------------------------------------- ----------------
<S> <C> <C> <C>
$ 4,111,077/ 9/11/98 Agreement with Morgan Stanley Capital (186,535)
4,354,873 Services, Inc. dated 9/8/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread and to receive
(pay) the change in market value of a
basket of selected securities
(including dividends) less the
counterparty's notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread.
----------------
Net unrealized depreciation $ (699,419)
================
</TABLE>
27
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- -------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
60.43% of distributions as net capital gain dividends.
28
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
- -------------------------------------------------------------------------------
Portfolio Managers
Mr. Richard A. Mayo, Mr. R. Jeremy Grantham and Mr. Christopher Darnell are
primarily responsible for the day-to-day management of the Fund's
portfolio. Each of these individuals has been a portfolio manager at
Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Value Fund returned 31.5% for the fiscal
year ended February 28, 1998, as compared to 35.0% for the S&P 500 and
33.7% for the Russell 1000 Value Index. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
common stocks throughout the period.
Although performance of the Fund was strong for the fiscal year, it lagged
the Russell 1000 Value Index somewhat. Contributing positively to
performance was our overweight of technology stocks. Technology stocks,
buoyed by good earnings growth and takeover activity, rose 42% for the
year. Our technology holdings included Tandem (which was acquired during
the year by Compaq) and Digital Equipment (a buyout of which by Compaq was
announced during the year). In addition, our holdings of Microsoft and
Storage Technology posted exceptionally strong gains.
Also contributing positively to performance was our underweight in oil
stocks. We maintained an underweight in these issues throughout the fiscal
year. Because of falling energy prices, oil stocks underperformed the
Russell 1000 Value Index by more than 10%.
Our underweight in financial stocks, on the other hand, contributed
negatively to the performance of the Fund compared to that of the Index.
Financial stocks benefited from a declining interest rate environment and
takeovers in the financial service industry, and the stocks rose more than
40% during the fiscal year. In addition, our utility stock holdings did not
keep pace with those in the Index. Last, our holding in Waste Management
provided disappointing returns. However, our patience with the stock has
been rewarded. After the close of the fiscal year, USA Waste agreed to
acquire Waste Management, and the stock rallied 25%.
Currently, the portfolio is well positioned in what may be a more difficult
environment for stocks. We are maintaining our overweights in both
technology and consumer discretionary stocks, focusing on low-expectation
companies that are least likely to demonstrate earnings disappointments. We
are also emphasizing medium-sized companies, as the largest stocks continue
to look significantly overpriced. Last, the Fund has a strong value
orientation, as demonstrated by both the average price to book ratio and
the average forward-looking price earnings ratio, which are trading at
discounts to the benchmark and to the overall market. These characteristics
should enable the Fund to do well in the event of market turbulence in the
current fiscal year.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
29
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Value Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 5 Year 11/13/90
--------------------------------
Class
III 31.4% 21.1% 21.0%
--------------------------------
[LINE GRAPH APPEARS HERE]
GMO Value Fund
Class III Shares S & P 500 Index
---------------- ---------------
11/13/90 $9,986 $10,000
2/28/91 $12,267 $11,677
2/29/92 $13,854 $13,544
2/28/93 $15,374 $14,987
2/28/94 $17,374 $16,236
2/28/95 $18,562 $17,431
2/29/96 $25,159 $23,479
2/28/97 $30,508 $29,621
2/28/98 $40,130 $39,989
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of Fund investments will fluctuate so that an
Investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single
class of shares that has been offered by the Fund since inception. Past
performance is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Tobacco-Free Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tobacco Free Core Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- -------------------------------------------------------------------------------
COMMON STOCKS -- 95.8%
Advertising -- 0.5%
8,500 Interpublic Group Inc 463,250
-------------
Aerospace -- 0.4%
1,000 Northrop Grumman Corp 139,000
3,900 Textron Inc 292,256
-------------
431,256
-------------
Automotive -- 3.3%
100 Bandag Inc 5,606
46,700 Ford Motor Co 2,641,468
8,200 General Motors Corp 565,288
3,100 Genuine Parts Co 114,700
-------------
3,327,062
-------------
Banking and Financial Services -- 12.3%
11,200 Ahmanson (HF) & Co 699,300
3,550 Amsouth Bancorp 199,466
13,480 Banc One Corp 761,619
1,100 Bank of New York Inc 64,419
7,400 BankBoston Corp 737,688
5,100 Bankers Trust New York Corp 603,075
6,335 Bear Stearns Inc 295,386
2,300 Beneficial Corp 271,400
8,700 Charles Schwab & Co Inc 328,425
9,264 Chase Manhattan Corp 1,149,314
1,300 Citicorp 172,250
5,900 Countrywide Credit Industry Inc 262,181
11,200 Dime Bancorp Inc 341,600
1,600 Donaldson Lufkin & Jenrette 131,000
6,850 Edwards (AG) Inc 288,128
2,200 First of America Bank Corp 170,913
7,800 Franklin Resources Inc 397,800
2,500 Golden West Financial Corp 223,125
3,600 Greenpoint Financial Corp 267,300
4,300 Hibernia Corporation, Class A 86,000
2,700 Lehman Brothers Holding Inc 170,269
14,800 Merrill Lynch 1,059,124
400 MGIC Investment Corp 29,475
11,845 Morgan Stanley Dean Witter Discover & Co 825,447
10,106 Nationsbank Corp 692,261
See accompanying notes to the financial statements.
1
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
8,300 Paine Webber Group Inc 348,600
9,100 PNC Bank Corp 505,050
500 Providian Financial Corp 28,375
100 Republic New York Corp 12,100
3,600 Summit Bancorp 178,875
9,265 Travelers Group Inc 516,524
1,300 U.S. Bancorp 149,581
4,200 Washington Mutual Inc 281,925
------------
12,247,995
------------
Chemicals -- 0.7%
2,900 Eastman Chemical Co 189,950
4,000 Great Lakes Chemical Corp 194,500
1,800 Lubrizol Corp 69,413
5,500 Union Carbide Corp 255,406
------------
709,269
------------
Computer and Office Equipment -- 1.6%
400 Computer Associates International Inc 18,850
12,500 EMC Corp 478,125
1,100 Gateway 2000 Inc 48,400
5,100 Lexmark International Group Inc * 218,025
16,700 Micron Technology Inc * 554,231
1,900 Pitney Bowes Inc 89,063
9,700 Unisys Corp * 173,388
1,700 Western Digital Corp 31,025
------------
1,611,107
------------
Construction -- 1.6%
6,400 Georgia-Pacific Corp 375,600
19,400 Home Depot Inc 1,237,962
------------
1,613,562
------------
Consumer Goods -- 4.7%
2,800 Callaway Golf Co 90,300
1,100 Colgate-Palmolive Co 89,306
8,900 Eastman Kodak Co 584,063
11,600 Fortune Brands Inc 460,375
3,950 Hasbro Inc 143,434
1,900 Jones Apparel Group Inc * 104,500
100 Liz Claiborne Inc 5,000
See accompanying notes to the financial statements.
2
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Consumer Goods -- continued
15,800 Mattel Co 668,538
11,200 Maytag Corp 504,000
1,500 Moore Corp Ltd 23,531
4,800 Newell Co 220,200
14,500 Procter and Gamble Co 1,231,593
3,600 Reebok International Ltd * 112,275
4,700 Sunbeam Corp 194,463
6,300 VF Corp 300,431
-------------
4,732,009
-------------
Electronic Equipment -- 1.8%
600 Arrow Electronics Inc 19,988
900 Cooper Industries Inc 50,513
1,000 Harris Corp 50,688
2,600 Litton Industries * 161,850
9,000 Motorola Inc 501,750
1,400 National Semiconductor Corp * 33,425
9,700 Raytheon Co, Class B 570,481
6,900 Texas Instruments 399,338
-------------
1,788,033
-------------
Environmental Control -- 0.1%
5,500 Wheelabrator Technology Inc 89,719
-------------
Food and Beverage -- 5.1%
13,700 Anheuser Busch Cos Inc 642,188
10,771 Archer Daniels Midland Co 241,674
9,800 Bestfoods 1,032,674
12,700 Coca Cola Enterprises Inc 419,894
1,100 Dean Foods Co 60,500
5,000 IBP Inc 111,563
7,400 Kellogg Co 315,425
17,100 Sara Lee Corp 966,149
7,600 Seagrams Co Ltd 288,800
11,800 Unilever NV ADR 758,888
400 Universal Foods Corp 18,000
4,900 Whitman Corp 87,281
1,300 Wrigley (William Jr) Co 99,288
-------------
5,042,324
-------------
See accompanying notes to the financial statements.
3
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Health Care -- 3.0%
400 Becton Dickinson & Co 25,450
3,200 Columbia HCA Healthcare Corp 86,800
1,300 Hillenbrand Industries Inc 73,044
19,400 Johnson & Johnson 1,464,699
4,700 Mallinckrodt Inc 182,419
6,100 McKesson Corp 317,963
4,800 Medtronic Inc 255,000
5,900 Pharmacia & Upjohn Inc 233,419
3,100 United States Surgical Corp 94,938
4,500 Wellpoint Health Network * 262,969
-------------
2,996,701
-------------
Insurance -- 3.5%
1,800 AMBAC Inc 95,850
500 Cincinnati Financial Corp 67,500
500 CNA Financial Corp * 71,969
14,500 Conseco Inc 680,594
3,900 Foundation Health Systems Inc, Class A * 107,981
1,000 MBIA Inc 73,188
1,300 Mercury General Corp 73,775
2,200 Old Republic International Corp 92,813
2,800 Progressive Corp 324,450
3,500 Reliastar Financial Corp 166,469
5,400 Safeco Corp 283,163
5,100 Saint Paul Cos Inc 451,988
12,800 Torchmark Corp 596,000
2,800 Transamerica Corp 326,025
1,100 Transatlantic Holding Inc 83,188
-------------
3,494,953
-------------
Machinery -- 1.6%
33,600 Applied Materials Inc 1,236,899
1,800 Cummins Engine Inc 104,175
1,300 FMC Corp * 94,088
1,100 Parker-Hannifin Corp 51,288
1,400 Smith International Inc * 74,550
-------------
1,561,000
-------------
Manufacturing -- 2.8%
9,800 General Electric Co 761,949
11,900 IBM Corp 1,242,805
7,800 International Game Technology 189,150
See accompanying notes to the financial statements.
4
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- ------------------------------------------------------------------------------
Manufacturing -- continued
1,900 Leggett & Platt Inc 95,356
11,900 Owens Illinois Inc * 456,663
500 Temple Inland Inc 29,813
-------------
2,775,736
-------------
Oil and Gas -- 7.0%
1,100 Apache Corp 37,400
18,000 Atlantic Richfield Co 1,399,499
2,200 BJ Services Co 75,625
2,000 Chevron Corp 162,250
1,400 Columbia Energy Group 106,838
25,100 Exxon Corp 1,603,262
1,400 Mobil Corp 101,413
2,000 Nabors Industries Inc * 45,750
11,000 Occidental Petroleum Corp 281,188
1,800 Pennzoil Co 120,488
6,000 Phillips Petroleum Co 294,000
14,800 Schlumberger Ltd 1,115,549
9,600 Texaco Inc 535,800
12,500 Union Pacific Resources Group 279,688
5,400 Unocal Corp 203,513
17,500 USX - Marathon Group 604,844
-------------
6,967,107
-------------
Paper and Allied Products -- 1.0%
4,500 Champion International Corp 229,781
2,200 Fort James Corp 99,825
6,500 Mead Corp 222,219
5,600 Sonoco Products Co 216,650
5,100 Westvaco Corp 165,750
2,900 Willamette Industries Inc 107,119
-------------
1,041,344
-------------
Pharmaceuticals -- 6.1%
31,300 Abbott Laboratories 2,341,630
1,600 Allergan Inc 56,000
18,100 Bristol Myers Squibb Co 1,813,393
4,500 Merck & Co Inc 574,031
4,300 Schering Plough Corp 327,069
5,500 Warner Lambert Co 804,374
6,000 Watson Pharmaceutical Inc 215,250
-------------
6,131,747
-------------
See accompanying notes to the financial statements.
5
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- -----------------------------------------------------------------------------
Primary Materials -- 0.2%
1,900 EVI Inc 93,219
1,100 Rubbermaid Inc 31,900
1,100 Vulcan Materials Co 110,688
--------------
235,807
--------------
Primary Processing -- 0.1%
3,400 USX-US Steel Group Inc 119,425
--------------
Printing and Publishing -- 0.1%
500 AH Belo Corp 27,375
100 Washington Post Co, Class B 49,350
--------------
76,725
--------------
Refining -- 0.7%
300 Murphy Oil Corp 14,981
10,900 Royal Dutch Petroleum 592,006
3,100 Sun Co Inc 123,806
--------------
730,793
--------------
Retail Trade -- 7.2%
12,400 Albertsons Inc 580,475
6,400 American Stores Co 161,200
8,600 Autozone Inc * 260,150
12,900 Costco Cos Inc * 630,488
7,300 Dayton Hudson Corp 564,381
6,500 Dillards Inc 231,563
3,800 Dollar General Corp 175,275
1,200 Family Dollar Stores Inc 42,750
6,600 Fred Meyer Inc 293,288
300 Fruit of the Loom Inc * 9,638
17,550 Gap Inc 784,265
41,800 Kmart Corp * 559,075
12,800 Limited Inc 371,200
7,200 Rite Aid Corp 233,100
8,900 Tandy Corp 396,050
600 Toys R Us Inc * 15,750
37,100 Wal Mart Stores Inc 1,718,193
3,200 Winn-Dixie Stores Inc 172,600
--------------
7,199,441
--------------
6 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Services -- 0.5%
400 BHC Communications Inc, Class A 55,200
1,200 Cendant Corp * 45,000
300 Fleming Cos Inc 5,344
4,600 Halliburton Company 213,900
3,300 Supervalu Inc 157,171
--------------
476,615
--------------
Technology -- 11.9%
8,700 Advanced Micro Devices Inc * 203,906
4,700 America Online Inc * 569,288
2,600 Avnet Inc 165,750
20,100 Bay Networks Inc * 680,888
60,600 Compaq Computer Corp 1,942,987
500 Computer Sciences Corp * 52,344
9,300 Dell Computer Corp 1,300,837
2,700 Grainger (WW) Inc 261,394
32,800 Intel Corp 2,941,749
33,600 Microsoft Corp 2,847,599
4,100 Teradyne Inc * 193,469
8,500 Xerox Corp 753,844
--------------
11,914,055
--------------
Telecommunications -- 8.3%
9,700 Ameritech Corp 404,369
33,700 AT & T Corp 2,051,487
14,293 Bell Atlantic Corp 1,282,796
400 Bellsouth Corp 24,400
3,800 CBS Corp 117,563
3,900 Century Telephone Enterprises Inc 237,900
8,600 GTE Corp 465,475
10,900 MCI Communications Corp 521,156
10,000 Nextel Communications Inc, Class A * 295,625
10,400 SBC Communications 786,499
2,500 Southern New England Telecommunications Corp 157,813
14,500 Sprint Corp 956,999
17,100 US West Inc 890,268
2,500 Worldcom Inc * 95,469
--------------
8,287,819
--------------
See accompanying notes to the financial statements. 7
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Transportation -- 2.2%
10,800 Burlington Northern Santa Fe Railroad Co 1,075,949
3,900 CSX Corp 218,156
4,700 FDX Corp * 299,331
6,100 Kansas City Southern Industries 226,844
2,800 UAL Corp * 238,350
1,600 USAir Group Inc * 101,300
--------------
2,159,930
--------------
Utilities -- 7.5%
11,400 AES Corp 501,600
5,400 Allegheny Energy Inc 165,038
600 Ameren Corp * 23,063
8,000 American Electric Power Inc 384,000
7,900 Baltimore Gas and Electric Co 249,344
8,000 Carolina Power and Light Co 334,000
10,400 Cinergy Corp 362,050
2,821 Citizens Utilities, Class B 26,447
4,900 CMS Energy Corp 216,825
3,500 Coastal Corp 222,688
5,900 Dominion Resources Inc 235,263
8,150 DPL Inc 148,228
4,200 DQE Inc 139,388
7,200 Duke Power Co 400,050
19,400 Edison International 535,925
19,100 Entergy Corp 552,706
5,700 Florida Progress Corp 220,519
9,100 FPL Group Inc 528,369
7,400 General Public Utilities Inc 297,388
2,000 LG&E Energy Corp 47,875
5,900 Long Island Lighting Co 182,900
2,100 New Century Energies Inc 97,913
4,500 New England Electric System 189,563
4,400 Nipsco Industries Inc 113,025
2,100 Northern States Power Co 115,369
11,200 Pacificorp 270,900
6,300 Pinnacle West Capital Corp 257,119
3,300 Southern Co 81,469
3,800 Teco Energy Inc 99,988
1,600 Texas Utilities Co 64,700
2,700 Western Resources Inc 110,700
12,300 Wisconsin Energy Corp 335,175
8 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value($)/
Shares Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities -- continued
-------------
7,509,587
-------------
TOTAL COMMON STOCKS (COST $78,291,601) 95,734,371
-------------
SHORT-TERM INVESTMENTS -- 11.0%
Cash Equivalents -- 4.0%
$1,694,667 BankBoston Eurodollar Time Deposit, 5.7875% due 3/2/98(a) 1,694,667
$ 186,667 First Union National Bank of North Carolina Eurodollar
Time Deposit, 5.6250% due 3/2/98(a) 186,667
1,054,666 Merrimac Cash Fund Premium Class(a) 1,054,666
$1,000,000 Prudential Securities Group Inc, Master Note, 5.8875% due
3/2/98(a) 1,000,000
-------------
3,936,000
-------------
Repurchase Agreements -- 6.7%
$2,411,538 Prudential Securities Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $2,412,557
and an effective yield 5.07%, collateralized by a U.S.
Government Agency Obligation with a rate of 8.50%, with a
maturity date of 10/01/26 and with a market value of
$2,459,779. 2,411,538
$4,307,288 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $4,309,108
and an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.125%, with a maturity
date of 8/15/21 and with an aggregate market value of
$4,393,434. 4,307,288
-------------
6,718,826
-------------
U.S. Government -- 0.3%
$ 300,000 U.S. Treasury Bill, 5.165%, due 5/28/98(b) 296,244
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $10,950,995) 10,951,070
-------------
TOTAL INVESTMENTS -- 106.8%
(COST $89,242,596) 106,685,441
Other Assets and Liabilities (net)-- (6.8)% (6,763,003)
-------------
TOTAL NET ASSETS-- 100% 99,922,438
=============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) Security has been segregated to cover margin requirements on open
financial futures contracts.
10 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $89,242,596) (Note 1) $106,685,441
Receivable for Fund shares sold 16,258,747
Receivable for investments sold 1,530,141
Dividends and interest receivable 138,578
Receivable for expenses waived or borne by Manager (Note 2) 17,906
------------
Total assets 124,630,813
------------
Liabilities:
Payable for investments purchased 17,930,459
Payable upon return of securities loaned (Note 1) 3,936,000
Payable for Fund shares repurchased 2,351,387
Payable to affiliate for (Note 2):
Management fee 32,054
Shareholder service fee 9,256
Payable for open swap contracts (Note 1 and 6) 405,544
Payable for variation margin on open futures contracts (Notes 1 and 6) 7,254
Accrued expenses 36,421
------------
Total liabilities 24,708,375
------------
Net assets $ 99,922,438
============
Net assets consist of:
Paid-in capital $ 75,784,865
Accumulated undistributed net investment income 223,078
Accumulated undistributed net realized gain 6,776,064
Net unrealized appreciation 17,138,431
============
$ 99,922,438
============
Net assets attributable to:
Class III shares $ 99,922,438
============
Shares outstanding:
Class III 7,114,000
============
Net asset value per share:
Class III $ 14.05
============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $1,526) $ 1,332,605
Interest (including securities lending income of $4,540) 355,240
-----------
Total income 1,687,845
-----------
Expenses:
Management fee (Note 2) 394,815
Custodian and transfer agent fees 41,642
Audit fees 35,306
Registration fees 5,134
Legal fees 1,556
Trustees fees (Note 2) 635
Miscellaneous 185
Fees waived or borne by Manager (Note 2) (218,695)
-----------
260,578
Shareholder service fee (Note 2)
Class III 118,083
-----------
Net expenses 378,661
-----------
Net investment income 1,309,184
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 10,768,116
Closed futures contracts 1,300,286
Closed swap contracts 138,889
-----------
Net realized gain 12,207,291
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 11,758,144
Open futures contracts 113,686
Open swap contracts (320,845)
-----------
Net unrealized gain 11,550,985
-----------
Net realized and unrealized gain 23,758,276
-----------
Net increase in net assets resulting from operations $25,067,460
===========
</TABLE>
See accompanying notes to the financial statements.
12
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,309,184 $ 1,068,038
Net realized gain 12,207,291 17,195,664
Change in net unrealized appreciation (depreciation) 11,550,985 (6,109,720)
----------- ------------
Net increase in net assets resulting from operations 25,067,460 12,153,982
----------- ------------
Distributions to shareholders from:
Net investment income
Class III (1,251,164) (1,070,308)
----------- ------------
Net realized gains
Class III (16,435,486) (10,440,389)
----------- ------------
(17,686,650) (11,510,697)
----------- ------------
Net share transactions: (Note 5)
Class III 26,281,193 8,132,135
----------- ------------
Increase in net assets resulting from net share
transactions 26,281,193 8,132,135
----------- ------------
Total increase in net assets 33,662,003 8,775,420
Net assets:
Beginning of period 66,260,435 57,485,015
----------- ------------
End of period (including accumulated undistributed net
investment income of $223,078 and $165,058,
respectively) $99,922,438 $66,260,435
=========== ============
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 12.98 $ 12.93 $ 10.65 $ 11.07 $ 11.35
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.22 0.24 0.28 0.23 0.34
Net realized and unrealized
gain 4.07 2.41 3.71 0.50 1.18
------- ------- ------- ------- -------
Total from investment
operations 4.29 2.65 3.99 0.73 1.52
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.22) (0.24) (0.25) (0.28) (0.35)
From net realized gains (3.00) (2.36) (1.46) (0.87) (1.45)
------- ------- ------- ------- -------
Total distributions (3.22) (2.60) (1.71) (1.15) (1.80)
------- ------- ------- ------- -------
Net asset value, end of period $ 14.05 $ 12.98 $ 12.93 $ 10.65 $ 11.07
======= ======= ======= ======= =======
Total Return/(a)/ 37.82% 22.76% 38.64% 7.36% 14.12%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $99,922 $66,260 $57,485 $47,969 $55,845
Net expenses to average
daily net assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to
average daily net assets 1.66% 1.83% 2.25% 2.52% 2.42%
Portfolio turnover rate 70% 131% 81% 112% 38%
Average broker commission
rate per equity share/(b)/ $0.0251 $0.0259 N/A N/A N/A
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the
following per share
amounts: $ 0.04 $ 0.04 $ 0.03 $ 0.03 $ 0.03
</TABLE>
/(a)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
/(b)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
See accompanying notes to the financial statements.
14
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment of substantially all of its assets in
common stocks chosen from the Wilshire 5000 Index and primarily in common
stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange which are not tobacco producing issuers.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, Class I and Class II shares
ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its
15
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $3,816,731, collateralized by cash in the amount of
$3,936,000, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the Statement
of
16
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Assets and Liabilities. Such risks involve the possibility that there is no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform, or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. See Note 6 for a summary of all open swap agreements as of
February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Distributions in excess of tax basis
earnings and profits, if any, are reported in the Fund's financial
statements as a return of capital. Differences in the recognition or
classification of income for financial statement and tax purposes which
result in temporary over-distributions for financial statement purposes are
classified as distributions in excess of net investment income or
accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
17
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14% of the amount
invested. Prior to June 1, 1996, the premium on cash purchases was .17% of
the amount invested. All purchase premiums are paid to and recorded by the
Fund as paid-in capital. This fee is allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $10,986 in purchase premiums.
There is no premium for cash redemptions, reinvested distributions or
in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .33% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .48%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $635. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$61,386,092 and $50,803,405, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
$89,359,634 $18,080,972 $755,165 $17,325,807
</TABLE>
18
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
4. Principal shareholders
At February 28, 1998, 93.6% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
--------------------------------- -------------------------------
Shares Amount Shares Amount
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 1,705,285 $ 23,536,920 1,730,490 $ 22,801,781
Shares issued to shareholders
in reinvestment of
distributions 1,411,739 17,655,036 933,753 11,510,697
Shares repurchased (1,109,228) (14,910,763) (2,002,361) (26,180,343)
=============== ================ =============== ==============
Net increase 2,007,796 $ 26,281,193 661,882 $ 8,132,135
=============== ================ =============== ==============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
--------------- --------------- ------------------ --------------------- ----------------
<S> <C> <C> <C> <C>
9 S&P 500 March 1998 $2,363,625 $101,130
================
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
19
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net
Notional Amount Expiration Unrealized
Fund/Counterparty Date Description Depreciation
--------------------- ------------ ----------------------------------------- ----------------
<S> <C> <C> <C>
$3,095,463/ 5/11/98 Agreement with NatWest Securities $ (26,086)
2,981,806 Limited dated 5/6/97 to pay (receive)
the notional amount multiplied by the
change in market value of a basket of
selected securities (including
dividends) less the counterparty's
notional amount multiplied by 6 month
LIBOR adjusted by a specified spread
and to receive (pay) the notional
amount multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread.
3,724,764/ 5/16/98 Agreement with Morgan Stanley Capital (162,736)
4,018,085 Services, Inc. dated 5/13/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread and to receive
(pay) the change in market value of a
basket of selected securities
(including dividends) less the
counterparty's notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread.
</TABLE>
20
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Notional Amount Expiration Unrealized
Fund/Counterparty Date Description Depreciation
--------------------- ------------ ----------------------------------------- ----------------
<S> <C> <C> <C>
$2,221,149/ 9/11/98 Agreement with Morgan Stanley Capital $(100,792)
2,353,309 Services, Inc. dated 9/8/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread and to receive
(pay) the change in market value of a
basket of selected securities
(including dividends) less the
counterparty's notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread.
1,481,251/ 9/19/98 Agreement with Morgan Stanley Capital (115,930)
1,378,812 Services, Inc. dated 9/16/97 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread and to receive
(pay) the counterparty's notional
amount multiplied by the return on the
Russell 2000 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted
by a specified spread.
================
Net unrealized depreciation $(405,544)
================
</TABLE>
21
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
56.83% of distributions as net capital gain dividends.
22
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily
responsible for the day-to-day management of the Fund's portfolio. Each of
these individuals has been a portfolio manager at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Tobacco-Free Core Fund returned 37.8% for
the fiscal year ended February 28, 1998, as compared to 35.0% for the S&P
500. Consistent with the Fund's investment objective and policies, the Fund
was invested substantially in common stocks throughout the period.
The Fund's outperformance of the benchmark is attributed to strong stock
selection, especially within the technology and non-bank financial sectors,
as well as the Fund's lack of exposure to tobacco stocks, which
underperformed dramatically during the period. Sector selection strategies
posted neutral results for the year, as the losses from the Fund's
overweights in electric utilities and small capitalization stocks were
offset by the gains from the Fund's overweight in long distance telephone
companies and underweight in defensive, high growth stocks.
During the year, the Fund's fair value and momentum stock selection
strategies worked successfully in identifying stocks for inclusion in the
Fund's portfolio. The Fund's technology stock holdings, including Dell and
Compaq, contributed to strong performance for the portfolio. Dell was
selected for inclusion in the portfolio based on its attractive valuation
by the momentum strategy, while Compaq earned inclusion based on positive
valuations on both the fair value and momentum strategies. These strategies
were also successful in selecting non-bank financial stocks. The Fund's
value added within this sector came primarily from its overweight in large
brokerage firms, which benefited from merger activity and record market
returns.
With respect to sector selection, the Fund employed a strategy of
overweighting electric utilities. These stocks appeared significantly
undervalued relative to their historic levels. This strategy worked against
the Fund during the year's record setting returns, as utilities
significantly underperformed for the majority of the year. Some early
losses were partially offset in the fourth quarter of 1997, as electric
utilities strongly outperformed the market during the flight to quality
following October's market turbulence. The Fund's strategy of overweighting
small capitalization stocks also detracted from performance. Small
capitalization stocks, as represented by the Russell 2000 index,
underperformed the S&P 500 by 5.1% during the year.
These losses were partially offset by gains from the Fund's strategy of
overweighting long distance telephone companies, including AT&T and MCI,
which significantly outperformed during the period. The Fund also benefited
from its strategy of underweighting defensive, high growth companies such
as Coca-Cola and Gillette. Since the beginning of the fiscal year, these
stocks have looked overvalued, and we continue to underweight them in the
portfolio. Finally, the Fund's lack of exposure to tobacco stocks, which
underperformed the S&P 500 by 1.8% during the period, also contributed
positively to performance.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
The risk control enhancements that we implemented in 1996 contributed
positively to performance in 1997, by limiting our sector under- or
overweights. These control features limited our overweight in technology
stocks in a volatile year for the sector. We expect to continue to benefit
from the enhanced controls going into another volatile year.
Outlook
The Fund is typically overweight in high quality stocks as defined using a
GMO measure that focuses on high, stable return on equity and low debt
ratios. However, we are now about 1% underweight in this group as these
stocks appear to be overvalued. In particular the market is paying a
premium for high return on equity that we feel is excessive.
The Fund's overweight in utility stocks, which is in companies with good
fundamental prospects in the continuing deregulatory environment, remains
unchanged. We continue to believe that smaller stocks have more attractive
valuation levels than the largest stocks. We have moved from a 5%
underweight to an 8% underweight in the largest 100 stocks, and continue to
maintain a weight of 7% to 8% in small, value stocks.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Tobacco-Free Core Fund Class III Shares and the S&P 500 Index
As of February 28,1998
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 5 Year 10/31/91
--------------------------------
Class
III 37.6% 23.4% 21.2%
--------------------------------
[LINE GRAPH APPEARS HERE]
GMO Tobacco-Free
Core Fund S&P 500 Index
---------------- -------------
10/31/91 $9,986 $10,000
2/29/92 $10,548 $10,631
2/28/93 $11,728 $11,764
2/28/94 $13,384 $12,744
2/28/95 $14,367 $13,682
2/29/96 $19,919 $18,430
2/28/97 $24,453 $23,251
2/28/98 $33,701 $31,389
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Fundamental Value Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Fundamental Value Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 90.2%
Advertising -- 0.1%
6,000 Cordiant Communications Group PLC ADR 54,750
6,000 Saatchi & Saatchi Plc ADR * 57,000
--------------
111,750
--------------
Aerospace -- 0.1%
2,500 Boeing Company 135,625
--------------
Automotive -- 1.9%
5,000 Chrysler Corp 194,688
16,500 General Motors Corp 1,137,469
50,000 Mascotech Industries Inc 1,037,500
--------------
2,369,657
--------------
Banking and Financial Services -- 9.6%
17,500 American Express Co 1,576,094
60,000 Block (HR) Inc 2,823,749
22,500 Chase Manhattan Corp 2,791,405
18,500 Citicorp 2,451,249
45,000 Travelers Group Inc 2,508,749
--------------
12,151,246
--------------
Chemicals -- 0.2%
15,000 Engelhard Corp 271,875
--------------
Computer and Office Equipment -- 0.5%
70,000 Intergraph Corp * 682,508
--------------
Consumer Goods -- 3.1%
10,000 Black and Decker Corp 503,750
35,000 Eastman Kodak Co 2,296,874
7,500 Groupe Danone ADR 299,063
20,000 Maytag Corp 900,000
--------------
3,999,687
--------------
Electronic Equipment -- 0.9%
30,000 International Rectifier Corp * 436,875
25,000 National Semiconductor Corp * 596,932
5,000 Stewart & Stevenson Services Corp 122,188
--------------
1,155,995
--------------
See accompanying notes to the financial statements. 1
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Food and Beverage -- 3.4%
40,000 Anheuser Busch Cos Inc 1,874,999
25,000 Fresh Delaware Monte Produce Inc * 385,938
22,500 Nestle SA ADR 1,970,052
5,000 Wendy's International Inc 108,438
--------------
4,339,427
--------------
Health Care -- 1.5%
12,500 Baxter International Inc 707,813
25,000 Beverly Enterprises Inc * 379,688
10,000 Haemonetics Corp * 166,875
2,500 Johnson & Johnson 188,750
20,000 Owens and Minor Holdings Co 355,000
5,625 Quest Diagnostics Inc * 87,188
--------------
1,885,314
--------------
Insurance -- 5.5%
5,000 Aetna Life and Casualty Co 436,875
15,000 Allstate Corp 1,398,750
17,500 Chartwell Re Corp 535,938
60,000 Reliance Group Holdings Inc 1,020,000
35,000 Sedgwick Group ADR 439,688
90,000 TIG Holdings Inc 2,390,624
65,000 Willis Corroon Group Plc ADR 763,750
--------------
6,985,625
--------------
Machinery -- 0.9%
25,000 Cincinnati Milacron Inc 771,875
2,500 FMC Corp * 180,938
10,000 Pall Corp 209,375
--------------
1,162,188
--------------
Manufacturing -- 9.0%
10,000 American Greetings Corp 456,250
15,000 Clayton Homes Inc 298,125
50,000 Corning Inc 2,031,249
25,000 General Electric Co 1,943,749
15,000 Griffon Corp * 246,563
25,000 IBM Corp 2,610,937
50,000 Owens Corning 1,543,750
12,500 Rockwell International Corp 756,250
15,000 Tenneco Inc 616,875
10,000 United Technologies Corp 893,125
--------------
11,396,873
--------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Metals and Mining -- 0.6%
25,000 Amcol International Corp 356,250
5,000 Newmont Mining Corp 144,688
12,500 Pittston Minerals Group 109,375
10,000 Placer Dome Inc 128,750
--------------
739,063
--------------
Oil and Gas -- 6.0%
5,000 Amerada Hess Corp 296,563
15,000 Cabot Oil & Gas Corp, Class A 315,000
25,000 EEX Corp * 214,063
25,000 Enron Oil & Gas 534,375
50,000 Gulf Canada Resources Ltd * 293,750
25,000 Lasmo Plc ADR 339,063
25,000 Mitchell Energy, Class B 685,938
50,000 Occidental Petroleum Corp 1,278,125
5,000 Texaco Inc 279,063
5,000 Total SA ADR 276,563
15,000 Union Texas Petroleum Holdings Inc 302,813
25,000 Unocal Corp 942,188
25,000 USX - Marathon Group 864,063
40,000 Westcoast Energy Inc 1,010,000
--------------
7,631,567
--------------
Paper and Allied Products -- 1.8%
5,000 Champion International Corp 255,313
32,500 Fort James Corp 1,474,688
5,000 International Paper Co 233,125
7,500 Weyerhaeuser Co 374,531
--------------
2,337,657
--------------
Pharmaceuticals -- 2.7%
35,000 Lilly (Eli) & Co 2,303,437
15,000 Medpartners Inc * 180,000
25,000 Mylan Laboratories Inc 509,375
7,500 Smithkline Beecham PLC ADR 464,063
--------------
3,456,875
--------------
Primary Processing -- 0.3%
2,500 Du Pont (EI) De Nemours & Co 153,281
5,000 USX-US Steel Group Inc 175,625
--------------
328,906
--------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Real Estate -- 5.7%
50,000 Amli Residential Properties Trust 1,125,000
25,000 Crown American Realty Trust 231,250
70,000 JP Realty Inc 1,758,749
25,000 Simon Debartolo Group Inc 771,875
75,000 Summit Properties Inc 1,518,750
10,000 Tower Realty Trust Inc 235,000
37,500 United Dominion Realty Trust 525,000
45,000 Walden Residential Properties Inc 1,113,750
--------------
7,279,374
--------------
Refining -- 0.1%
10,000 Quaker State Corp 151,250
--------------
Retail Trade -- 5.1%
10,000 Costco Cos Inc * 488,750
40,000 Federated Department Stores * 1,874,999
35,000 Sears Roebuck & Co 1,857,187
25,000 Toys R Us Inc * 656,250
35,000 Wal Mart Stores Inc 1,620,937
--------------
6,498,123
--------------
Services -- 4.3%
12,500 Hilton Hotels Corp 372,656
15,000 Manpower Inc 632,813
15,000 Pinkertons Inc 345,000
150,000 Waste Management Inc 3,749,999
50,000 Waste Management International PLC ADR * 303,125
--------------
5,403,593
--------------
Technology -- 7.7%
7,500 Avnet Inc 478,125
45,000 Compaq Computer Corp 1,442,813
25,000 Data General Corp * 515,625
40,000 Digital Equipment Corp * 2,277,499
37,500 Information Resources Inc * 525,000
10,000 Intel Corp 896,875
25,000 Novell Inc * 262,890
40,000 Storage Technology Corp * 2,729,999
7,500 Xerox Corp 665,156
--------------
9,793,982
--------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Telecommunications -- 5.4%
25,000 CBS Corp 773,438
15,000 Cox Communications, Class A * 578,438
50,000 GTE Corp 2,706,249
2,500 SBC Communications 189,081
20,000 US West Inc 1,041,250
50,000 US West Media Group * 1,609,375
--------------
6,897,831
--------------
Tobacco -- 0.4%
35,000 Imperial Tobacco Group Plc ADR 485,219
--------------
Transportation -- 3.1%
7,500 AMR Corp * 949,219
35,000 Canadian Pacific 999,688
5,000 Delta Air Lines Inc 565,313
10,000 Ryder System Inc 366,875
12,500 Sabre Group Holding Inc * 412,500
10,000 USAir Group Inc * 633,125
--------------
3,926,720
--------------
Utilities -- 10.3%
20,000 Cinergy Corp 696,250
37,500 DPL Inc 682,031
25,000 Duke Power Co 1,389,063
40,000 Entergy Corp 1,157,500
20,000 Firstenergy Corp 578,750
50,000 Houston Industries Inc 1,293,750
10,000 Illinova Corp 277,500
75,000 Niagara Mohawk Power Corp * 960,938
30,000 Pacificorp 725,625
25,000 Public Service Enterprise Group Inc 806,250
20,000 Southern Co 493,750
65,000 Texas Utilities Co 2,628,437
25,000 TransCanada Pipeline Ltd 564,063
25,000 Unicom Corp 801,563
--------------
13,055,470
--------------
TOTAL COMMON STOCKS (COST $77,193,328) 114,633,400
--------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS -- 4.4%
Metals and Mining -- 0.8%
47,500 Freeport McMoran Corp $0.34 1,056,875
-------------
Pharmaceuticals -- 0.3%
25,000 Medpartners Inc 6.5% 357,813
-------------
Primary Processing -- 0.2%
5,000 Armco Inc Convertible $3.625 240,000
-------------
Refining -- 1.1%
25,000 Unocal Corp Convertible 6.25% 144A 1,384,375
-------------
Services -- 0.4%
25,000 International Technology Corp Convertible 7.00% 540,625
-------------
Telecommunications -- 0.6%
12,500 Sprint Corp Convertible 8.25% 687,500
-------------
Transportation -- 1.0%
25,000 Navistar International Corp $6.00 1,267,188
-------------
TOTAL PREFERRED STOCKS (COST $5,768,241) 5,534,376
-------------
DEBT OBLIGATIONS -- 1.9%
Health Care -- 1.2%
$2,500,000 Roche Holdings Inc, 0.00% due 4/20/10 1,512,500
-------------
Oil and Gas -- 0.7%
$1,000,000 Noram Energy Corp, 6.00% due 3/15/12 942,500
-------------
TOTAL DEBT OBLIGATIONS (COST $1,895,971) 2,455,000
-------------
SHORT-TERM INVESTMENTS -- 11.5%
Cash Equivalents -- 8.5%
$2,370,970 BankBoston Eurodollar Time Deposit, 5.7875% due 3/2/98/(a)/ 2,370,970
$ 510,606 First Union National Bank of North Carolina Eurodollar
Time Deposit, 5.6250% due 3/2/98/(a)/ 510,606
2,884,924 Merrimac Cash Fund Premium Class/(a)/ 2,884,924
$5,000,000 Prudential Securities Group Inc, Master Note, 5.8875% due
3/2/98/(a)/ 5,000,000
-------------
10,766,500
-------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- 3.0%
$3,845,682 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $3,874,307
and an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.125%, with a maturity
date of 8/15/21 and with a market value of $3,922,596. 3,845,682
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $14,612,182) 14,612,182
-------------
TOTAL INVESTMENTS -- 108.0%
(COST $99,469,722) 137,234,958
Other Assets and Liabilities (net) -- (8.0)% (10,198,675)
-------------
TOTAL NET ASSETS -- 100% $ 127,036,283
=============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional investors.
* Non-income producing security.
/(a)/ Represents investments of security lending collateral
(Note 1).
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $99,469,722) (Note 1) $137,234,958
Receivable for investments sold 324,910
Dividends and interest receivable 349,474
Receivable for expenses waived or borne by Manager (Note 2) 18,634
------------
Total assets 137,927,976
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 10,766,500
Payable to affiliate for (Note 2):
Management fee 71,446
Shareholder service fee 13,424
Accrued expenses 40,323
------------
Total liabilities 10,891,693
------------
Net assets $127,036,283
============
Net assets consist of:
Paid-in capital $ 69,989,128
Accumulated undistributed net investment income 389,111
Accumulated undistributed net realized gain 18,892,808
Net unrealized appreciation 37,765,236
------------
$127,036,283
============
Net assets attributable to:
Class III shares $127,036,283
============
Shares outstanding:
Class III 10,655,373
============
Net asset value per share:
Class III $ 11.92
============
8 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of withholding taxes of $13,810) $ 4,578,330
Interest (including securities lending income of $26,024) 345,383
-----------
Total income 4,923,713
-----------
Expenses:
Management fee (Note 2) 1,425,989
Custodian and transfer agent fees 46,816
Audit fees 35,422
Registration fees 7,188
Legal fees 3,911
Trustees fees (Note 2) 1,796
Miscellaneous 1,376
Fees waived or borne by Manager (Note 2) (381,705)
-----------
1,140,793
Shareholder service fee (Note 2)
Class III 284,344
-----------
Net expenses 1,425,137
-----------
Net investment income 3,498,576
-----------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 70,085,215
-----------
Net realized gain 70,085,215
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (21,715,271)
-----------
Net unrealized loss (21,715,271)
-----------
Net realized and unrealized gain 48,369,944
-----------
Net increase in net assets resulting from operations $51,868,520
===========
See accompanying notes to the financial statements. 9
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 3,498,576 $ 4,658,349
Net realized gain 70,085,215 18,434,364
Change in net unrealized appreciation (depreciation) (21,715,271) 17,227,189
------------ ------------
Net increase in net assets resulting from operations 51,868,520 40,319,902
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (4,080,386) (4,445,572)
------------ ------------
Net realized gains
Class III (60,475,201) (17,043,498)
------------ ------------
(64,555,587) (21,489,070)
------------ ------------
Net share transactions: (Note 5)
Class III (92,859,874) 1,324,046
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (92,859,874) 1,324,046
------------ ------------
Total increase (decrease) in net assets (105,546,941) 20,154,878
Net assets:
Beginning of period 232,583,224 212,428,346
------------ ------------
End of period (including accumulated undistributed net
investment income of $389,111 and $938,206,
respectively) $127,036,283 $232,583,224
============ ============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 16.33 $ 15.04 $ 12.54 $ 12.49 $ 11.71
--------- --------- -------- --------- --------
Income from investment operations:
Net investment income 0.35 0.33 0.37 0.34 0.27
Net realized and
unrealized gain 3.90 2.53 3.26 0.55 1.64
--------- -------- -------- --------- --------
Total from investment
operations 4.25 2.86 3.63 0.89 1.91
--------- -------- -------- --------- --------
Less distributions to shareholders:
From net investment
income (0.38) (0.32) (0.37) (0.32) (0.28)
From net realized gains (8.28) (1.25) (0.76) (0.52) (0.85)
--------- -------- -------- --------- --------
Total distributions (8.66) (1.57) (1.13) (0.84) (1.13)
--------- -------- -------- --------- --------
Net asset value, end
of period $ 11.92 $ 16.33 $ 15.04 $ 12.54 $ 12.49
========= ======== ======== ========= ========
Total Return/(a)/ 30.43% 20.03% 29.95% 7.75% 16.78%
Ratios/Supplemental Data:
Net assets, end of
period (000's) $127,036 $232,583 $212,428 $ 182,871 $147,767
Net expenses to average
daily net assets 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income
to average daily net
assets 1.84% 2.15% 2.61% 2.84% 2.32%
Portfolio turnover rate 21% 25% 34% 49% 65%
Average broker
commission rate per
equity share/(b)/ $ 0.0670 $ 0.0590 N/A N/A N/A
Fees and expenses
voluntarily waived
or borne by the
Manager consisted of
the following per
share amounts: $ 0.04 $ 0.02 $ 0.01 $ 0.01 $ 0.01
</TABLE>
/(a)/Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
/(b)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Fundamental Value Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks long-term capital growth through investment primarily in
equity securities.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, Class I and Class II shares
ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
12
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain member firms of the New York
Stock Exchange. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. As with other extensions of credit, the Fund may bear
the risk of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. The Fund receives
compensation for lending its securities. At February 28, 1998, the Fund
loaned securities having a market value of $10,440,636, collateralized by
cash in the amount of $10,766,500, which was invested in short-term
instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for partnership interests.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
--------------------- ------------------------- --------------------
$32,715 $(32,715) --
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
13
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The Manager may waive such premium to the extent that a
transaction results in minimal brokerage and transaction costs to the Fund.
All purchase premiums are paid to and recorded by the Fund as paid-in
capital. This fee is allocated relative to each class' net assets on the
share transaction date. Purchase premiums are included as part of each
class' "shares sold" as summarized in Note 5. For the year ended February
28, 1998, the Fund received $150 in purchase premiums. There is no premium
for cash redemptions, reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .60% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .75%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $1,796. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
14
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$38,530,662 and $194,752,575, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------------- --------------------- ------------------------ ---------------------
<S> <C> <C> <C>
$99,561,728 $40,643,636 $2,970,406 $37,673,230
</TABLE>
4. Principal shareholders
At February 28, 1998, 99.9% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1998 February 28, 1997
--------------------------------- -------------------------------
Shares Amount Shares Amount
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 5,670 $ 100,000 7,028 $ 107,000
Shares issued to shareholders
in reinvestment of distributions 5,160,848 61,023,843 1,161,012 17,805,046
Shares repurchased (8,757,323) (153,983,717) (1,045,307) (16,588,000)
=============== ================ =============== ===============
Net increase (decrease) (3,590,805) $ (92,859,874) 122,733 $ 1,324,046
=============== ================ =============== ===============
</TABLE>
15
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
83.34% of distributions as net capital gain dividends.
16
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Manager
Mr. Richard Mayo is responsible for the management of the GMO Fundamental
Value Fund. Mr. Mayo has been a portfolio manager with GMO since its
founding in 1977 and began his career in the late 1960's.
Management Discussion and Analysis of Fund Performance
The Investing Environment
The investing environment has been quite volatile the last six months of
the year. The emergence of the financial crisis in Southeast Asia and its
potential impact has generated much greater volatility in the U.S. stock
market and rotation within the market has increased. Our performance
reflects a shift in our assessment of the risks in the financial markets
due to some probable economic stress and concern about the increase in risk
in the economic environment that could add additional pressure to profit
margins. However, at the present time, investors do not share our view.
This was even highlighted by Alan Greenspan in testimony at a congressional
hearing: "Lenders and investors in the stock market are demanding less in
the way of protection against risks by historical standards."
Our behavior in the market has been influenced by our belief that we may be
near the end of the rise in profit margins that have been dramatic in this
cycle. After-tax profit margins have reached 6.4% up from the low of 3.9%.
The dilemma is that the present level of the stock market requires
continued increases. According to our valuation formula investors are
expecting earnings to grow 8.0-9.0% annually for the next ten years
(assuming present interest rates). If revenues grow at the present rate of
5.0%, profit margins must rise to 7.3%. We think this is unlikely for a
series of reasons. Restructuring and downsizing benefits may have been
fully exploited. The favorable cost environment, specifically labor
expenses, may be shifting unfavorably (see the graph below). The strength
of the dollar reduces the value of foreign profits, and the economic
dislocations in Southeast Asia, as well as the anemic growth in Japan, are
beginning to impact the profitability of more U.S. companies. IBM,
Motorola, Intel and Compaq are just a few of the companies that have
discussed the negative impact. There will be more.
17
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
U.S. Employment Cost Index
(% Year-Over-Year)
[A LINE GRAPH DEPICTING THE PERCENTAGE GROWTH OF U.S. EMPLOYMENT COST INDEX FROM
1980 TO 1998 APPEARS HERE.]
We think profit growth this year will be less than 5.0% and this would be
disappointing to investors. Presently, if we used the Federal Reserve
market model, stocks are approximately 18% overvalued and any doubts about
profitability may create reactions in the market similar to the sell off in
August and October of 1997.
Fed's S&P 500 Valuation Model
(percent)
[A LINE GRAPH DEPICTING THE FEDERAL RESERVE S&P 500 VALUATION MODEL FROM 1980 TO
1998 APPEARS HERE.]
We have tried to build a portfolio that does better in a difficult
environment and our experiences in August and October were encouraging. Our
return of -1.59% was a 4.01% gain over the S&P's 5.60% decline in August.
This was due mainly to the recovery in small stocks that started in August
and continued to the first of October. At that point we started reducing
this segment due to the major advances of some of the stocks, but also due
to the fear that smaller companies would be penalized in a more difficult
market because of their lower liquidity.
18
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Fundamental Value Fund
As of February 28, 1998
Fundamental
Value Fund* S&P 500
----------- -------
RISK
Beta 0.89 1.00
% of LT Debt to Capital 47% 42%
LIQUIDITY
Market Cap ($000) 25,642 61,300
PROFITABILITY
Return on Equity 13.0% 19.0%
Return on Capital 7.3% -
EBITDA Margin 17.8% 16.9%
Net Profit Margin 5.8% 6.5%
Earnings 5 Yr Hist Gr Rate 19% 15%
VALUATION
Price/Earnings Trailing 4 Qtrs 18.0 23.3
Price to Cashflow 9.3 13.7
Price to Book 2.5 4.0
Price to Sales 1.07 1.66
Dividend Yield 2.2% 1.5%
* Equally Weighted
Looking at the characteristics of the present portfolio you can see we have
maintained a risk profile (measured by beta) that is less than the market.
In addition we have gravitated to stocks with low expectations to avoid the
penalty of disappointments. We are expecting improvement in our selections
but favorable performance may require some patience -- something investors
don't have at the moment. In other words, at this stage of the market we
think there is more to gain by investing in stocks that can still improve
long term returns on capital and possibly experience a positive valuation
change, rather than invest in those companies that have improved and the
stock price reflects the change without a discount for some cyclical
erosion.
In the chart you can also see we own stocks with market caps significantly
below average. For the last year we have maintained our bias against the
"Mega Fifty" stocks. Very simply, we think their valuations are at extreme
levels and are unlikely to produce good returns going forward. Our view has
not been shared by the majority of investors and they have continued to do
better than the market. The fifty largest stocks exceeded the S&P by 5.5%
in 1997, and in 1998 through February they are 1.5% ahead. Our fears are
expressed in the charts below. The out-performance is demonstrated in the
top chart and the valuation measures in the charts below show the very high
levels versus the past. These stocks are perceived as safe havens but given
their lofty valuations we don't think
19
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
they will give the protection expected in a market sell off. They did not
in August and October of last year.
Exhibit 3. The Biggest Have Outperformed For a Number of Years.
Biggest 50 Stocks/Large-Cap Universe --
Cumulative Relative Performance
[LINE GRAPH APPEARS HERE]
Source: Prudential Securities, Inc.
Price/Sales
[LINE GRAPH APPEARS HERE]
Source: Compusheet; Prudential Securities, Inc.
Price/Cash Flow
[LINE GRAPH APPEARS HERE]
Source: Compusheet; Prudential Securities, Inc.
Return on Equity
(ROE)
[LINE GRAPH APPEARS HERE]
Source: Compusheet; Prudential Securities, Inc.
We hope to make money with an eclectic portfolio that excludes very
overvalued areas (the Mega Fifty) and sectors that are experiencing profit
declines -- segments of technology and major energy companies. We can't
find any sectors that are significantly undervalued comparable to last
year. At the beginning of 1997 we were buying all the cable TV stocks
thinking they were 30-40% undervalued, adding to our small stock exposure,
and accumulated electric utilities and telephone companies into the second
quarter. The cable TV stocks have doubled in the last 12 months. Small
stocks, the utilities and telephone companies underperformed for the year
but each had a quarter of major outperformance; small stocks in the third
quarter and telephone and utility stocks were up 17% vs. the S&P gain of
2.87%. Due to these price moves we have cut back in these areas and in
technology as well. The technology sector outperformed the group (i.e.,
Microsoft, Cisco and Dell Computer) and we took profits aggressively as our
concerns about deteriorating profitability were reinforced by negative
earnings estimate revisions caused by slowing final demand aggravated by
the major exposure to Southeast Asia.
20
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
With the funds generated from these profits we have responded
opportunistically. We are waiting for good risk reward situations to
present themselves to add to good values presently in the portfolio. Waste
Management Inc. was a major frustration in the last year. We were too
optimistic about its potential profitability improvement and getting a new
chief executive proved troublesome. First they hired the former president
of Sprint. Unfortunately he left after three months so for five months the
company has been led by an interim CEO, a man with excellent capabilities,
but the market required more certainty. We stayed with the investment
believing margins that were 40% below the top tier in the industry, could
be improved by a new and motivated management. The stock sold off
dramatically in October and January and each time we added to the position.
This poor performance cost the portfolio 1.5% relatively. Patience was
rewarded in March. USA Waste, the most profitable waste services company
has agreed to acquire Waste Management and the stock has rallied 25%,
recapturing half of last year's performance.
Another sector ignored last year was retail. For instance, Federated
Department Stores was ignored in the first half providing an opportunity to
buy the stock at 14 times earnings (the market at the time was 20 times
earnings) with no hint of profit difficulties. A more controversial
opportunity occurred in October when Sears announced it was experiencing a
dramatic increase in credit card charge offs. The stock, which peaked at
$65.00 per share in early summer dropped as low as $40.00 per share in
October. This allowed us the opportunity to buy the stock at 15 times a
worst case scenario, which now seems to be an exaggerated fear. The stock
has rebounded recently to $50.00 per share. More recently Toys-R-Us
declined precipitously and reduced earnings expectations. We responded
similarly to the Sears situation, encouraged by the company's announced $1
billion stock buyback. The Toys-R-Us situation will probably not be as good
as Sears and Federated, but the risk-reward at its lows looked very
attractive.
Another success in the past year was Digital Equipment. We had bought the
stock earlier but were convinced to add significantly to the position when
the stock traded down to $25.00 per share. Our analysis suggested the
company's assets were worth at least $50.00 per share. In December Compaq
confirmed our analysis by announcing a merger worth $60.00 per share at the
time.
I have mentioned these examples because they reflect the types of
situations we are trying to find today to put in the portfolio which are
low expectation opportunities where perceptions are excessively negative.
The chances of improvement in profitability have risen (without paying for
it) and the value of the companies' assets may be worth more to a strategic
buyer limiting the downside risk.
Data General is an example like Digital Equipment, and Occidental Petroleum
could attract the attention of a larger oil company that is struggling to
grow revenues in an environment of declining oil prices.
21
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Listed below are the major additions or increases in the last six months
and they are opportunities created by the rotational aspects of the market.
That is, if it appears not to be a short-term performer, sell it and go to
where the action is.
Federated Department Stores
Sears Roebuck
Corning
Occidental Petroleum
Unicom
Stewart & Stevenson
Our experience to date is that good investments are created and interest
can shift quickly. A great example is Electronics for Imaging. The stock in
1997 went from $52.00 to $14.00 (earnings were very disappointing but this
was due to an inventory adjustment by its customers). The inventory shift
is almost over and the stock has doubled in three months.
We will keep looking for opportunities but think they will be more limited
so we will concentrate the portfolio in fewer positions. This has and will
create more volatility in month to month relative performance particularly
when the major market cap stocks make a major move like they did in January
to mid February. We fear this less going forward because the market has
obviously broadened in March and good values with potential catalysts or
favorable news are clearly doing well in the present market phase. However,
risk must not be ignored. The concentration of 1997 may erode in 1998
giving us a better opportunity for picking stocks.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
22
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Fundamental Value Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
---------------------------------
Average Annual Total Return
---------------------------------
Since
Inception
1 Year 5 Year 10/31/91
---------------------------------
Class
III 30.2% 20.6% 20.3%
---------------------------------
[LINE GRAPH APPEARS HERE]
GMO Fundamental S&P 500
Date Value Fund Index
---- --------------- -------
10/31/91 $9,985 $10,000
2/29/92 $10,870 $10,631
2/28/93 $12,571 $11,764
2/28/94 $14,680 $12,744
2/28/95 $15,818 $13,682
2/29/96 $20,554 $18,430
2/28/97 $24,671 $23,251
2/28/98 $32,178 $31,389
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
Investor's shares, when redeemed, may be worth more or less than their original
cost. The total return would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Small Cap Growth Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Small Cap Growth Fund at
February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.6%
Advertising -- 0.0%
6,100 CKS Group Inc * 115,900
-------------
Aerospace -- 1.2%
20,400 AAR Corp 619,650
7,900 BE Aerospace Inc * 232,556
26,300 Gencorp Inc 716,675
16,400 Orbital Sciences Corp * 625,250
26,100 Thiokol Corp 2,495,812
-------------
4,689,943
-------------
Automotive -- 0.7%
34,900 Arvin Industries Inc 1,382,913
21,900 Mascotech Industries Inc 454,425
36,000 Wabash National Corp 1,068,750
-------------
2,906,088
-------------
Banking and Financial Services -- 5.6%
32,300 Americredit * 882,194
31,000 Amresco Inc * 1,046,250
2,677 Associated Banc Corp 140,208
4,800 Astoria Financial Corp 268,200
35,620 BOK Financial Corporation 1,749,833
15,250 Comdisco Inc 635,734
12,800 Deposit Guaranty Corp 709,600
21,700 Dime Bancorp Inc 661,850
20,400 Eaton Vance Corp 847,875
2,700 First Citizens Bancshares, Class A 313,200
700 First Empire State Corp 330,400
12,300 First Federal Financial Corp * 496,613
11,180 First Financial Bancorp 610,708
4,500 Fund American Enterprises Holdings 588,375
41,400 Golden State Bancorp * 1,474,875
10,300 Jefferies Group Inc 456,419
17,333 Legg Mason Inc 1,035,647
14,100 Mercantile Bankshares 493,940
9,900 National Commerce Bancorp 372,488
68,600 Northfork Bancorp 2,345,262
8,200 Onbancorp Inc 595,525
See accompanying notes to the financial statements. 1
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
18,400 Park District National Corp 1,598,500
21,600 Piper Jaffray Inc 793,800
13,100 Provident Financial Group 671,375
12,200 Raymond James Financial Corp 486,475
24,750 St. Paul Bancorp Inc 655,875
8,800 Sumitomo Bank Of California 411,400
31,100 The Trust Company of N. J. 851,363
23,300 Value Line Inc 978,600
--------------
22,502,584
--------------
Chemicals -- 1.6%
44,600 Albemarle Corp 1,087,125
18,800 Crompton & Knowles Corp 566,350
18,900 Cytec Industries Inc * 923,738
7,100 Dexter Corp 288,438
44,200 Kaiser Aluminum Corp * 433,713
54,600 Macdermid Inc 1,904,174
88,600 Nl Industries Inc * 1,317,925
--------------
6,521,463
--------------
Communications -- 0.0%
1,100 NTL Inc * 36,575
--------------
Computer and Office Equipment -- 2.1%
27,000 Apple Computer Inc * 637,875
18,060 Comverse Technology Inc * 844,305
29,500 Intergraph Corp * 287,625
15,400 Lexmark International Group Inc * 658,350
17,100 Sequent Computer Inc * 362,306
27,900 Stratus Computer Inc * 1,400,231
33,400 Telxon Corp * 780,725
193,900 Unisys Corp * 3,465,962
--------------
8,437,379
--------------
Construction -- 2.4%
37,300 Centex Corp 2,725,230
27,100 Horton (DR) Inc 631,769
30,900 Kaufman & Broad Home Corp 799,538
58,800 McDermott International Inc 2,315,249
134,100 Standard Pacific Corp 2,321,605
12,400 Texas Industries Inc 700,600
--------------
9,493,991
--------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Consumer Goods -- 5.2%
46,500 Furniture Brands International Inc * 1,272,938
64,000 Genesco Inc * 880,000
15,800 Gulf South Medical Supply Inc * 570,775
35,800 Hartmarx Corp * 290,875
30,900 Hon Industries Inc 2,031,674
15,300 Jones Apparel Group Inc * 841,500
40,500 Miller Herman Inc 2,480,624
25,800 N. E. Business SVC Inc 822,375
52,700 O'Sullivan Industries Holdings Inc * 602,756
9,000 Oneida LTD 240,750
32,300 Oxford Industries Inc 1,017,450
16,000 Pittston Brinks Group 618,000
18,700 Russ Berrie and Co 521,263
13,500 Samsonite Corp * 445,500
12,800 Scotts Company, Class A * 435,200
31,800 Technology Data Corp * 1,478,700
50,200 Timberland Co * 3,639,499
13,000 Unifi Inc 477,750
46,100 US Industries Inc 1,285,038
18,400 VWR Scientific Products Corp * 634,800
--------------
20,587,467
--------------
Electronic Equipment -- 7.1%
17,600 American Power Conversion Corp * 510,400
15,600 Amphenol Corp, Class A * 975,975
22,500 Burr-Brown Corp 925,313
23,200 Cable Design Technologies 674,250
40,500 Cellstar Corp 1,308,656
73,100 CTS Corp 2,352,905
39,600 Dallas Semiconductor Corp 1,880,999
36,500 Digital Microwave Corp 670,688
18,400 DSP Communications Inc * 325,450
21,000 Electro Scientific Industries * 798,000
11,400 Highwaymaster Communications * 77,663
8,700 Hutchinson Technology Inc * 201,188
See accompanying notes to the financial statements. 3
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Electronic Equipment -- continued
18,600 Integrated Circuit Systems Inc * 651,000
51,000 Integrated Process Equipment * 943,500
22,800 Inter-Tel Inc 504,450
35,500 Jabil Circuit Inc 1,868,188
16,900 Lattice Semiconductor Corp * 905,206
21,600 Level One Communications Inc 970,650
40,400 Magnetek Inc * 717,100
5,600 Microchip Technology Inc * 135,450
164,800 Oak Technology Inc * 1,153,600
11,900 P-Com Inc 240,975
29,500 Pacific Scientific Co 886,844
21,700 PMC-Sierra Inc * 781,200
12,200 Sanmina Corp * 972,188
32,000 Silicon Valley Group Inc * 872,000
12,300 Siliconix Inc * 518,138
6,900 Technitrol Inc 252,281
63,000 Tekelec 2,575,124
40,700 Trimble Navigation Limited * 814,000
27,400 Unitrode Corp 515,463
51,800 VLSI Technology * 1,000,388
12,500 Xylan Corp * 301,563
--------------
28,280,795
--------------
Food and Beverage -- 5.0%
31,900 Canadnaigua Wine Co, Class B * 1,786,400
41,400 Coors (Adolph) Co 1,293,750
80,700 Darden Restaurants Inc 1,089,450
47,600 Dean Foods Co 2,617,999
20,400 Dekalb Genetics Corp 1,370,625
15,200 Dimon Inc 266,000
38,700 Interstate Bakeries Corp 1,296,450
66,500 Michael Foods Inc 1,687,438
19,100 Pilgrims Pride Corp 205,325
2,500 Quality Food Centers Inc * 209,063
29,500 Ralcorp Holdings Inc * 499,656
1,000 Seaboard Corp 412,000
6,100 Showbiz Pizza Time * 176,900
37,300 Smithfield Foods Inc 1,179,613
4 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Food and Beverage -- continued
35,900 Tootsie Roll Industries Inc 2,679,037
25,300 Triarc Companies * 635,663
53,900 Universal Corp 2,560,249
--------------
19,965,618
--------------
Health Care -- 4.0%
21,200 BioMet Inc 632,025
20,600 Concentra Managed Care Inc * 706,838
19,100 Cooper (The) Companies Inc * 892,925
71,000 Coventry Corp * 1,149,313
35,100 Medimmune Inc * 1,820,813
50,100 Novacare Corp * 701,400
15,600 Orthodontic Centers of America * 301,275
27,500 Paragon Health Network Inc 512,188
8,300 Pediatrix Medical Group Inc * 342,375
34,900 Physician Sales & Service Inc * 728,538
62,400 Safeskin Corp * 3,829,799
6,200 Sofamor Denek Group Inc * 466,550
73,725 Total Renal Care Holdings 2,373,022
116,500 Vivus Inc 1,354,313
--------------
15,811,374
--------------
Insurance -- 5.0%
45,000 American Annuity Group Inc 1,001,250
11,600 CMAC Investment Corp 777,200
11,500 Commerce Group Inc 399,625
62,500 Crawford and Co 1,187,500
13,800 Enhance Financial Services Group Inc 856,463
93,100 Everest Re Holdings Inc 3,433,062
18,200 Fidelity National Financial Inc 532,350
16,600 First American Financial Corp 989,775
43,100 Fremont General Corp 2,529,430
34,618 Frontier Insurance Group Inc 815,687
19,900 John Alden Financial Corp 446,506
61,900 Mercury General Corp 3,512,824
35,200 Presidential Life Corp 765,600
1,600 Reliance Group Holdings Inc 27,200
48,400 Twentieth Century Industries 1,294,700
17,500 UICI * 562,188
See accompanying notes to the financial statements. 5
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Insurance -- continued
11,300 United Wisconsin Services 350,300
11,600 Vesta Insurance Group 664,825
--------------
20,146,485
--------------
Machinery -- 4.2%
118,600 Aviall Inc * 1,704,875
24,000 Camco International Inc 1,404,000
17,000 Cooper Cameron Corp 911,625
11,800 Donaldson Co Inc 280,988
10,200 ETEC Systems Inc * 534,863
62,700 Federal Mogul Corp 3,076,218
12,500 Gleason Corp 417,188
11,850 Graco Inc 349,575
49,300 Helix Technology Corp 1,121,575
18,200 Kaydon Corp 676,813
31,700 Kulicke & Soffa Industries * 879,675
30,000 Novellus System Inc 1,438,125
8,750 Paxar Corp 122,500
10,300 Smith International Inc * 548,475
20,700 Tennant Co 752,963
32,000 Terex Corp * 764,000
75,400 Varco International Inc 1,875,574
--------------
16,859,032
--------------
Manufacturing -- 4.0%
18,100 ACX Technologies Inc * 432,138
22,700 Aeroquip-Vickers Inc 1,318,019
34,400 Applied Power Inc, Class A 1,238,400
16,500 Barnes Group Inc 486,750
19,200 Blyth Industries Inc 577,200
17,600 Crane Co 862,400
8,500 CSS Industries Inc * 299,625
21,100 Gentex Corp * 680,475
17,100 Griffon Corp * 281,081
37,300 Handy & Harman 1,359,119
27,000 Lafarge Corp 906,188
36,425 Manitowoc Co Inc 1,436,511
17,600 Mine Safety Appliances 1,091,200
37,800 Nortek Inc * 1,176,525
6 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Manufacturing -- continued
18,500 Robbins & Myers Inc 733,063
12,200 Tredegar Industries 854,000
33,000 Trinity Industries Inc 1,658,250
20,000 Wyman-Gordon Co. * 400,000
--------------
15,790,944
--------------
Metals and Mining -- 1.4%
15,750 Amcol International Corp 224,438
9,600 Nacco Inds Inc, Class A 1,248,600
395,500 Sunshine Mining & Refining Co * 519,094
29,300 Timken Co 944,925
7,200 Wesco Financial Corp 2,620,799
--------------
5,557,856
--------------
Oil and Gas -- 3.0%
9,300 Atwood Oceanics Inc 456,863
33,800 BJ Services Co 1,161,875
6,700 Cabot Oil & Gas Corp, Class A 140,700
62,400 Global Industries Limited 1,076,400
45,600 Helmerich & Payne Inc 1,319,550
8,100 Louis Dreyfus Natural Gas * 146,306
49,100 Marine Drilling Co Inc * 880,731
29,900 Nabors Industries Inc * 683,963
11,500 Ocean Energy Inc * 537,625
101,800 Parker Drilling Co * 1,119,800
57,000 Pooled Funds Energy Services Co * 1,346,625
32,800 RPC Inc 371,050
22,500 Surety Corp * 354,375
35,300 Tuboscope Vetco International Corp * 690,556
13,900 Unit Corp * 110,331
41,700 Weatherford Enterra Inc * 1,443,863
--------------
11,840,613
--------------
Paper and Allied Products -- 1.0%
35,300 Bowater Inc 1,747,350
64,600 Jefferson Smurfit Corp * 964,963
10,000 TJ International Inc 300,000
9,800 United Stationers Inc * 586,775
31,200 US Office Products Co 577,200
--------------
4,176,288
--------------
See accompanying notes to the financial statements. 7
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Pharmaceuticals -- 3.0%
38,500 Agouron Pharmaceuticals Inc 1,419,688
37,400 Alpharma Inc 864,875
5,900 Amerisource Health Corp * 345,150
22,200 Bergen Brunswig Corp, Class A 999,000
20,000 Biomatrix Inc * 652,500
9,700 Dura Pharmaceuticals Inc * 243,713
93,100 Gensia Sicor Inc * 526,592
28,400 ICN Pharmaceuticals Inc 1,640,100
16,100 IDEC Pharmaceuticals Corp * 730,538
11,300 Immnunex Corp * 668,113
15,900 NBTY Inc * 740,344
17,000 Protein Design Labs Inc * 731,000
8,700 Quintiles Transnational Corp 425,213
38,000 Rexall Sundown Inc 1,406,000
15,000 Watson Pharmaceutical Inc 538,125
--------------
11,930,951
--------------
Primary Materials -- 2.5%
12,800 Carlisle Cos Inc 620,000
25,300 Centec Construction Products 803,275
18,250 Elcor Corp 489,328
41,200 EVI Inc 2,021,374
11,300 Kuhlman Corp 498,613
5,800 Lone Star Industries 349,450
28,900 Martin Marietta Materials Inc 1,100,006
14,200 Premark International Inc 441,975
24,300 Southdown Inc 1,555,200
40,200 USG Corp * 2,195,924
--------------
10,075,145
--------------
Primary Processing -- 1.6%
122,300 Armco Inc * 649,719
142,500 Bethlehem Steel Corp * 1,514,063
38,800 Inland Steel Industries Inc 800,250
34,300 Lone Star Technologies Inc * 1,063,300
82,900 National Steel Corp, Class B 1,284,950
8 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Primary Processing -- continued
22,300 Oregon Steel Mills Inc 448,788
14,200 Precision Castparts Corp 787,213
--------------
6,548,283
--------------
Printing and Publishing -- 1.7%
29,300 Central Newspapers, Class A 2,093,118
33,300 Hollinger International Inc 534,881
5,700 John Wiley and Sons, Class A 282,506
23,675 McClatchy Newspapers Inc 649,583
2,800 Pulitzer Publishing Co 235,200
81,100 Valassis Communications Inc * 3,091,937
--------------
6,887,225
--------------
Real Estate -- 0.8%
59,900 CN Fairfield Communities Inc 1,340,263
65,800 PEC Isreal Economic Corp * 1,328,338
25,100 Penn Virginia Corp 704,369
--------------
3,372,970
--------------
Refining -- 0.8%
30,700 Lyondell Petro Chemical Co 836,575
20,100 Sun Co Inc 802,744
43,600 Valero Energy Corp 1,547,800
--------------
3,187,119
--------------
Retail Trade -- 10.9%
21,700 American Eagle Outfitters 642,863
7,500 AnnTaylor Stores Corp * 106,406
33,400 Arbor Drugs Inc 784,900
33,100 Barnes & Noble Inc 1,162,638
65,300 Best Buy Co Inc * 3,893,512
51,600 Borders Group Inc 1,718,925
23,100 Buckle Inc 949,988
84,880 Burlington Coat Factory Warehouse 1,289,115
39,400 Cash American Investments Inc 472,800
19,800 Cato Corp, Class A 262,350
66,050 CKE Restaurants Inc 2,802,996
24,850 Dollar Tree Stores Inc 1,077,869
152,400 Dress Barn Inc * 4,448,174
64,500 Ethan Allen Interiors Inc 3,595,874
See accompanying notes to the financial statements. 9
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Retail Trade -- continued
81,550 Family Dollar Stores Inc 2,905,218
35,000 Fingerhut Cos Inc 868,438
53,000 Foodmaker Inc * 963,938
20,790 Fred Meyer Inc 923,856
38,100 General Nutrition Cos Inc * 1,514,475
11,660 Genovese Drug Stores Inc, Class A 210,609
45,100 Goodys Family Clothing Inc * 1,691,250
88,600 Hanover Direct Inc 310,100
25,200 Michaels Stores Inc * 856,800
24,500 Micro Warehouse Inc * 336,875
84,200 Microage Inc * 1,084,075
74,200 Pier 1 Imports Inc 1,984,849
25,500 Proffitts Inc 863,813
19,300 Ross Stores Inc 759,938
21,800 Shopko Stores Inc * 573,613
12,300 Stein Mart Inc * 397,444
33,800 Stride Rite Corp 414,050
24,300 Transportation World Entertainment Corp 669,769
126,200 Valhi Inc 1,214,675
16,900 Whole Foods Market Inc * 1,034,069
12,600 Williams-Sonoma Inc * 648,900
--------------
43,435,164
--------------
Services -- 5.1%
30,900 Accustaff Inc * 872,925
18,900 Advo Inc * 461,869
20,300 AMC Entertainment Inc * 522,725
27,200 Anchor Gaming * 1,849,600
13,200 Apollo Group Inc * 559,350
120,100 Aura Systems Inc * 375,313
62,700 Avid Technology Inc * 2,167,068
4,900 Bowne and Co Inc 207,638
25,350 Central Parking Corp 1,102,725
28,500 COR Therapeutics Inc * 359,813
41,500 Corestaff Inc * 1,294,281
49,900 Icos Corp * 701,719
125,600 McGrath Rentcorp 2,747,499
16,600 Meredith Corp 712,763
10 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Services -- continued
89,200 Metromedia International Group Inc * 1,014,650
10,200 Norrell Corp 238,425
12,600 Oakwood Homes Corp 499,275
19,000 Promus Hotel Corp 916,750
21,700 Renters Choice Inc * 542,500
13,100 Sonic Corp * 383,175
6,000 SPS Transaction Services Corp * 175,125
3,800 Stone & Webster Inc 156,988
14,400 United Video Satellite Group Inc * 532,800
31,550 Volt Information Sciences Inc 1,658,347
6,300 XTRA Corp 387,450
--------------
20,440,773
--------------
Technology -- 8.0%
4,900 ABR Information Services Inc * 139,038
5,200 Affiliated Computer Services * 167,375
30,100 Autodesk Inc 1,425,988
27,100 Avanti Corporation * 379,400
31,800 Cerner Corp * 655,875
31,300 Checkfree Holdings Corp * 672,950
77,150 Citrix Systems Inc 3,245,121
17,200 CMG Information Services Inc 823,450
50,100 Cognex Corp * 1,205,531
12,400 Cohu Inc 573,500
14,900 Computer Horizons Corp 777,594
26,900 Credence Systems Corp * 897,788
16,100 CSG Systems International Inc * 623,875
64,100 Data General Corp * 1,322,063
25,800 Digi International Inc * 625,650
17,200 FileNet Corp * 574,050
11,900 HNC Software Inc * 423,938
42,000 Hyperion Software Corp * 1,727,250
40,600 Information Resources Inc * 568,400
55,400 Input/Output Inc * 1,194,563
27,300 Intersolv Inc * 424,856
53,800 Keane Inc 2,501,699
400 KLA Instruments Corp * 18,462
28,050 National Instruments Corp 845,006
See accompanying notes to the financial statements. 11
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
Technology -- continued
10,600 Network Appliance Inc 312,700
85,200 Platinum Technology Inc * 2,161,949
40,400 Psinet Inc * 311,835
21,700 Remedy Corp * 416,369
54,800 Symantec * 1,380,275
41,300 Systems & Computer Technology Corp * 1,806,875
16,900 Transaction Systems Archit, Class A * 735,150
12,400 Uniphase Corp 496,775
16,500 Vantive Corp * 451,688
18,800 Viasoft Inc * 507,600
37,800 Visio Corp 1,360,800
--------------
31,755,438
--------------
Telecommunications -- 3.2%
24,700 Adelphia Communications Corp, Class A * 636,025
25,600 Adtran Inc * 764,800
15,500 Aliant Communications Inc 406,875
23,800 Cablevision Systems Corp * 2,326,449
24,200 Cellular Commerce International Inc * 1,155,550
15,600 Centennial Cellular Corp, Class A * 290,550
10,500 Jacor Communications Inc * 607,688
18,300 LCI International Inc * 603,900
11,800 Mastec Inc 330,400
102,100 Mobile Telecommunications Technologies Corp * 2,297,249
83,100 Paging Network Inc * 1,204,950
31,000 Premiere Technologies Inc * 972,625
19,900 Sinclair Broadcast Group, Class A 1,125,594
5,500 TCI Music Inc, Class A * 42,625
--------------
12,765,280
--------------
Textiles -- 0.3%
20,700 Interface Flooring Systems Inc 791,775
10,800 Westpoint Stevens Inc * 576,450
--------------
1,368,225
--------------
Transportation -- 5.6%
110,000 Airborne Freight Corp 3,980,624
73,700 CNF Transportation Inc 2,883,512
12 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------
Transportation -- continued
25,500 Comair Holdings Inc 678,938
29,400 Expeditors International Washington Inc 1,190,700
33,100 FDX Corp * 2,108,055
21,800 Fleetwood Enterprises Inc 1,021,875
54,400 Fritz Companies Inc * 754,800
117,900 Navistar International Corp * 3,581,212
37,400 Overseas Shipholding Group Inc 776,050
14,300 Skywest Inc 557,700
8,500 Swift Transportation Co * 277,313
26,800 US Freightways Corp 936,325
22,000 USAir Group Inc * 1,392,875
30,500 Westinghouse Air Brake Co 770,125
73,200 Yellow Corp * 1,541,775
--------------
22,451,879
--------------
Utilities -- 0.6%
5,200 Calenergy Inc * 139,425
13,400 IPALCO Enterprises Inc 572,013
32,700 Kinder Morgan Energy Partners 1,193,550
11,800 UGI Corp 337,775
--------------
2,242,763
--------------
TOTAL COMMON STOCKS (COST $355,817,081) 390,181,610
--------------
SHORT-TERM INVESTMENTS -- 15.4%
Cash Equivalents -- 12.9%
$17,202,422 BankBoston Eurodollar Time Deposit, 5.7875% due
3/2/98/(a)/ 17,202,422
$ 2,438,562 First Union National Bank of North Carolina
Eurodollar Time Deposit, 5.6250% due 3/2/98/(a)/ 2,438,562
13,777,872 Merrimac Cash Fund Premium Class/(a)/ 13,777,872
$18,000,000 Prudential Securities Group Inc, Master Note,
5.8875% due 3/2/98/(a)/ 18,000,000
--------------
51,418,856
--------------
U.S. Government -- 0.1%
$ 300,000 U.S. Treasury Bill, 5.165%, due 5/28/98/(b)/ 296,245
--------------
See accompanying notes to the financial statements. 13
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Par Value Description Value ($)
- --------------------------------------------------------------------------------
Repurchase Agreements -- 2.4%
$9,719,100 Salomon Brothers Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of
$9,723,206 and an effective yield of 5.07%,
collateralized by U.S. Treasury Obligation
with a rate of 8.125%, with a maturity date of
8/15/21 and with a market value of $9,913,482. 9,719,100
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $61,434,125) 61,434,201
--------------
TOTAL INVESTMENTS -- 113.0%
(COST $417,251,206) 451,615,811
Other Assets and Liabilities (net)--(13.0)% (52,002,818)
--------------
TOTAL NET ASSETS-- 100% $ 399,612,993
==============
Notes to the Schedule of Investments:
* Non-income producing security.
/(a)/ Represents investments of security lending collateral (Note 1).
/(b)/ Security has been segregated to cover margin requirements on
open financial futures contracts.
14 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $417,251,206) (Note 1) $451,615,811
Receivable for investments sold 17,522,940
Dividends and interest receivable 209,455
Receivable for expenses waived or borne by Manager (Note 2) 80,751
------------
Total assets 469,428,957
------------
Liabilities:
Payable for investments purchased 18,111,305
Payable upon return of securities loaned (Note 1) 51,418,856
Payable for Fund shares repurchased 13,819
Payable to affiliate for (Note 2):
Management fee 150,300
Shareholder service fee 43,456
Payable for variation margin on open futures contracts (Notes 1 and 6) 12,597
Accrued expenses 65,631
------------
Total liabilities 69,815,964
------------
Net assets $399,612,993
============
Net assets consist of:
Paid-in capital $355,342,044
Accumulated undistributed net realized gain 9,900,974
Net unrealized appreciation 34,369,975
------------
$399,612,993
============
Net assets attributable to:
Class III shares $399,612,993
============
Shares outstanding:
Class III 32,547,633
============
Net asset value per share:
Class III $ 12.28
============
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends $ 1,661,804
Interest (including securities lending income of $199,072) 1,255,784
-----------
Total income 2,917,588
-----------
Expenses:
Management fee (Note 2) 1,537,995
Custodian and transfer agent fees 129,517
Registration fees 38,202
Audit fees 23,457
Legal fees 6,718
Trustees fees (Note 2) 2,722
Miscellaneous 434
Fees waived or borne by Manager (Note 2) (725,457)
-----------
1,013,588
Shareholder service fee (Note 2)
Class III 459,765
-----------
Net expenses 1,473,353
-----------
Net investment income 1,444,235
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 37,950,146
Closed futures contracts 1,867,495
-----------
Net realized gain 39,817,641
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 37,483,260
Open futures contracts 288,725
-----------
Net unrealized gain 37,771,985
-----------
Net realized and unrealized gain 77,589,626
-----------
Net increase in net assets resulting from operations $79,033,861
===========
16 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from December 31, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
----------------- -----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,444,235 $ 173,151
Net realized gain 39,817,641 18,414
Change in net unrealized appreciation
(depreciation) 37,771,985 (3,402,010)
------------ ------------
Net increase (decrease) in net assets
resulting from operations 79,033,861 (3,210,445)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (1,617,385) --
------------ ------------
In excess of net investment income
Class III (159,172) --
------------ ------------
Net realized gains
Class III (29,775,910) --
------------ ------------
(31,552,467) --
------------ ------------
Net share transactions: (Note 5)
Class III 192,233,498 163,108,546
------------ ------------
Increase in net assets resulting from net
share transactions 192,233,498 163,108,546
------------ ------------
Total increase in net assets 239,714,892 159,898,101
Net assets:
Beginning of period 159,898,101 --
------------ ------------
End of period (including accumulated
undistributed net investment income
of $0 and $173,151, respectively) $399,612,993 $159,898,101
============ ============
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from December 31, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
----------------- -----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.82 $ 10.00
------- --------
Income from investment operations:
Net investment income 0.05 0.01
Net realized and unrealized gain (loss) 3.43 (0.19)
------- --------
Total from investment operations 3.48 (0.18)
------- --------
Less distributions to shareholders:
From net investment income (0.06) --
In excess of net investment income (0.01) --
From net realized gains (0.95) --
------- --------
Total distributions (1.02) --
------- --------
Net asset value, end of period $ 12.28 $ 9.82
======= ========
Total Return (a) 36.66% (1.80)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $399,613 $159,898
Net expenses to average daily net assets 0.48% 0.48%*
Net investment income to average daily net
assets 0.47% 0.70%*
Portfolio turnover rate 132% 13%
Average broker commission rate per equity
share $0.0277 $ 0.0344
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.03 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
* Annualized.
18 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Small Cap Growth Fund (the "Fund"), which commenced operations on
December 31, 1996, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks long-term growth of capital through investment primarily in
companies whose equity capitalization ranks in the lower two-thirds of the
1,800 companies with the largest equity capitalization whose securities are
listed on a United States national securities exchange.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange.
19
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $49,651,424, collateralized by cash in the amount of
$51,418,856, which was invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
20
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of short-term capital gains.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
--------------------- ------------------------- ---------------------
$159,171 ($159,171) --
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
21
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .50%
of the amount invested or redeemed. All purchase premiums and redemption
fees are paid to and recorded by the Fund as paid-in capital. These fees
are allocated relative to each class' net assets on the share transaction
date. Purchase premiums are included as part of each class' "shares sold"
and redemption fees are included as part of each class' "shares
repurchased," respectively, as summarized in Note 5. For the year ended
February 28, 1998, the Fund received $1,015,515 in purchase premiums and
$261,172 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, and .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .33% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $2,722. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$559,715,731 and $386,665,017, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ----------------- ------------------
$ 418,193,555 $ 50,407,457 $ 16,985,201 $ 33,422,256
4. Principal shareholder
At February 28, 1998, 21.9% of the outstanding shares of the Fund were held
by one shareholder.
22
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from
December 31, 1996
Year Ended (commencement of operations)
Class III: February 28, 1998 to February 28, 1997
----------------------------- -----------------------------
Shares Amount Shares Amount
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 17,993,943 $ 216,188,799 16,278,745 $ 163,108,546
Shares issued to shareholders
in reinvestment of distibutions 2,786,345 30,554,838 -- --
Shares repurchased (4,511,400) (54,510,139) -- --
============= =============== ============= ===============
Net increase 16,268,888 $ 192,233,498 16,278,745 $ 163,108,546
============= =============== ============= ===============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
----------- ------------ --------------- -------------- --------------
12 Russell 2000 March 1998 $ 2,776,500 $ 5,370
==============
At February 28, 1998, the Fund had sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
23
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 3.99% of distributions as net capital gain dividends.
24
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's
portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at
Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr.
Soucy for more than ten years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Small Cap Growth Fund returned 36.7% for
the fiscal year ended February 28, 1998 as compared to 35.0% for the S&P
500. The Russell 2000 Growth Index returned 25.9% for the same period.
Consistent with the Fund's investment objective and policies, the Fund was
primarily invested in common stocks throughout the period.
In the fiscal year that just ended, small stocks posted strong returns.
However, in a continuation of a market trend that has persisted for three
years, large capitalization stocks recorded even better gains. In this
environment, the performance of the GMO Small Cap Growth Fund was
excellent, outperforming not only the Russell 2000 Growth Index, but also
the S&P 500.
Strong performing sectors in the Russell 2000 Growth Index included
consumer stocks, which benefited from the strong economy and low
unemployment. Utility and financial stocks also performed well in an
environment of declining interest rates. On the other hand, technology and
health care stocks posted smaller gains. These more speculative issues
declined sharply during the fall of 1997 in the wake of events in the Far
East. In a "flight to quality," investors adjusted their portfolios to
increase their holdings of the stocks of larger companies with more stable
earnings.
The primary reason for good performance in the Fund during the fiscal year
was strong stock selection. The GMO Small Cap Growth Fund selects stocks
based on three strategies: the trend in consensus analyst estimates, price
momentum and earnings surprises. Using these strategies, we favor the
stocks of companies that have had upward revisions in earnings
expectations, strong price momentum, and positive earnings surprises. These
strategies allowed us to realize superior returns from our holdings in
technology, consumer and retail stocks.
Our sector emphasis also benefited performance, albeit to a lesser extent.
Our underweight of health care issues contributed positively to returns, as
these issues underperformed the rest of the index. These gains were
partially offset by our overweight of technology stocks.
Outlook
Since 1983, small capitalization stocks have lagged their larger
counterparts. At the current time, they look increasingly attractive
relative to large capitalization stocks on a number of measures --
price-to-book, price-to-cash flow, price-to-sales and price-to-fair value.
Although not as cheap as they were in the mid-1970's (prior to their
legendary rise through 1983), today small-cap stocks are at their cheapest
relative price since the late 1970's when institutions began to treat
small-cap stocks as a separate asset class. We believe that this bodes well
for the relative returns of small cap stocks over the next few years.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Small Cap Growth Fund Class III Shares and the S&P 500 Index
As of February 28, 1998
---------------------------------
Average Annual Total Return
---------------------------------
Since
1 Year 5 Year Inception
---------------------------------
Class 12/31/96
III 35.3% n/a 27.8%
---------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Small Cap Growth Fund S&P 500 Index
- -------- ------------------------- -------------
12/31/96 $9,950 $10,000
2/28/97 $9,811 $10,764
2/28/98 $13,286 $14,455
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO REIT Fund (A
Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
REIT Fund at February 28, 1998, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 13, 1998
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Shares Description Value ($)
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS -- 93.8%
Apartments -- 12.4%
10,800 Ambassador Apartments Inc 218,700
14,500 AMLI Residential Properties Trust 326,250
140,600 Apartment Investment & Management Co, Class A 5,123,113
116,300 Avalon Properties Inc 3,343,625
113,000 Bay Apartment Communities Inc 4,272,813
71,900 Berkshire Realty Co 826,850
104,700 BRE Properties Inc 2,839,988
64,204 Camden Property Trust 1,857,903
72,900 Cornerstone Realty Income Trust 924,919
172,925 Equity Residential Properties Trust 8,289,567
40,500 Gables Residential Trust 1,070,719
75,400 Home Properties of NY Inc 2,007,525
35,900 Irvine Apartment Communities 1,094,950
78,400 Merry Land & Investment Co 1,817,900
39,100 Mid America Apartment Community 1,107,019
76,100 Security Capital Atlantic 1,598,100
43,038 Security Capital Group Inc, Class B Warrants 9/18/98 158,703
171,128 Security Capital Pacific Trust 3,925,249
50,000 Smith (Charles E) Residential 1,650,000
202,238 United Dominion Realty Trust 2,831,332
49,600 Walden Residential Properties Inc 1,227,600
--------------
46,512,825
--------------
Diversified -- 9.2%
846,100 Catellus Development Corp * 15,335,562
27,900 Colonial Properties Trust 847,463
87,500 Cousins Properties Inc 2,559,375
460,000 First Union Real Estate 5,433,750
83,500 Glenborough Realty Trust Inc 2,379,750
37,700 MGI Properties Inc 902,444
55,300 Pacific Gulf Properties Inc 1,282,269
174,400 The Rouse Company 5,798,800
--------------
34,539,413
--------------
Enclosed Malls -- 6.3%
120,900 Crown American Realty Trust 1,118,325
119,000 General Growth Properties 4,343,500
200 JP Realty Inc 5,025
60,300 Macerich Co 1,703,475
46,400 Mills Corp 1,238,300
See accompanying notes to the financial statements. 1
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- -------------------------------------------------------------------------------
Enclosed Malls -- continued
404,200 Simon Debartolo Group Inc 12,479,674
66,500 Taubman Centers Inc 868,656
51,600 Urban Shopping Centers Inc 1,722,150
--------------
23,479,105
--------------
Factory Outlet -- 0.4%
22,400 Chelsea GCA Realty Inc 837,200
46,900 Prime Retail Inc 682,981
--------------
1,520,181
--------------
Hotel/Motel -- 11.4%
85,000 American General Hospitality 2,295,000
35,400 Boykin Lodging Co 878,363
25,000 Capstar Hotel Co * 843,750
116,700 Equity Inns Inc 1,852,613
110,600 Felcor Suite Hotels Inc 3,967,775
114,600 Franchise Finance Corp of America 3,065,550
33,626 Homestead Village 477,069
80,000 Hospitalities Properties Trust 2,800,000
25,000 Host Marriott Corp * 495,313
141,700 Innkeepers USA Trust 2,098,931
10,500 Jameson Inns Inc 122,063
206,574 Patriot America Hospitality Inc 5,164,350
56,100 RFS Hotel Investors Inc 1,016,813
253,800 Starwood Lodging Trust 14,355,562
195,500 Sunstone Hotel Investors Inc 3,128,000
15,200 Winston Hotels Inc 200,450
--------------
42,761,602
--------------
Industrial -- 11.5%
25,000 AMB Property Corp 587,500
65,400 Bedford Property Investors 1,283,475
52,100 Centerpoint Properties Corp 1,768,144
329,000 Duke Realty Investments 7,546,437
122,350 Eastgroup Properties Inc 2,477,588
143,600 First Industrial Reality Trust 5,187,550
181,300 Liberty Property Trust 4,815,781
101,900 Meridian Industrial Trust Inc 2,528,394
324,290 Security Capital Industrial Trust 7,864,032
155,600 Spieker Properties Inc 6,175,374
34,300 Trinet Corporate Realty Trust 1,329,125
40,600 Weeks Corp 1,339,800
--------------
42,903,200
--------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- --------------------------------------------------------------------------------
Manufactured Housing -- 1.3%
52,500 Chateau Communities Inc 1,575,000
67,800 Manufactured Home Communities 1,745,850
45,800 Sun Communities Inc 1,597,275
--------------
4,918,125
--------------
Office -- 26.4%
12,100 Alexandria Real Estate Equities Inc 412,913
101,600 Arden Realty Group Inc 2,901,950
267,100 Boston Properties Inc 9,081,399
215,000 Brandywine Realty Trust 5,079,375
127,800 Carramercia Realty Corp 3,802,050
195,100 Cornerstone Properties Inc 3,487,413
556,300 Crescent Real Estate Equities 18,948,968
527,600 Equity Office Properties 15,564,199
43,000 Great Lakes Reit Inc 814,313
183,500 Highwood Properties Inc 6,388,093
106,400 Kilroy Realty Corp 2,799,650
67,700 Koger Equity Inc 1,506,325
221,100 Mack-Cali Realty Corp 8,346,524
138,700 Parkway Properties Inc 4,525,088
107,300 Prentiss Properties Trust 2,863,569
124,900 Reckson Associates Realty 3,145,919
100,000 SL Green Realty Corp 2,656,250
269,800 Trizec Hahn Corporation 6,626,962
--------------
98,950,960
--------------
Recreation -- 0.0%
4,100 National Golf Properties Inc 125,050
--------------
Regional Malls -- 1.5%
92,500 Cadillac Fairview Corp * 2,000,313
202,800 Westfield America Inc 3,625,050
--------------
5,625,363
--------------
Self Storage -- 2.2%
219,900 Public Storage Inc 6,775,668
7,200 Shurgard Storage Centers 200,700
400 Storage Trust Realty 10,000
28,700 Storage USA Inc 1,146,206
--------------
8,132,574
--------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Shares Description Value($)
- -------------------------------------------------------------------------------
Shopping Centers -- 0.3%
36,600 Mid Atlantic Realty Trust 491,813
30,000 Pan Pacific Retail Properties Inc 667,500
--------------
1,159,313
--------------
Shopping/Power Center -- 10.7%
10,300 Alexander Haagen Properties 177,031
62,900 Bradley Real Estate Inc 1,348,419
40,600 Burnham Pacific Properties Inc 603,925
59,600 Commercial Net Lease Realty 1,039,275
55,900 Developers Diversified Realty Corp 2,281,419
49,000 Essex Property Trust Inc 1,586,375
70,400 Excel Realty Trust Inc 2,261,600
42,200 Federal Realty Investment Trust 1,044,450
10,900 First Washington Realty Trust 283,400
48,600 Glimcher Realty Trust 1,093,500
61,900 IRT Property Co 719,588
62,100 JDN Realty Corp 2,064,825
52,500 Kimco Realty Corp 1,844,063
6,300 Kranzco Realty Trust 116,944
60,600 New Plan Realty Trust 1,511,213
24,100 Price Reit Inc 1,073,956
54,900 Realty Income Corp 1,417,106
76,800 Regency Realty Corp 2,011,200
500 Saul Centers Inc 8,781
352,516 Vornado Realty Trust 14,959,898
55,200 Weingarten Realty 2,463,300
16,000 Western Investment Real Estate Trust 233,000
--------------
40,143,268
--------------
Triple Net -- 0.2%
57,900 Lexington Corporate 846,788
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST
$333,188,075) 351,617,767
--------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 7.5%
Cash Equivalents -- 1.8%
$ 622,200 BankBoston Eurodollar Time Deposit, 5.7875% due
3/2/98/(a)/ 622,200
$6,000,000 Prudential Securities Group Inc, Master Note, 5.8875% due
3/2/98/(a)/ 6,000,000
--------------
6,622,200
--------------
U.S. Government -- 0.2%
$ 600,000 U.S. Treasury Bill, 5.165%, due 5/28/98/(b)/ 592,489
--------------
Repurchase Agreements -- 5.5%
$18,869,438 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $18,877,410
and an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.125%, with a
maturity date of 8/15/21 and with a market value of
$19,246,827. 18,869,438
$1,869,282 Prudential Securities Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $1,870,072
and an effective yield 5.07%, collateralized by a U.S.
Government Agency Obligation with a rate of 8.5%, with a
maturity date of 10/1/26 and with a market value of
$1,906,676. 1,869,282
--------------
20,738,720
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $27,953,259) 27,953,409
--------------
TOTAL INVESTMENTS -- 101.3%
(COST $361,141,334) 379,571,176
Other Assets and Liabilities (net) -- (1.3)% (4,797,023)
--------------
TOTAL NET ASSETS -- 100% $ 374,774,153
==============
</TABLE>
Notes to the Schedule of Investments:
* Non-income producing security.
/(a)/Represents investments of security lending collateral
(Note 1).
/(b)/Security has been segregated to cover margin requirements
on open financial futures contracts.
See accompanying notes to the financial statements. 5
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $361,141,334) (Note 1) $379,571,176
Receivable for investments sold 13,159,243
Dividends and interest receivable 471,096
Receivable for expenses waived or borne by Manager (Note 2) 101,808
Receivable for Fund shares sold 7,313
------------
Total assets 393,310,636
------------
Liabilities:
Payable for investments purchased 10,123,892
Payable upon return of securities loaned (Note 1) 6,622,200
Payable for Fund shares repurchased 1,462,614
Payable to affiliate for (Note 2):
Management fee 221,737
Shareholder service fee 42,758
Payable for variation margin on open futures contracts (Notes 1 and 6) 13,614
Accrued expenses 49,668
------------
Total liabilities 18,536,483
------------
Net assets $374,774,153
============
Net assets consist of:
Paid-in capital $341,541,377
Accumulated undistributed net realized gain 14,480,459
Net unrealized appreciation 18,752,317
============
$374,774,153
============
Net assets attributable to:
Class III shares $374,774,153
============
Shares outstanding:
Class III 29,015,600
============
Net asset value per share:
Class III $ 12.92
============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- -------------------------------------------------------------------------------
Investment Income:
Dividends (net of withholding taxes of $8,996) $16,593,373
Interest (including securities lending income of $320,286) 1,054,521
-----------
Total income 17,647,894
-----------
Expenses:
Management fee (Note 2) 2,765,300
Custodian and transfer agent fees 90,424
Registration fees 40,681
Audit fees 37,906
Legal fees 9,340
Trustees fees (Note 2) 3,363
Miscellaneous 2,290
Fees waived or borne by Manager (Note 2) (961,297)
-----------
1,988,007
Shareholder service fee (Note 2)
Class I 219
Class II 1,386
Class III 550,421
-----------
Net expenses 2,540,033
-----------
Net investment income 15,107,861
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 34,322,635
Closed futures contracts 1,445,024
-----------
Net realized gain 35,767,659
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (3,597,519)
Open futures contracts 16,547
-----------
Net unrealized loss (3,580,972)
-----------
Net realized and unrealized gain 32,186,687
-----------
Net increase in net assets resulting from operations $47,294,548
===========
See accompanying notes to the financial statements. 7
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from May 31, 1996
Year Ended (commencement of
February 28, operations)
1998 to February 28, 1997
--------------- ------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $15,107,861 $ 4,196,242
Net realized gain 35,767,659 4,239,035
Change in net unrealized
appreciation (depreciation) (3,580,972) 22,333,289
------------ ------------
Net increase in net assets resulting
from operations 47,294,548 30,768,566
------------ ------------
Distributions to shareholders from:
Net investment income
Class I (4,860) --
Class II (8,347) --
Class III (15,852,407) (2,888,627)
------------ ------------
Total distributions from net
investment income (15,865,614) (2,888,627)
------------ ------------
In excess of net investment income
Class I (223) --
Class II (382) --
Class III (726,208) --
------------ ------------
Total distributions in excess of
net investment income (726,813) --
------------ ------------
Net realized gains
Class I (7,273) --
Class II (26,734) --
Class III (24,529,349) (784,771)
------------ ------------
Total distributions from net
realized gains (24,563,356) (784,771)
------------ ------------
(41,155,783) (3,673,398)
------------ ------------
Net share transactions: (Note 5)
Class I (42,863) 41,658
Class II (218,750) --
Class III 107,926,697 233,833,478
------------ ------------
Increase in net assets resulting
from net share transactions 107,665,084 233,875,136
------------ ------------
Total increase in net assets 113,803,849 260,970,304
Net assets:
Beginning of period 260,970,304 --
------------ ------------
End of period (including accumulated
undistributed net investment
income of $0 and $1,209,863,
respectively) $374,774,153 $260,970,304
============ ============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Period from December 31, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
---------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $12.62 $ 12.58
------ -------
Income from investment operations:
Net investment income 0.47+ 0.03
Net realized and unrealized gain 1.57 0.01
------ -------
Total from investment operations 2.04 0.04
------ -------
Less distributions to shareholders:
From net investment income (0.56) --
In excess of net investment income (0.03) --
From net realized gains (0.89) --
------ -------
Total distributions (1.48) --
------ -------
Net asset value, end of period $13.18/(c)/ $ 12.62
====== =======
Total Return/(a)/ 16.55% 0.32%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 41
Net expenses to average daily net assets 0.82%* 0.82%*
Net investment income to average daily net assets 3.99%* 3.17%*
Portfolio turnover rate 86% 21%
Average broker commission rate per equity share $0.0394 $0.0323
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.03 (b)
</TABLE>
/(a)/Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
+ Computed using average shares outstanding throughout the period.
/(c)/All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
* Annualized.
See accompanying notes to the financial statements. 9
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
- --------------------------------------------------------------------------------
Period from April 30, 1997
(commencement of operations)
to August 4, 1997
----------------------------
Net asset value, beginning of period $12.31
------
Income from investment operations:
Net investment income 0.14+
Net realized and unrealized gain 1.27
------
Total from investment operations 1.41
------
Less distributions to shareholders:
From net investment income (0.05)
In excess of net investment income --/(a)/
From net realized gains (0.15)
------
Total distributions (0.20)
------
Net asset value, end of period $13.52/(b)/
======
Total Return/(c)/ 11.46%
Ratios/Supplemental Data:
Net expenses to average daily net assets 0.76%*
Net investment income to average daily net assets 3.96%*
Portfolio turnover rate 86%
Average broker commission rate per equity share $0.0394
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following
per share amount: $ 0.01
+ Computed using average shares outstanding throughout the period.
(a) The per share distribution in excess of net investment income was $0.002.
(b) All Class II shares of the Fund were exchanged for Class III shares on
August 4, 1997. Amount represents ending net asset value per share on
August 4, 1997.
(c) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
* Annualized.
10 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from May 31, 1996
Year Ended (commencement of operations)
February 28,1998 to February 28, 1997
---------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 12.62 $ 10.00
-------- --------
Income from investment operations:
Net investment income 0.53 0.24
Net realized and unrealized gain 1.26 2.60
-------- --------
Total from investment operations 1.79 2.84
-------- --------
Less distributions to shareholders:
From net investment income (0.57) (0.17)
In excess of net investment income (0.03) --
From net realized gains (0.89) (0.05)
-------- --------
Total distributions (1.49) (0.22)
-------- --------
Net asset value, end of period $ 12.92 $ 12.62
======== ========
Total Return /(a)/ 14.29% 28.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $374,774 $260,929
Net expenses to average daily net assets 0.69%* 0.69%*
Net investment income to average daily net assets 4.10%* 4.72%*
Portfolio turnover rate 86% 21%
Average broker commission rate per equity share $ 0.0394 $ 0.0323
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share
amounts: $ 0.03 $ 0.02
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
* Annualized.
See accompanying notes to the financial statements. 11
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO REIT Fund (the "Fund"), which commenced operations on May 31, 1996, is
a series of GMO Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by Grantham,
Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was
established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a series
into classes.
The Fund seeks maximum total return through investment primarily in real
estate investment trusts ("REITs").
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Class I and Class II shares ceased operations on January 9, 1998 and August
4, 1997, respectively and all shares were exchanged for Class III shares.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange.
12
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund loaned securities having a
market value of $6,432,613, collateralized by cash in the amount of
$6,622,200, which was invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
13
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of short-term capital gains and the classification of
income received from REIT securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
--------------------- ------------------------- ---------------------
$274,703 ($275,860) $1,157
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
The Fund's investments in REIT equity securities may at times result in the
Fund's receipt of cash in excess of its interest in the REIT's earnings.
The excess amount cannot be determined by the Fund at the time of receipt.
If the Fund distributes amounts which are subsequently determined to exceed
REIT earnings, such amounts would constitute a return of capital to Fund
shareholders for federal income tax purposes.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
14
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .50%
of the amount invested or redeemed. Prior to March 25, 1997, the premium on
cash purchases and the fee on redemptions was .75% of the amount invested
or redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. These fees are allocated relative
to each class' net assets on the share transaction date. Purchase premiums
are included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 28, 1998, the Fund
received $793,466 in purchase premiums and $458,911 in redemption fees.
There is no premium for reinvested distributions or in-kind transactions.
Investment risk
There are certain additional risks involved in investing in REITs rather
than a more diversified portfolio of investments. Since the Fund's
investments are concentrated in real-estate related securities, the value
of its shares can be expected to change in light of factors affecting the
real estate industry, including local or regional economic conditions,
changes in zoning laws, changes in real estate value and property taxes,
and changes in interest rates. The value of the Fund's shares may fluctuate
more widely than the value of shares of a portfolio that invests in a
broader range of industries.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, and .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .54% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $3,363. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
15
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$365,569,410 and $297,803,278, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ------------------ ----------------
$ 361,379,058 $ 21,741,354 $ 3,549,236 $ 18,192,118
4. Principal shareholders
At February 28, 1998, 29.2% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from Period from December 31, 1996
March 1, 1997 (commencement of operations)
Class I: to January 9, 1998 to February 28, 1997
-------------------------------------------------------------
Shares Amount Shares Amount
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 6,339 $ 84,207 3,284 $ 41,658
Shares issued to shareholders in
reinvestment of distributions 953 12,356 -- --
Shares repurchased (10,576) (139,426) -- --
------------ -------------- ------------ --------------
Net increase (decrease) (3,284) $ (42,863) 3,284 $ 41,658
============ ============== ============ ==============
</TABLE>
Period from April 30, 1997
(commencement of operations)
Class II: to August 4, 1997
-----------------------------
Shares Amount
------------ --------------
Shares sold 181,864 $ 2,240,225
Shares issued to shareholders in
reinvestment of distributions 2,703 35,463
Shares repurchased (184,567) (2,494,438)
============ ==============
Net decrease -- $ (218,750)
============ ==============
16
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Share transactions -- continued
<TABLE>
<CAPTION>
Period from May 31, 1996
Year Ended (commencement of operations)
Class III: February 28, 1998 to February 28, 1997
----------------------------- -----------------------------
Shares Amount Shares Amount
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 12,232,100 $ 161,677,900 20,722,033 $ 234,377,685
Shares issued to shareholders in
reinvestment of distributions 2,754,721 35,760,499 180,673 2,193,376
Shares repurchased (6,643,834) (89,511,702) (230,093) (2,737,583)
------------- --------------- ------------- ---------------
Net increase 8,342,987 $ 107,926,697 20,672,613 $ 233,833,478
============= =============== ============= ===============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
----------- ------------ ----------------- ---------------- --------------
32 S & P 500 March 1998 $8,404,000 $322,475
==============
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
17
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- -------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 9.25% of distributions as net capital gain dividends.
18
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
- -------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham, Mr. Richard McQuaid and Mr. Robert Brokaw are
primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Grantham has been with Grantham, Mayo, Van Otterloo & Co.
LLC since its founding in 1977. Mr. McQuaid has been with GMO for four
years and Mr. Brokaw for ten years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO REIT Fund returned 14.3% during the twelve
months ending February 28, 1998. The Morgan Stanley REIT Index (MSRI)
returned 15.3% and the S&P 500 returned 35.0% during the same period.
REIT Industry Review
During fiscal 1998, REITs holding commercial office, retail shopping,
factory outlet and hotel assets led industry total return. REITs with
diversified holdings also had high returns. Both office and hotel REITs
have lagged during the past two months. Residential REITs lagged once
again, as did self-storage and regional retail mall REITs. Hotels, offices
and diversified companies reported rapid funds from operations (FFO)
growth, while retail and apartment FFOs were relatively sluggish. So, FFO
growth dominated investor thinking, but some sectors corrected past over-
or underpricing.
Fundamental Stock Selection
The Fund's fundamental valuation process analyzes individual companies and
adds a strong component of sector and geographic information. This stream
uses a present value model to incorporate the information and rank the
stocks. It looks out two to three years and emphasizes a value approach. We
also use a traditional fundamental approach to select a few new issues and
existing companies for a separate component portfolio. Fundamental stock
selection added value, although the select portfolio lost some of its gain
after December.
Quantitative Stock Selection
The Fund uses two entirely different quantitative models. One model selects
stocks based on short-term technical indicators, while the other selects
stocks on the basis of long-term return momentum. Both models added value.
Long-term momentum was strong until the reversal in office and hotel prices
after December 31, while the short-term model had more difficulty with
sudden sector shifts than in the prior year.
19
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
- -------------------------------------------------------------------------------
Implementation
Implementation negatively affected the Fund's performance relative to the
MSRI during the year. We tightly controlled direct expenses, cash levels
and turnover, but indirect trading costs were again significant. This
results from the small size and, therefore, relatively illiquid nature of
REIT stocks. We trade with minimal market impact, but this often adds to
timing risk. When the Fund holds cash, it uses S&P 500 futures to gain
temporary equity market exposure until it invests those funds. This
strategy protected our clients against most of the risk of holding cash and
helped Fund results during the year.
Outlook
The Fund holds a concentrated subset of the REIT and real estate operating
company (REOC) universe in each of its four streams. Because the streams
have a loose correlation, this gives it a broad exposure to U.S. real
estate equities. As an asset class, REITs have attractive valuations
relative to large capitalization U.S. equities. REIT valuations are close
to the fair value of property assets and they have higher yields than do
equities. Further, the REIT market is capturing the attention of
institutional investors as an attractive alternative to the less liquid
private market for real estate investing. The resulting influx of capital
to the REIT market should improve price discovery and liquidity over the
next few years.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
20
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO REIT Fund Class III Shares and the Morgan Stanley REIT Index "MSRI"
As of February 28, 1998
-----------------------------
Average Annual Total Return
-----------------------------
Since
1 Year Inception
-----------------------------
Class 5/31/96
III 13.2% 23.9%
-----------------------------
[LINE GRAPH APPEARS HERE]
GMO REIT Fund Morgan Stanley REIT Index
------------- -------------------------
5/31/96 $9,950 $10,000
2/28/97 $12,721 $12,982
2/28/98 $14,539 $14,968
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Currency Hedged
International Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Bond Fund at February 28, 1998, the results of its operations for the year then
ended, the changes in its net assets and the financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 90.2%
Argentina -- 0.2%
USD 1,000,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.50%, due 3/31/23 758,125
--------------
Australia -- 5.5%
GBP 8,700,000 Commonwealth Bank Australia Series EMTN, 8.13%,
due 12/7/06 15,592,273
AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 9/14/07 2,007,239
--------------
17,599,512
--------------
Brazil -- 3.0%
USD 8,664,194 Brazil Capitalization Bond, PIK, 8.00%, due 4/15/14 7,039,657
USD 3,000,000 Brazil Discount ZL Bond,
Variable Rate, 6 Mo. LIBOR + .81%, 6.69%, due
4/15/24 2,482,500
--------------
9,522,157
--------------
Bulgaria -- 1.5%
USD 10,000,000 Bulgaria Discount Series B Strips, Basket 2,
0.00%, due 7/28/24 1,275,000
USD 15,000,000 Bulgaria Discount Strips, 0.00%, due 7/28/24 2,887,500
USD 1,000,000 Bulgaria FLIRB Series B,
Variable Rate, Step up, 2.75%, due 7/28/12 645,000
--------------
4,807,500
--------------
Canada -- 5.5%
CAD 3,750,000 Government of Canada, 10.25%, due 3/15/14 3,891,495
CAD 8,000,000 Government of Canada Real Return, 4.25%, due
12/1/21 6,294,660
CAD 5,000,000 Government of Canada Real Return, 4.25%, due
12/1/26 3,729,132
CAD 5,000,000 Province of Quebec, 7.50%, due 12/1/03 3,822,372
--------------
17,737,659
--------------
Cayman Islands -- 1.0%
CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 6/1/08 3,083,193
--------------
Denmark -- 5.0%
DKK 9,680,000 Kingdom of Denmark Bullet, 8.00%, due 3/15/06 1,658,597
DKK 87,900,000 Kingdom of Denmark Bullet, 7.00%, due 11/15/07 14,363,492
--------------
16,022,089
--------------
Ecuador -- 0.1%
USD 533,019 Republic of Ecuador PDI (Registered), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 6.63%, due
2/27/15 341,132
--------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
France -- 9.1%
FRF 21,000,000 Auxiliare Credit Foncier, 10.00%, due 4/20/01 3,959,076
FRF 30,000,000 Auxiliare Credit Foncier, 6.25%, due 3/28/03 5,182,862
SEK 30,000,000 Credit Foncier, 6.50%, due 2/22/99 3,779,789
ECU 11,000,000 Government of France, 8.25%, due 4/25/22 16,252,518
--------------
29,174,245
--------------
Germany -- 5.4%
DEM 1,000,000 Bundesrepublic Deutschland, 6.00%, due 6/20/16 595,933
ESP 320,000,000 Deutsche Ausgleichsbank, 8.60%, due 5/22/03 2,423,660
GBP 2,000,000 KFW International Finance, 10.63%, due 9/3/01 3,653,584
DEM 19,000,000 Westdeutsche LB, 5.25%, due 10/14/05 10,664,205
--------------
17,337,382
--------------
Greece -- 1.0%
GRD 1,000,000,000 Hellenic Republic,
Variable Rate, 12 mo. GTB + 1.50%, 11.00%, due
9/30/03 3,277,948
--------------
Italy -- 1.4%
ITL 1,550,000,000 BTPS, 8.50%, due 8/1/04 1,022,275
ITL 3,485,000,000 BTPS, 6.75%, due 2/1/07 2,151,042
ITL 1,700,000,000 BTPS, 9.00%, due 11/1/23 1,358,043
--------------
4,531,360
--------------
Japan -- 6.8%
GBP 2,300,000 Export Import Bank of Japan, 10.75%, due 5/15/01 4,173,219
USD 800,000 Japan Development Bank, 6.88%, due 12/16/99 810,800
GBP 3,000,000 Japan Finance Corp Municipal Enterprises, 9.13%,
due 2/16/05 5,581,635
GBP 6,000,000 Kobe City, 9.50%, due 10/20/04 11,271,939
--------------
21,837,593
--------------
Jordan -- 0.2%
USD 1,000,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step up 144A, 5.00%, due
12/23/23 692,500
--------------
Mexico -- 0.4%
FRF 10,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,430,788
--------------
New Zealand -- 1.6%
NZD 9,200,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 5,124,519
--------------
Norway -- 0.6%
SEK 13,700,000 A/S Eksportfinans, 7.50%, due 8/16/01 1,828,515
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supra National -- 8.6%
JPY 440,000,000 Asian Development Bank, 5.00%, due 2/5/03 4,115,095
AUD 24,200,000 European Bank Recon and Development, Zero Coupon,
0.00%, due 2/10/28 2,483,011
CAD 2,700,000 European Investment Bank, 8.50%, due 8/30/05 2,194,983
ESP 821,900,000 European Investment Bank, 10.35%, due 12/20/05 7,065,517
GBP 1,755,000 European Investment Bank, 8.75%, due 8/25/17 3,652,464
JPY 200,000,000 International Bank Recon and Development, 6.75%,
due 6/18/01 1,894,245
GBP 3,000,000 International Bank Recon and Development, 11.50%,
due 11/9/03 6,080,525
--------------
27,485,840
--------------
Sweden -- 4.7%
SEK 35,000,000 Government of Sweden Index Linked Bond, 4.00%, due
12/1/20 4,848,871
SEK 43,900,000 Kingdom of Sweden, 6.00%, due 2/9/05 5,695,858
SEK 6,100,000 Kingdom of Sweden, 6.50%, due 10/25/06 817,737
SEK 24,800,000 Kingdom of Sweden, 8.00%, due 8/15/07 3,669,944
--------------
15,032,410
--------------
United States -- 27.9%
Asset Backed Securities -- 18.7%
USD 3,000,000 Augusta Funding VI Series 96-A3, 144A, 7.38%, due
4/15/13 3,134,970
USD 10,000,000 Chyps CBO 97-1, Class A2, 144A, 6.72%, due 1/15/10 9,862,500
USD 3,297,386 CS First Boston Mortgage Securities Corp, Series
96-1 Class A1, Variable Rate, 3 mo. LIBOR + .23%,
5.98%, due 7/28/29 3,299,364
USD 11,500,000 Discover Card Master Trust I 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 5.98%, due
10/16/04 11,600,625
USD 1,950,000 Keycorp Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .73%, 6.38%, due
11/25/21 1,950,000
USD 9,000,000 National Premier Finance 95-2 Class A, 144A,
6.21%, due 6/01/99 9,000,000
USD 6,500,000 National Premier Finance IX 96-1 Class A, 144A,
7.20%, due 7/01/00 6,636,500
USD 724,634 New York City Tax Lien Series 96-1 Class B, 144A,
6.91%, due 5/25/05 735,504
USD 5,000,000 Rhyno CBO Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 0.00%, due 9/15/09 5,322,656
USD 5,000,000 Student Loan Marketing Association Series 96-4
Class A2, Variable Rate, 3 mo. U.S. Treasury
Bill +.64%, 5.92%, due 7/25/09 4,979,688
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 3,465,000 TMS Auto Grantor Trust Series 96-1 Class CTFS,
7.10%, due 12/20/02 3,544,695
--------------
60,066,502
--------------
Corporate Debt -- 1.8%
SEK 44,000,000 Toyota Motor Credit, 7.50%, due 8/06/01 5,843,475
--------------
U.S. Government -- 4.6%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 8/15/13 3,877,390
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 2/15/14 3,747,605
USD 7,050,680 U.S. Treasury Inflation Indexed Note, 3.63%, due
7/15/02/(a)/ 7,013,220
--------------
14,638,215
--------------
U.S. Government Agency -- 2.8%
USD 1,600,000 Agency for International Development Floater
(Support of Belize), Variable Rate, 6 mo. U.S.
Treasury Bill + .50%, 5.74%, due 1/01/14 1,594,250
USD 5,000,000 Agency for International Development Floater
(Support of India), Variable Rate, 3 mo.
LIBOR + .10%, 5.73%, due 2/01/27 5,017,969
USD 2,333,334 Agency for International Development Floater
(Support of Zimbabwe), Variable Rate, 3 mo.
U.S. Treasury Bill x 115%, 5.88%, due 1/01/12 2,330,782
--------------
8,943,001
--------------
Total United States 89,491,193
--------------
Venezuela -- 0.7%
USD 500,000 Republic of Venezuela, 9.25%, due 9/15/27 448,250
USD 2,000,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due
3/31/20 1,750,000
--------------
2,198,250
--------------
TOTAL DEBT OBLIGATIONS (COST $280,491,083) 289,313,910
--------------
LOAN ASSIGNMENTS -- 0.0%
Russia -- 0.0%
USD 278 Russia Vnesh Restructured Loan Agreements, LIBOR +
.8125% (3.2486%) 168
--------------
TOTAL LOAN ASSIGNMENTS (COST $155) 168
--------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS -- 3.1%
United States -- 3.1%
10,000 Bear Stearns Managed Income Securities Plus Fund
13.27% 9,975,700
--------------
TOTAL PREFERRED STOCKS (COST $9,778,893) 9,975,700
--------------
<CAPTION>
Principal Amount
- ----------------------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 2.3%
Cross Currency Options -- 0.2%
DEM 236,300,000 DEM Call/BEF Put, Expires 7/8/98, Strike 20.6 273,435
DEM 109,800,000 DEM Call/ITL Put, Expires 9/22/98, Strike 993 447,718
--------------
721,153
--------------
Options on Bonds -- 0.4%
SEK 348,000,000 Sweden Government Bond, Expires 4/30/98, Strike
100.677 1,338,728
--------------
Options on Currency -- 1.7%
USD 97,500,000 German Mark, Expires 9/17/98, Strike 1.725 5,079,750
USD 110,000,000 Japanese Yen, Expires 6/15/98, Strike 140 187,000
--------------
5,266,750
--------------
Options on Futures -- 0.0%
USD 750,000 Eurodollar, Expires 3/16/98, Strike 94.25 60,000
--------------
TOTAL CALL OPTIONS PURCHASED
(COST $7,626,861) 7,386,631
--------------
PUT OPTIONS PURCHASED -- 0.5%
Cross Currency Options -- 0.1%
DEM 109,800,000 DEM Put/ITL Call, Expires 9/22/98, Strike 993 278,311
USD 5,146,502 TRL Put/1.00 USD + 1.50 DEM Basket Call, Expires
5/12/98, Strike 545,000 26,560
--------------
304,871
--------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Principal Amount Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options on Currency -- 0.4%
USD 97,500,000 German Mark, Expires 9/17/98, Strike 1.725 1,365,000
--------------
Options on Futures -- 0.0%
USD 750,000 Eurodollar, Expires 3/16/98, Strike 94 3,750
--------------
TOTAL PUT OPTIONS PURCHASED
(COST $4,446,404) 1,673,621
--------------
<CAPTION>
Par Value/Shares
- ----------------------------
<S> <C> <C> <C>
RIGHTS AND WARRANTS -- 0.0%
Mexico -- 0.0%
3,846,000 United Mexican States Warrants, Expires 6/30/03* --
--------------
Venezuela -- 0.0%
19,280 Republic of Venezuela Recovery Warrants,
Expires 04/15/20* --
--------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
--------------
SHORT-TERM INVESTMENTS -- 1.4%
Commercial Paper -- 1.3%
USD 4,000,000 GE Capital Corp, 5.68% due 3/02/98 4,000,000
--------------
Repurchase Agreements -- 0.1%
USD 417,086 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value
of $417,262 and an effective yield of 5.07%,
collateralized by a U.S. Treasury Obligation with
a rate of 8.875%, with a maturity date of 8/15/17
and with a market value of $425,427. 417,086
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $4,417,086) 4,417,086
--------------
TOTAL INVESTMENTS -- 97.5%
(COST $306,760,482) 312,767,116
Other Assets and Liabilities (net)-- 2.5% 8,138,091
--------------
TOTAL NET ASSETS-- 100% $ 320,905,207
==============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Notes to the Schedule of Investments:
EMTN -- Euromarket Medium Term Note
FLIRB -- Front Loaded Interest Reduction Bond
GTB -- Greek Treasury Bill
PDI -- Past Due Interest
PIK -- Payment In Kind
144A -- Securities exempt from registration under
Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
Variable and step up rates -- The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1998, which are
subject to change based on the terms of the
security, including varying reset dates.
Currency Abbreviations:
AUD - Australian Dollar GRD - Greek Drachma
BEF - Belgian Franc ITL - Italian Lira
CAD - Canadian Dollar JPY - Japanese Yen
CHF - Swiss Franc MYR - Malaysian Ringgit
DEM - German Mark NLG - Netherlands Guilder
DKK - Danish Krone NZD - New Zealand Dollar
ECU - European Currency Unit SEK - Swedish Krona
ESP - Spanish Peseta THB - Thailand Baht
FRF - French Franc TRL - Turkish Lira
GBP - British Pound USD - United States Dollar
/(a)/ All or a portion of this security has been segregated to
cover margin requirements on open financial futures contracts.
* Non-income producing security.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1998
- -----------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $306,760,482) (Note 1) $312,767,116
Cash (Note 1) 2,027,623
Interest receivable 5,966,109
Receivable for Fund shares sold 10,560,000
Receivable for open forward foreign currency contracts (Notes 1 and 6) 7,346,694
Receivable for expenses waived or borne by Manager (Note 2) 45,222
-------------
Total assets 338,712,764
-------------
Liabilities:
Written options outstanding, at value (premiums $11,606,055) (Notes 1 and 6) 11,000,690
Payable for open forward foreign currency contracts (Notes 1 and 6) 4,863,044
Payable for Fund shares repurchased 997,624
Payable to affiliate for (Note 2):
Management fee 121,287
Shareholder service fee 35,162
Payable for open swap contracts (Notes 1 and 6) 590,287
Payable for variation margin on open futures contracts (Notes 1 and 6) 89,298
Accrued expenses 110,165
-------------
Total liabilities 17,807,557
-------------
Net assets $320,905,207
=============
Net assets consist of:
Paid-in capital $300,447,376
Accumulated undistributed net investment income 2,799,507
Accumulated undistributed net realized gain 9,655,525
Net unrealized appreciation 8,002,799
=============
$320,905,207
=============
Net assets attributable to:
Class III shares $320,905,207
=============
Shares outstanding:
Class III 30,095,080
=============
Net asset value per share:
Class III $ 10.66
=============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest (including securities lending income of $1,024) $25,157,706
Dividends 995,250
-----------
Total income 26,152,956
-----------
Expenses:
Management fee (Note 2) 1,895,291
Custodian and transfer agent fees 253,222
Audit fees 59,189
Legal fees 25,224
Registration fees 23,663
Trustees fees (Note 2) 3,610
Miscellaneous 4,214
Fees waived or borne by Manager (Note 2) (1,316,764)
-----------
947,649
Shareholder service fee (Note 2)
Class I 3,065
Class III 565,710
-----------
Net expenses 1,516,424
-----------
Net investment income 24,636,532
-----------
Realized-and-unrealized gain (loss):
Net realized gain on:
Investments 1,512,850
Closed futures contracts 5,700,403
Closed swap contracts 1,088,107
Written options 2,237,605
Foreign currency, forward contracts and foreign currency related
transactions 51,333,095
-----------
Net realized gain 61,872,060
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (15,283,041)
Open futures contracts 1,376,174
Open swap contracts (590,287)
Written options 361,615
Foreign currency, forward contracts and foreign currency related
transactions (20,400,594)
-----------
Net unrealized loss (34,536,133)
-----------
Net realized and unrealized gain 27,335,927
-----------
Net increase in net assets resulting from operations $51,972,459
===========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 24,636,532 $24,438,613
Net realized gain 61,872,060 37,539,759
Change in net unrealized appreciation (depreciation) (34,536,133) 19,999,551
------------ -----------
Net increase in net assets resulting from operations 51,972,459 81,977,923
------------ -----------
Distributions to shareholders from:
Net investment income
Class I (93,768) --
Class III (22,677,467) (20,376,190)
------------ -----------
Total distributions from net investment income (22,771,235) (20,376,190)
------------ -----------
Net realized gains
Class I (232,835) --
Class III (65,046,883) (15,129,774)
------------ -----------
Total distributions from net realized gains (65,279,718) (15,129,774)
------------ -----------
In excess of net realized gains
Class III -- (14,706,753)
------------ -----------
Total distributions in excess of net realized gains -- (14,706,753)
------------ -----------
(88,050,953) (50,212,717)
------------ -----------
Net share transactions: (Note 5)
Class I (1,008,924) 1,123,429
Class III (112,148,597) 201,090,729
------------ -----------
Increase (decrease) in net assets resulting from net
share transactions (113,157,521) 202,214,158
------------ -----------
Total increase (decrease) in net assets (149,236,015) 233,979,364
Net assets:
Beginning of period 470,141,222 236,161,858
------------ -----------
End of period (including accumulated undistributed net
investment income and distributions in excess of net
investment income of $2,799,507 and $7,695,280,
respectively) $320,905,207 $470,141,222
============ ============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Period from January 2, 1997
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
--------------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period $12.16 $11.75
------ ------
Income from investment operations:
Net investment income 0.69+ 0.11
Net realized and unrealized gain 0.90 0.30
------ ------
Total from investment operations 1.59 0.41
------ ------
Less distributions to shareholders:
From net investment income (0.87) --
From net realized gains (2.23) --
------ ------
Total distributions (3.10) --
------ ------
Net asset value, end of period $10.65/(a)/ $12.16
====== ======
Total Return/(b)/ 14.30% 3.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $1,162
Net expenses to average daily net assets 0.53%* 0.53%*
Net investment income to average daily net
assets 6.60%* 5.91%*
Portfolio turnover rate 135% 90%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.04 $ 0.01
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(b)/Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
---------------------------------------------
1998 1997 1996 1995 *
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.16 $ 10.92 $ 9.99 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income 0.88 0.66 1.05 0.24
Net realized and unrealized gain (loss) 0.73 2.07 1.62 (0.09)
-------- -------- -------- --------
Total from investment operations 1.61 2.73 2.67 0.15
-------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.88) (0.60) (1.04) (0.16)
From net realized gains (2.23) (0.45) (0.42) --
In excess of net realized gains -- (0.44) (0.28) --
-------- -------- -------- --------
Total distributions (3.11) (1.49) (1.74) (0.16)
-------- -------- -------- --------
Net asset value, end of period $ 10.66 $ 12.16 $ 10.92 $ 9.99
======== ======== ======== ========
Total Return/(a)/ 14.44% 25.57% 27.36% 1.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $320,905 $468,979 $236,162 $238,664
Net expenses to average daily net assets 0.40% 0.40% 0.40% 0.40%**
Net investment income to average daily net
assets 6.50% 6.86% 8.54% 8.46%**
Portfolio turnover rate 135% 90% 85% 64%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.05 $ 0.03 $ 0.03 $ 0.01
</TABLE>
* Period from September 30, 1994 (commencement of operations) to February 28,
1995.
** Annualized.
/(a)/Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
12 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series into classes.
The Fund seeks high total return by investing primarily in investment grade
bonds denominated in various currencies including U.S. dollars and
multicurrency units, while generally attempting to hedge substantially all
of its foreign currency risk. The Fund generally seeks to provide a total
return greater than that provided by the international fixed income
securities market.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
13
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. 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 by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. At February 28, 1998, the
total value of these securities represented 11% of net assets. These prices
may differ from the value that would have been used had a broader market
for the securities existed and the differences could be material to the
financial statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from the changes in the value of
the underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at
14
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
the settlement price established each day by the board of trade or exchange
on which they are traded. See Note 6 for all open futures contracts as of
February 28, 1998.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1998.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for all open written
option contracts as of February 28, 1998.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and
15
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
any fees to which it is entitled only from the lender selling the loan
agreement and only upon receipt by the lender of payments from the
borrower. The Fund generally has no right to enforce compliance with the
terms of the loan agreement with the borrower. As a result, the Fund may be
subject to the credit risk of both the borrower and the lender that is
selling the loan agreement. When the Fund purchases assignments from
lenders it acquires direct rights against the borrower on the loan. Direct
indebtedness of emerging countries involves a risk that the governmental
entities responsible for the repayment of the debt may be unable or
unwilling to pay the principal and interest when due.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a
market-linked return based on a notional amount. To the extent the total
return of the security or index underlying the transaction exceeds or falls
short of the offsetting interest rate obligation, the Fund will receive a
payment from or make a payment to the counterparty, respectively. In
connection with these agreements, cash may be set aside as collateral by
the Fund's custodian in accordance with the terms of the swap agreement. At
February 28, 1998, $2,027,623 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform and that there may be unfavorable
changes in the fluctuation of interest rates. See Note 6 for a summary of
open swap agreements as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
16
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1998, there were no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
--------------------- ------------------------- --------------------
$8,629,490 $(8,629,490) --
17
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on the U.S. Treasury inflation indexed securities is accrued daily based
upon an inflation adjusted principal. Additionally, any increase in the
principal or face amount of the securities adjusted for inflation is
recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium may be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $139,637 in purchase premiums.
There is no premium for cash redemptions, reinvested distributions or
in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
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.
18
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .25% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .40%;
thus the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $3,610. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
------------------- ----------------
U.S. Government securities $ 51,551,152 $ 54,671,192
Investments (non-U.S. Government 398,499,455 494,819,518
securities)
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ------------------ -----------------
$306,892,190 $16,867,307 $10,992,381 $5,874,926
4. Principal shareholders
At February 28, 1998, 62.2% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
19
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from January 2, 1997
Period from March 1, 1997 (commencement of operations) to
to January 9, 1998 February 28, 1997
-------------------------------- ---------------------------------
Class I: Shares Amount Shares Amount
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 6,040 $ 71,065 95,601 $ 1,123,429
Shares issued to shareholders
in reinvestment of 30,405 326,603 -- --
distributions
Shares repurchased (132,046) (1,406,592) -- --
============== ============== ============== ===============
Net increase (decrease) (95,601) $ (1,008,924) 95,601 $ 1,123,429
============== ============== ============== ===============
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
-------------------------------- ---------------------------------
Class III: Shares Amount Shares Amount
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 12,690,672 $ 148,729,246 20,865,195 $ 251,713,393
Shares issued to shareholders
in reinvestment of 7,589,419 82,702,082 3,723,568 43,606,382
distributions
Shares repurchased (28,743,588) (343,579,925) (7,658,494) (94,229,046)
============== ============== ============== ===============
Net increase (decrease) (8,463,497) $(112,148,597) 16,930,269 $ 201,090,729
============== ============== ============== ===============
</TABLE>
20
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
------------ ---------------- --------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Buys
5/07/98 AUD 7,400,000 $ 5,048,450 $ 69,360
3/27/98 CAD 61,800,000 43,452,620 376,749
4/09/98 DEM 149,700,000 82,695,212 (345,551)
4/17/98 GBP 13,500,000 22,170,398 9,252
3/20/98 ITL 70,110,850,000 39,168,696 (997,949)
4/03/98 JPY 7,400,000,000 58,877,977 (557,216)
3/06/98 SEK 6,639,900 829,509 3,633
3/23/98 THB 280,000,000 6,462,334 (910,938)
6/22/98 THB 140,000,000 3,161,262 (462,395)
--------------
$ (2,815,055)
==============
<CAPTION>
Sales
<S> <C> <C> <C> <C>
5/07/98 AUD 23,800,000 $ 16,236,908 $ (328,036)
3/27/98 CAD 47,500,000 33,398,049 (184,368)
3/06/98 DEM 1,500,000 826,894 (1,130)
3/20/98 DEM 71,200,000 39,283,735 882,909
4/09/98 DEM 205,600,000 113,574,720 (141,204)
4/17/98 GBP 32,300,000 53,044,731 33,263
4/03/98 JPY 12,980,000,000 103,275,154 (330,967)
3/20/98 MYR 11,896,500 3,233,294 (233,294)
4/17/98 MYR 26,183,500 7,101,365 (11,329)
3/12/98 NZD 9,200,000 5,391,540 78,872
3/23/98 THB 280,000,000 6,462,334 3,243,039
6/22/98 THB 140,000,000 3,161,262 1,608,755
--------------
$ 4,616,510
==============
</TABLE>
21
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Forward cross currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
----------- -------------------------- --------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
7/10/98 BEF 2,100,224,400 DEM 101,600,000 $ (61,363)
5/14/98 CHF 13,756,608 DEM 17,100,000 (2,592)
3/06/98 DEM 61,500,000 SEK 271,331,480 (5,753)
3/20/98 DEM 4,600,000 ITL 4,526,265,000 (9,314)
4/23/98 DEM 15,414,100 GBP 5,200,000 14,990
4/24/98 DEM 4,400,000 ESP 373,802,000 (1,829)
4/30/98 DEM 434,510,300 ECU 220,900,000 759,381
5/14/98 DEM 2,000,000 CHF 1,607,200 (908)
7/10/98 DEM 2,200,000 BEF 45,378,124 (1,339)
3/23/98 DKK 317,108,480 DEM 83,200,000 19,843
4/30/98 ECU 131,600,000 DEM 259,176,907 (275,569)
5/22/98 FRF 502,117,616 DEM 149,800,000 89,921
3/05/98 NLG 36,511,560 DEM 32,400,000 15,493
3/06/98 SEK 443,222,612 DEM 100,700,000 141,234
-----------------------
$ 682,195
=======================
</TABLE>
22
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
------------- ---------------------------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Buys
316 MATIF FRF Bond June 1998 $ 26,821,572 $ (61,417)
6 Japanese Government Bond 10 yr. June 1998 6,144,859 13,332
109 German Government Bond March 1998 16,155,100 659,884
90 German Government Bond June 1998 13,265,925 (13,233)
145 Australian Government Bond 3 yr. March 1998 11,689,616 147,418
13 Australian Government Bond 10 yr. March 1998 1,283,103 35,462
----------------
$ 781,446
================
<CAPTION>
Sales
<S> <C> <C> <C> <C>
148 Spanish Government Bond 10 yr. March 1998 $ 10,450,281 $ (456,357)
111 Spanish Government Bond 10 yr. June 1998 7,807,441 19,095
173 Swiss Government Bond March 1998 14,758,517 (837,364)
112 Swiss Government Bond June 1998 9,584,410 66,987
104 Canadian Government Bond June 1998 9,100,000 (59)
158 MSE 3 mo. Bankers Acceptance March 1998 26,372,189 (111,011)
66 Italian Government Bond 10 yr. June 1998 8,713,202 5,307
93 U.K. Gilt June 1998 8,180,183 91,961
255 U.S. Treasury Bond June 1998 30,719,531 290,804
----------------
$ (930,637)
================
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any margin requirements on open futures contracts.
23
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Written option transactions
<TABLE>
<CAPTION>
Puts Calls
Principal
Principal Amount Amount of
of Contracts Contracts
(000's omitted) Premiums (000's omitted) Premiums
------------------ --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 25,000 $ 1,243,750 25,000 $ 1,065,000
Options written 271,425 6,303,030 392,352 7,113,429
Options exercised (43,000) (1,333,750) (13,052) (507,711)
Options closed (100) (89,975) -- --
Options expired (4,225) (376,350) (265,200) (1,811,368)
------------------ --------------- ----------------- ---------------
Outstanding, end
of period 249,100 $ 5,746,705 139,100 $ 5,859,350
================== =============== ================= ===============
Summary of written options outstanding
<CAPTION>
Principal
Amount of
Contracts Exercise Expiration
(000's omitted) Price Date Value
----------------- -------------- ----------------- --------------
Calls
<S> <C> <C> <C> <C>
Canadian Dollar 41,600 1.4294 CAD 5/08/98 $ 295,360
Japanese Yen 97,500 113.65 JPY 9/17/98 8,121,750
Puts
Canadian Dollar 41,600 1.4294 CAD 5/08/98 470,080
Japanese Yen 110,000 117.18 JPY 6/15/98 924,000
Japanese Yen 97,500 113.65 JPY 9/17/98 1,189,500
--------------
$ 11,000,690
==============
</TABLE>
24
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements - (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ------------ ------------------------------------------------- --------------
<S> <C> <C> <C>
11,250,000 USD/ 5/04/98 Agreement with Morgan Guaranty Trust Company $ 225,296
6,634,340 USD dated 2/10/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) on the Russia
Principal Floating Rate Note due 12/15/20 and
to pay the notional amount multiplied by 3
month LIBOR adjusted by a specified spread.
3,697,979 USD/ 5/14/99 Agreement with Bank of America dated 5/29/97 to (1,430,073)
494,875,000,000 TRL receive the notional amount multiplied by the
change in market value (including accrued
interest) on the Turkey Index Linked Bond due
5/14/99 and to pay the notional amount multiplied
by 3 month LIBOR adjusted by a specified spread.
1,448,524 USD/ 6/04/99 Agreement with Bank of America dated 6/20/97 to 268,859
316,183,601,428 TRL receive the notional amount multiplied by the
change in market value (including accrued interest)
on the Turkey Index Linked Bond due 6/04/99 and to
pay the notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
488,115 USD/ 6/04/99 Agreement with Bank of America dated 11/13/97 345,631
152,951,203,814 TRL to receive the notional amount multiplied by
the change in market value (including accrued
interest) on the Turkey Index Linked Bond due
6/04/99 and to pay the notional amount multiplied
by 3 month LIBOR adjusted by a specified spread.
--------------
Net unrealized depreciation $ (590,287)
==============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
25
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
13.74% of distributions as net capital gain dividends.
26
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Currency Hedged International Bond Fund
returned 14.4% for the fiscal year ended February 28, 1998, compared to
11.7% for the J.P. Morgan Non-U.S. Government Bond Index (Hedged).
Consistent with the Fund's investment objectives and policies, the Fund was
substantially invested in investment-grade, foreign and domestic fixed
income instruments throughout the period.
Many of the strategies implemented in the Fund were successful during the
fiscal year. It outperformed its benchmark by 2.7%. During the year bond
market and currency selection were positive. Although foreign interest
rates generally declined during the year, the strength of the U.S. dollar
meant that many foreign bond markets performed poorly when measured in U.S.
dollar terms. Exceptions to this occurred in Italy and the U.K. whose bond
markets had double-digit U.S. dollar returns. Strong returns were shown as
well in Australia, Sweden and the U.K. The Canadian dollar was the only
currency that produced a positive return versus the U.S. dollar for the
year ended February 28, 1998. Value was added during the year by
overweighting the Canadian, Swedish and U.K. bond markets, as well as the
Italian lira, Spanish peseta and the ECU. Additionally, the Fund gained
versus the benchmark as a result of underweighting the French, Japanese,
and Swiss bond markets, as well as the Belgian franc and the Dutch guilder.
Because the fund hedged much of its non-U.S. dollar currency exposure
according to its investment policy, it benefited significantly from the
dollar's strength.
During the year the Fund held a position in emerging country sovereign
debt, emphasizing undervalued issues. This market had a somewhat volatile
year, buffeted by the financial problems in Asia. Returns came mainly from
bond yields as prices changed little from beginning to end. Our decision to
include emerging country debt exposure in the portfolio added value in all
but the third fiscal quarter.
Outlook
The Fund is structured to benefit from outperformance in the Australian,
Danish, French, German, Swedish and emerging bond markets. We expect
underperformance from the Italian, Japanese, Spanish and Swiss bond
markets. Our strategy maintains a market duration in each country. Strong
relative performance is expected from the Canadian dollar, Deutsche mark,
Italian lira, Spanish peseta and U.K. pound. The Belgian franc, Danish
krone, French franc, Japanese yen and U.S. dollar are expected to
underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Changes in Value of a $10,000 Investment in
GMO Currency Hedged International Bond Fund Class III Shares and
the JP Morgan Non-U.S. Governmental Bond Index (Hedged)
As of February 28, 1998
Average Annual Total Return
1 Year Since Inception 9/30/94
Class III 14.3% 19.8%
[LINE GRAPH APPEARS HERE]
GMO Currency Hedged JP Morgan Non-U.S.
International Bond Government Bond
Date Fund Class III Shares Index (Hedged)
---- --------------------- -------------------
9/30/94 $9,985 $10,000
2/28/95 $10,134 $10,408
2/29/96 $12,906 $12,048
2/28/97 $16,207 $13,772
2/28/98 $18,547 $15,381
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Annual Report
February 28 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Domestic Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Domestic Bond Fund at February 28, 1998, the results of its operations for
the year then ended, the changes in its net assets and the financial
highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at February 28, 1998 by correspondence
with the custodian and brokers, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 89.5%
Asset Backed Securities -- 31.6%
<S> <C> <C>
$13,000,000 Americredit Automobile Receivables Trust 97 Class A2,
Variable Rate, 1 mo. LIBOR + .10%, 5.73%, due 3/05/01 12,996,100
5,000,000 Anfield Road I Ltd.,
Variable Rate, 6 mo. LIBOR + .25%, 5.88%, due 11/06/06 4,986,000
5,000,000 Augusta Funding Series 96-F2,
Variable Rate, 3 mo. LIBOR + .30%, 144A, 6.06%, due 4/15/06 5,000,000
11,887,168 Augusta Funding VI Series 96-A3, 144A, 7.38%, due 4/15/13 12,421,972
3,000,000 Bombardier Receivables Master Trust I 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .12%, 5.75%, due 4/15/04 3,000,000
3,297,386 CS First Boston Mortgage Securities Corp, Series 96-1 Class A1,
Variable Rate, 3 mo. LIBOR + .23%, 5.98%, due 7/28/29 3,299,364
4,167,900 Dilmun Capital Corp,
Variable Rate, 6 mo. LIBOR + .88%, 6.79%, due 11/15/03 4,167,900
5,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.81%, due 10/15/06 5,000,000
8,000,000 DVI Healthcare 1998-1A,
Variable Rate, 1 mo. LIBOR + .35%, 5.98%, due 1/15/04 7,997,600
10,050,000 Keycorp Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .73%, 6.38%, due 11/25/21 10,050,000
6,000,000 National Premier Finance 95-2 Class A, 144A, 6.21%, due 6/01/99 6,000,000
14,000,000 National Premier Finance IX 96-1 Class A, 144A, 7.20%, due 7/01/00 14,294,000
6,500,000 Navistar Financial Dealer Note Master Trust 95-1 Class A,
Variable Rate, 1 mo. LIBOR + .30%, 5.96%, due 8/25/07 6,606,641
1,932,358 New York City Tax Lien Series 96-1 Class B, 144A, 6.91%, due 5/25/05 1,961,343
5,000,000 Northstar CBO Series 97-2 Class A2, 6.62%, due 7/15/09 5,478,905
3,500,000 Premier Auto Trust 94-4 Certificates, 6.85%, due 5/02/99 3,517,500
1,628,891 Resolution Trust Corp 94-C1 Class A1,
Variable Rate, 1 mo. LIBOR + .45%, 6.14%, due 6/25/26 1,631,437
1,551,193 Resolution Trust Corp 94-C1 Class A3,
Variable Rate, 1 mo. LIBOR + .55%, 6.24%, due 6/25/26 1,552,889
10,000,000 Rhyno CBO Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 0.00%, due 9/15/09 10,645,313
2,637,000 SMS Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 6.38%, due 10/25/23 2,637,000
4,932,000 SMS Student Loan Trust 95-A Certificates,
Variable Rate, 1 mo. LIBOR + .65%, 6.28%, due 4/25/25 4,925,835
5,888,000 Society Student Loan Trust 93-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 6.38%, due 7/25/03 5,897,200
2,176,150 UCFC Home Equity Loan 95-B2 Class A8,
Variable Rate, 1 mo. LIBOR + .45%, 6.14%, due 10/10/26 2,178,327
----------------
136,245,326
----------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Government Obligations -- 3.5%
$25,000,000 Bulgaria Discount Strips, due 7/28/24 4,812,500
39,794,675 Republic of Albania Par Bond, Zero Coupon, due 8/31/25 6,857,816
20,000,000 Republic of Ecuador Discount Bond Series A Receipts, Zero Coupon,
due 2/28/25 3,601,900
----------------
15,272,216
----------------
Municipal Bonds -- 2.1%
15,000,000 Alameda County California Pension, Zero Coupon, due 12/01/05 9,279,750
----------------
U.S. Government -- 13.5%
28,000,000 U.S. Treasury Bond, 6.25%, due 8/15/23(a) 28,936,235
29,959,652 U.S. Treasury Inflation Indexed Note, 3.38%, due 1/15/07 29,229,386
----------------
58,165,621
----------------
U.S. Government Agency -- 38.8%
U.S. Government Agency Bonds/Notes -- 32.5%
10,000,000 Agency for International Development Floater (Support of India),
Variable Rate, 3 mo. LIBOR + .10%, 5.73%, due 2/01/27 10,035,938
8,500,000 Agency for International Development Floater (Support of Jamaica),
Variable Rate, 6 mo. LIBOR + .30%, 6.05%, due 12/01/14 8,522,578
6,288,667 Agency for International Development Floater (Support of Jamaica),
Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 5.99%, due 6,287,685
3/30/19
15,000,000 Agency for International Development Floater (Support of Morocco),
Variable Rate, 6 mo. LIBOR + .15%, 5.78%, due 10/29/26 15,044,531
20,000,000 Agency for International Development Floater (Support of Morocco),
Variable Rate, 6 mo. LIBOR - .015%, 5.71%, due 2/01/25 19,578,125
25,000,000 Agency for International Development Floater (Support of Portugal),
Variable Rate, 6 mo. LIBOR, 5.75%, due 1/01/21 24,769,531
10,077,500 Agency for International Development Floater (Support of Sri Lanka),
Variable Rate, 6 mo. LIBOR + .20%, 5.95%, due 6/15/12 10,116,865
10,266,668 Agency for International Development Floater (Support of Zimbabwe),
Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 5.88%, due 10,255,439
1/01/12
15,000,000 Federal National Mortgage Association, 5.19%, due 7/20/98 14,977,500
20,000,000 Small Business Administration Series 95-C, 6.88%, due 9/01/05 20,560,000
----------------
140,148,192
----------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Structured Notes -- 6.3%
$ 3,550,000 Federal Home Loan Bank,
Variable Rate, (10 YR CMT + 2.55% - 3 mo. LIBOR), 2.38%, due
7/28/98 3,535,800
$ 1,250,000 Federal National Mortgage Association,
Variable Rate, ((.50 * 2YR CMT) + 1.80%), 4.79%, due 3/10/98 1,246,875
$22,500,000 Student Loan Marketing Association,
Variable Rate, (10.25% - 5YR DM SWAP), 5.23%, due 3/23/98 22,455,000
----------------
27,237,675
----------------
167,385,867
----------------
TOTAL DEBT OBLIGATIONS (COST $379,462,633) 386,348,780
----------------
PREFERRED STOCKS -- 6.9%
Preferred Stocks -- 6.9%
10,000 Bear Stearns Managed Income Securities Plus Fund 13.27% 9,975,700
20,000 Home Ownership Funding 2 Preferred 144A, 13.338% 19,746,800
----------------
29,722,500
----------------
TOTAL PREFERRED STOCKS (COST $29,706,360) 29,722,500
----------------
SHORT-TERM INVESTMENTS -- 7.4%
Cash Equivalents -- 0.2%
$ 1,050,000 BankBoston Eurodollar Time Deposit, 5.7875% due 3/2/98 1,050,000 (b)
----------------
Commercial Paper -- 2.7%
$11,500,000 GE Capital Corp, 5.68% due 3/02/98 11,500,000
----------------
Repurchase Agreements -- 4.5%
$18,967,500 Morgan Stanley Repurchase Agreement dated 2/27/98, due
3/2/98, with a maturity value of $18,976,648 and an
effective yield of 5.7875%, collateralized by the
following debt obligations having an aggregate market
value of $24,502,875 (including accrued interest):
Norwest Corp, 6.55% due 12/1/06
Morgan Stanley Group, Floating Rate Note due 5/1/01
General Mills Food Corp, 5.82% due 2/5/03
First Chicago NBD, 6.05% due 7/21/00
Citicorp, 6.62% due 10/15/07
Citicorp, Floating Rate Note due 5/24/01 18,967,500 (b)
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- continued
$ 364,084 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/27/98, due
3/2/98, with a maturity value of $364,237 and an effective yield of
5.07%, collateralized by a U.S. Treasury Obligation with a rate of
8.875%, with a maturity date of 8/15/17 and with a market value of
$371,365. 364,084
----------------
19,331,584
----------------
TOTAL SHORT-TERM INVESTMENTS
(COST $31,881,584) 31,881,584
----------------
TOTAL INVESTMENTS -- 103.8%
(Cost $441,050,577) 447,952,864
Other Assets and Liabilities (net) -- (3.8)% (16,542,483)
----------------
TOTAL NET ASSETS -- 100% $ 431,410,381
================
</TABLE>
Notes to the Schedule of Investments:
CMT - Constant Maturity Treasury Index
DM SWAP - 5 Year Deutsche Mark Constant Maturity Swap Rate
Variable rates -- The rates shown on variable notes are
the current interest rates at February 28, 1998, which
are subject to change based on the terms of the security,
including varying reset dates.
144A - Securities exempt from registration under Rule
144A of the Securities Act of 1933. These securities may
be resold in transactions exempt from registration,
normally to qualified institutional buyers.
(a) All or a portion of this security has been segregated to
cover margin requirements on open financial futures
contracts.
(b) Represents investments of security lending collateral
(Note 1).
4 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $441,050,577) (Note 1) $447,952,864
Dividends and interest receivable 3,708,975
Receivable for variation margin on open futures contracts (Notes 1 and 6) 168,594
Receivable for expenses waived or borne by Manager (Note 2) 51,138
------------
Total assets 451,881,571
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 20,017,500
Payable to affiliate for (Note 2):
Management fee 89,096
Shareholder service fee 53,458
Payable for open swap contracts (Notes 1 and 6) 112,256
Accrued expenses 198,880
------------
Total liabilities 20,471,190
------------
Net assets $431,410,381
============
Net assets consist of:
Paid-in capital $418,257,647
Accumulated undistributed net investment income 2,980,545
Accumulated undistributed net realized gain 3,434,575
Net unrealized appreciation 6,737,614
------------
$431,410,381
============
Net assets attributable to:
Class III shares $431,410,381
============
Shares outstanding:
Class III 42,034,709
============
Net asset value per share:
Class III $ 10.26
============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest (including securities lending income of $33,834) $30,219,243
Dividends 3,284,940
-----------
Total income 33,504,183
-----------
Expenses:
Management fee (Note 2) 1,311,252
Custodian and transfer agent fees 78,733
Audit fees 35,999
Legal fees 11,740
Registration fees 9,946
Trustees fees (Note 2) 4,720
Miscellaneous 4,754
Fees waived or borne by Manager (Note 2) (932,631)
-----------
524,513
Shareholder service fee (Note 2)
Class I 7,627
Class III 782,627
-----------
Net expenses 1,314,767
-----------
Net investment income 32,189,416
-----------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 1,587,942
Closed futures contracts 9,623,154
Closed swap contracts 3,034,102
-----------
Net realized gain 14,245,198
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 7,228,892
Open futures contracts 1,956,925
Open swap contracts (112,256)
Written options (9,375)
-----------
Net unrealized gain 9,064,186
-----------
Net realized and unrealized gain 23,309,384
-----------
Net increase in net assets resulting from operations $55,498,800
===========
6 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 32,189,416 $ 27,372,630
Net realized gain 14,245,198 984,536
Change in net unrealized appreciation (depreciation) 9,064,186 (3,180,642)
------------- -------------
Net increase in net assets resulting from operations 55,498,800 25,176,524
------------- -------------
Distributions to shareholders from:
Net investment income
Class I (206,797) (17,070)
Class III (34,705,546) (25,071,527)
------------- -------------
Total distributions from net investment income (34,912,343) (25,088,597)
------------- -------------
Net realized gains
Class I (76,406) (1,958)
Class III (10,245,112) (3,491,659)
------------- -------------
Total distributions from net realized gains (10,321,518) (3,493,617)
------------- -------------
In excess of net realized gains
Class I -- (878)
Class III -- (1,566,602)
------------- -------------
Total distributions in excess of net realized gains -- (1,567,480)
------------- -------------
(45,233,861) (30,149,694)
------------- -------------
Net share transactions: (Note 5)
Class I (3,679,073) 3,600,624
Class III (149,668,125) 264,915,841
------------- -------------
Increase (decrease) in net assets resulting from net share
transactions (153,347,198) 268,516,465
------------- -------------
Total increase (decrease) in net assets (143,082,259) 263,543,295
Net assets:
Beginning of period 574,492,640 310,949,345
------------- -------------
End of period (including accumulated undistributed net
investment income of $2,980,545 and $5,703,472, respectively) $ 431,410,381 $574,492,640
============= =============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from September 10, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ -----------------------------
<S> <C> <C>
Net asset value, beginning of period $10.16 $10.01
------ ------
Income from investment operations:
Net investment income 0.56+ 0.36
Net realized and unrealized gain 0.56 0.13
------ ------
Total from investment operations 1.12 0.49
------ ------
Less distributions to shareholders:
From net investment income (0.68) (0.29)
From net realized gains (0.27) (0.03)
In excess of net realized gains -- (0.02)
------ ------
Total distributions (0.95) (0.34)
------ ------
Net asset value, end of period $10.33/(a)/ $10.16
====== ======
Total Return /(b)/ 11.52 % 4.93 %
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $3,630
Net expenses to average daily net assets 0.38 %* 0.38 %*
Net investment income to average daily net assets 6.31 %* 5.83 %*
Portfolio turnover rate 59 % 25 %
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share $ 0.02 $ 0.01
amounts:
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b) The total returns would have been lower had certain expenses not been
waived during the periods shown.
8 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
--------------------------------------------------
1998 1997 1996 1995*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.18 $ 10.40 $ 10.13 $ 10.00
--------- --------- --------- ---------
Income from investment operations:
Net investment income 0.67 0.58 0.66 0.24
Net realized and unrealized gain (loss) 0.38 (0.09) 0.58 0.07
--------- --------- --------- ---------
Total from investment operations 1.05 0.49 1.24 0.31
--------- --------- --------- ---------
Less distributions to shareholders:
From net investment income (0.70) (0.60) (0.60) (0.18)
From net realized gains (0.27) (0.08) (0.37) --
In excess of net realized gains -- (0.03) -- --
--------- --------- --------- ---------
Total distributions (0.97) (0.71) (0.97) (0.18)
--------- --------- --------- ---------
Net asset value, end of period $ 10.26 $ 10.18 $ 10.40 $ 10.13
========= ========= ========= =========
Total Return/(a)/ 10.71% 4.93% 12.50% 3.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 431,410 $ 570,862 $ 310,949 $ 209,377
Net expenses to average daily net assets 0.25% 0.25% 0.25% 0.25%**
Net investment income to average daily net assets 6.14% 6.15% 6.52% 6.96%**
Portfolio turnover rate 59% 25% 70% 65%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.02 $ 0.02 $ 0.01 $ 0.01
</TABLE>
* For the period from August 18, 1994 (commencement of operations) to
February 28, 1995.
** Annualized.
/(a)/ The total returns would have been lower had certain expenses not been
waived during the periods shown.
See accompanying notes to the financial statements. 9
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks high total return through investment in U.S. government
securities and other investment grade bonds denominated in U.S. dollars
while generally maintaining a portfolio duration of approximately four to
six years (excluding short-term investments).
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets
invested with GMO, as more fully described in the Trust's prospectus.
Class III shares are the continuation of the Trust's shares that existed
prior to June 1, 1996, and bear the same total operating expenses (after
the voluntary expense waiver) as those shares.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. 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 other persons
acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. 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 by
10
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain investments in securities held by the Fund were valued on the
basis of a price provided by a principal market maker. At February 28,
1998, the total value of these securities represented 15% of net assets.
These prices may differ from the value that would have been used had a
broader market for the securities existed and the differences could be
material to the financial statements.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instruments or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government obligations in accordance
with the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1998.
Options
The Fund may write call and put options on securities it owns or in which
it may invest. When the Fund writes a call or put option, an amount equal
to the premium received is recorded as a liability and subsequently marked
to market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
offset against the proceeds or amounts paid on the transaction to
determine the realized gain or loss. If a written put option is exercised,
the premium reduces the cost basis of the securities purchased by the
Fund. The Fund as a writer of an option has no control over whether the
underlying securities may be sold (call) or purchased (put) and as a
result bears the market risk of an unfavorable change in the price of the
security underlying the written option. There is the risk the Fund may not
be able to enter into a closing transaction because of an illiquid market.
At February 28, 1998, the Fund had no written option contracts
outstanding.
11
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults, the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Indexed securities
The Fund may also invest in indexed securities whose redemption values
and/or coupons are linked to the prices of other securities, securities
indices, or other financial indicators. The Fund uses indexed securities
to increase or decrease its exposure to different underlying instruments
and to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1998, the Fund loaned securities
having a market value of $19,619,244, collateralized by cash in the amount
of $20,017,500 which was invested in short-term instruments.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return based on a notional amount. To the extent that the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty,
respectively. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities.
12
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Such risks involve the possibility that there is no liquid market for
these agreements, that the counterparty to the agreements may default on
its obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 28, 1998.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Distributions in excess of tax basis
earnings and profits, if any, are reported in the Fund's financial
statements as a return of capital. Differences in the recognition or
classification of income for financial statement and tax purposes which
result in temporary over-distributions for financial statement purposes
are classified as distributions in excess of net investment income or
accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis. Interest
income on U.S. Treasury inflation indexed securities is accrued daily
based upon an inflation adjusted principal. Additionally, any increase in
the principal or face amount of the securities adjusted for inflation is
recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
13
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including
the management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .10% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .25%;
thus, the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $4,720. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
----------------- ----------------
<S> <C> <C>
U.S. Government securities $ 125,653,058 $ 228,583,505
Investments (non-U.S. Government securities) 165,754,997 208,480,247
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
----------------------- ----------------------- ---------------------- -------------------
<S> <C> <C> <C>
$ 441,050,577 $ 7,668,137 $ 765,850 $ 6,902,287
</TABLE>
4. Principal shareholders
At February 28, 1998, 43.3% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
14
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from September 10, 1996
Period from March 1, 1997 (commencement of operations) to
to January 9, 1998 February 28, 1997
---------------------------------- -----------------------------------
Class I: Shares Amount Shares Amount
--------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Shares sold 46,389 $ 476,298 385,608 $ 3,888,618
Shares issued to shareholders in
reinvestment of distributions 27,963 283,203 1,967 19,906
Shares repurchased (431,611) (4,438,574) (30,316) (307,900)
--------------- ----------------- --------------- ------------------
Net increase/(decrease) (357,259) $ (3,679,073) 357,259 $ 3,600,624
=============== ================= =============== ==================
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
---------------------------------- -----------------------------------
Class III: Shares Amount Shares Amount
--------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Shares sold 22,386,390 $ 227,678,006 26,591,731 $ 269,419,204
Shares issued to shareholders in
reinvestment of distributions 3,685,870 37,365,549 2,531,335 25,549,376
Shares repurchased (40,102,345) (414,711,680) (2,947,048) (30,052,739)
--------------- ----------------- --------------- ------------------
Net increase/(decrease) (14,030,085) $ (149,668,125) 26,176,018 $ 264,915,841
=============== ================= =============== ==================
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
--------------- ---------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
146 U.S. Long Bond March 1998 $ 17,634,062 $ 221,832
67 U.S. Long Bond June 1998 8,071,406 (76,052)
187 U.S. Treasury Note 10 Yr March 1998 21,072,563 226,503
241 U.S. Treasury Note 10 Yr June 1998 27,142,625 (50,238)
446 U.S. Treasury Note 5 Yr June 1998 48,641,875 (374,462)
------------------
$ (52,417)
==================
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
15
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Written put option transactions
<TABLE>
<CAPTION>
Principal Amount of
Contracts
(000's omitted) Premiums
---------------------- ----------------------
<S> <C> <C>
Outstanding, beginning of period $30,000 $126,563
Options written 30,000 150,000
Options exercised (60,000) (276,563)
Options expired - -
---------------------- ----------------------
Outstanding, end of period - -
====================== ======================
</TABLE>
Swap agreement
<TABLE>
<CAPTION>
Notional Net Unrealized
Amount Expiration Date Description Depreciation
--------------- ---------------- ------------------------------------------------------ -----------------
<S> <C> <C> <C>
$50,000,000 5/22/98 Agreement with Morgan Guaranty Trust Company dated $(112,256)
4/22/97 to receive (pay) the notional amount
multiplied by the return on the Lehman Brothers
Treasury Index and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a specified
spread.*
-----------------
$ (112,256)
-----------------
</TABLE>
* Swap agreement valued by management (Note 1).
16
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Federal Income Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 11.68% of distributions as net capital gain dividends.
17
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily
responsible for the day-to-day management of the Fund's portfolio. Each of
these individuals has been a portfolio manager with Grantham, Mayo, Van
Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Domestic Bond Fund returned 10.7% for the
fiscal year ended February 28, 1998, as compared to 10.7% for the Lehman
Brothers Government Bond Index. Consistent with the Fund's investment
objectives and policies, the Fund was substantially invested in
high-quality, domestic fixed income instruments throughout the period.
The Fund matched the return of the benchmark as interest rates fell
significantly during the fiscal year. Because the policy of the Fund is to
match approximately the duration, or maturity risk, of the benchmark, the
shift in rates did not impact adversely its relative performance. The
falling rate environment provided attractive total return for the fund,
well in excess of its yield.
During the year the majority of the Fund's assets were invested in U.S.
agency and asset-backed securities. The additional yield provided by the
Fund's holdings of asset-backed securities offset the fees, expenses and
transaction costs associated with its management. Because these issues
tend to have short effective maturities, U.S. Treasury interest rate
futures were used to maintain the Fund's interest rate exposure near that
of the benchmark.
At the fiscal year end approximately 32% of the Fund was invested in
highly-rated, floating rate, asset-backed securities. These included
issues backed by auto, truck, credit card and health care receivables.
Also, approximately 33% of the Fund was invested in U.S. government agency
issues which offered higher yields than similar maturity U.S. Treasury
securities.
GMO believes that asset-backed securities will continue to offer
attractive opportunities to enhance the yield of the Fund. The maturity
exposure of the fund is managed to approximate that of the U.S. treasury
market. As such, the Fund will remain exposed to capital changes resulting
from shifts in U.S. interest rates.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investments in
GMO Domestic Bond Fund Class III Shares and
the Lehman Brothers Government Bond Index
As of February 28, 1998
-------------------------------------
Average Annual Total Return
-------------------------------------
Since
Inception
1 Year 5 Year 8/18/94
Class -------------------------------------
III 10.7% n/a 8.8%
-------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Domestic Bond Lehman Brothers
Fund Class III Government Bond
Date Shares Index
---- ----------------- ---------------
8/18/94 $10,000 $10,000
2/28/95 $10,315 $10,366
2/29/96 $11,604 $11,620
2/28/97 $12,176 $12,149
2/28/98 $13,481 $13,443
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. Class III shares are a
redesignation of the single class of shares that has been offered by the Fund
since inception. Past performance is not indicative of future performance.
Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Emerging Country
Debt Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Emerging Country Debt Fund at February 28, 1998, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at February 28, 1998
by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 62.5%
<C> <C> <S> <C>
Argentina -- 15.4%
USD 575,000 Argentina Pro 4,
Variable Rate, 1 mo. LIBOR, 5.61%, due 12/28/10 513,188
ARP 35,134,370 Argentina Pro-1 Co-Participation Rights,
Variable Rate, 1 mo. Peso Deposit Rate, 2.98%,
due 4/01/07 22,945,433
ARP 32,323,800 Province of Buenos Aires,
Variable Rate, 1 mo. Peso Deposit Rate, 2.98%,
due 4/01/07 27,569,824
ARP 1,900,000 Provincia Corrientes,
Variable Rate, 1 mo. Peso Deposit Rate, 2.98%,
due 4/01/09 964,732
ARP 13,000,000 Republic of Argentina, 8.75%, due 7/10/02 11,933,467
ARP 2,000,000 Republic of Argentina Bocon Pro 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.98%,
due 4/01/07 1,865,933
USD 9,600,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due
3/31/23 8,172,000
USD 900,000 Republic of Argentina Global Bond, 11.38%, due
1/30/17 1,023,750
USD 57,600,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.50%, due 3/31/23 43,668,000
--------------
118,656,327
--------------
Bosnia & Herzegovina -- 0.0%
DEM 2,244,033 Bosnia & Herzegovina Series A, Step Up, 2.00%,
due 12/11/17 284,399
DEM 3,446,721 Bosnia & Herzegovina Series B, Zero Coupon,
0.00%, due 12/11/17 83,091
--------------
367,490
--------------
Brazil -- 12.4%
USD 102,815,106 Brazil Capitalization Bond, PIK, 8.00%, due
4/15/14 83,537,276
USD 15,000,000 Brazil Discount ZL Bond,
Variable Rate, 6 Mo. LIBOR + .81%, 6.69%, due
4/15/24 12,412,500
--------------
95,949,776
--------------
Bulgaria -- 0.6%
USD 18,000,000 Bulgaria Discount Series B Strips, Basket 2,
0.00%, due 7/28/24 2,295,000
USD 1,950,000 Bulgaria IAB,
Variable Rate, 6 mo. LIBOR + .81%, 6.56%, due
7/28/11 1,491,750
USD 5,000,000 Bulgaria Par Bond, Series B Strips, Tranche B,
0.00%, due 7/28/24 727,500
--------------
4,514,250
--------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Costa Rica -- 0.4%
USD 1,548,832 Central Bank of Costa Rica Interest Series A,
Variable Rate, 3 mo. LIBOR + .81%, 6.57%, due
5/21/05 1,378,460
USD 881,232 Central Bank of Costa Rica Interest Series B,
Variable Rate, 3 mo. LIBOR + .81%, 6.57%, due
5/21/05 775,484
USD 1,000,000 Central Bank of Costa Rica Principal Bond Series
A, 6.25%, due 5/21/10 830,000
--------------
2,983,944
--------------
Dominican Republic -- 1.1%
USD 10,957,000 Dominican Republic Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due
8/30/24 8,765,600
--------------
Ecuador -- 4.5%
USD 13,215,000 Republic of Ecuador Discount Bond (Global
Registered), Variable Rate, 6 mo. LIBOR +
.81%, 6.63%, due 2/28/25 9,779,100
USD 44,500,000 Republic of Ecuador Par Bond,
Variable Rate, Step up, 3.50%, due 2/28/25 24,391,563
USD 222,555 Republic of Ecuador PDI (Global Bearer
Capitalization Bond), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 6.63%, due
2/27/15 142,435
USD 546,780 Republic of Ecuador PDI (Registered), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 6.63%, due
2/27/15 349,939
--------------
34,663,037
--------------
Ivory Coast -- 1.2%
FRF 120,000,000 Ivory Coast, FLIRB,
Variable Rate, Step Up, 2.00%, due 10/31/00/(a)/ 6,749,544
USD 7,000,000 Ivory Coast, FLIRB,
Variable Rate, Step Up, 2.00%, due 10/31/00/(a)/ 2,397,500
--------------
9,147,044
--------------
Jordan -- 3.3%
USD 21,250,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step up 144A, 5.00%, due
12/23/23 14,715,625
USD 11,019,428 Hashemite Kingdom of Jordan PDI,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due
12/23/05 10,523,554
--------------
25,239,179
--------------
Macedonia -- 1.2%
USD 14,384,127 Macedonia Capitalization Bond, PIK,
Variable Rate, 9 mo. and 10 mo. interpolated
LIBOR + .81%, 6.66%, due 7/02/12 8,990,080
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Mexico -- 9.6%
USD 14,000,000 Mexico Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 6.69%, due
12/31/19 13,098,750
USD 5,000,000 Mexico Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + .81%, 6.62%, due
12/31/19 4,678,125
FRF 335,250,000 Mexico Par Bond, 6.63%, due 12/31/19 47,967,182
CHF 10,000,000 Mexico Par Bond, 3.75%, due 12/31/19 5,269,147
USD 2,000,000 Mexico Par Bond, Series A, 6.25%, due 12/31/19 1,687,500
USD 1,500,000 Mexico Par Bond, Series B, 6.25%, due 12/31/19 1,265,625
--------------
73,966,329
--------------
Nigeria -- 2.2%
USD 23,500,000 Central Bank of Nigeria Par Bond,
Variable Rate, Step up, 6.25%, due 11/15/20 16,920,000
--------------
Panama -- 0.8%
USD 7,828,000 Panama Interest Reduction Bond,
Variable Rate, Step up, 3.75%, due 7/17/14 6,115,625
--------------
Peru -- 0.5%
USD 975,000 Peru FLIRB,
Variable Rate, Step Up, 3.25%, due 3/07/17 591,094
USD 5,000,000 Peru FLIRB,
Variable Rate, Step Up 144A, 3.25%, due 3/07/17 3,031,250
--------------
3,622,344
--------------
Supra National -- 1.1%
ZAR 250,000,000 International Bank Recon and Development, 0.00%,
due 5/14/12 8,722,048
--------------
United States -- 1.8%
Asset Backed Securities -- 0.6%
USD 5,000,000 Americredit Automobile Receivables Trust 97 Class
A2, Variable Rate, 1 mo. LIBOR + .10%, 5.73%,
due 3/05/01 4,998,500
--------------
U.S. Government -- 1.2%
USD 9,065,160 U.S. Treasury Inflation Indexed Note, 3.63%, due
7/15/02/(b)/ 9,016,997
--------------
Total United States 14,015,497
--------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Venezuela -- 6.4%
USD 21,025,000 Republic of Venezuela, 9.25%, due 9/15/27 18,848,913
USD 2,062,857 Republic of Venezuela DCB Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 6.81%, due
12/18/07 1,841,100
USD 16,040,953 Republic of Venezuela DCB,
Variable Rate, 6 mo. LIBOR + .88%, 6.81%, due
12/18/08 13,915,525
USD 360,000 Republic of Venezuela FLIRB Series B Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 6.75%, due
3/31/07 318,825
USD 15,320,325 Republic of Venezuela New Money Bond Series A,
Variable Rate, 6 Mo. LIBOR + 1%, 6.94%, due
12/18/05 13,520,187
USD 985,412 Republic of Venezuela New Money Bond Series B Odd
Lot, Variable Rate, 6 mo. LIBOR + .88%, 6.81%,
due 12/18/05 869,626
--------------
49,314,176
--------------
TOTAL DEBT OBLIGATIONS
(COST $428,382,939) 481,952,746
--------------
LOAN ASSIGNMENTS -- 25.2%
Algeria -- 1.6%
JPY 376,793,704 Algeria Tranche 1, JPY LIBOR + .8125% (1.4375%) 1,819,395
USD 3,818,182 Algeria Tranche 1, LIBOR + .8125% (6.6875%) 2,806,364
JPY 500,000,000 Algeria Tranche 3 Loan, JPY 6 mo. LIBOR + .8125%
(1.53125%) 2,562,733
USD 495,867 Algeria Tranche 3, LIBOR + .8125% (6.6875%) 345,867
USD 3,181,818 Algeria Tranche A Loan,
Variable Rate, 6 mo. LIBOR + 1.5% (7.375%) 2,982,955
JPY 313,994,754 Algeria Tranche A, JPY LIBOR + 1.5% (2.125%) 2,187,251
--------------
12,704,565
--------------
Congo Republic -- 1.0%
FRF 102,097,963 Republic of Congo Loan Agreement* 4,359,363
ECU 8,195,761 Republic of Congo Loan Agreement* 2,320,122
USD 4,179,127 Republic of Congo Loan Agreement* 1,086,573
--------------
7,766,058
--------------
Ivory Coast -- 3.4%
USD 3,656,573 Ivory Coast Credit Agreement* 1,417,110
DEM 361,735 Ivory Coast Credit Agreement* 73,750
SDR 2,974,383 Ivory Coast Credit Agreement* 1,480,202
FRF 299,447,436 Ivory Coast Credit Agreement* 21,883,321
JPY 428,291,342 Ivory Coast Refinancing Agreement* 1,254,396
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ivory Coast -- continued
BEF 18,333,554 Ivory Coast Refinancing Agreement* 181,084
-------------
26,289,863
-------------
Russia -- 19.0%
ECU 5,000,000 International Bank for Economic Cooperation Loan
Agreement* 2,912,540
CHF 1,500,000 International Bank for Economic Cooperation Loan
Agreement* 546,811
JPY 900,000,000 International Investment Bank Loan Agreement* 3,526,478
USD 24,000,000 International Investment Bank Loan Agreement* 13,560,000
DEM 10,000,000 International Investment Bank Loan Agreement* 3,113,291
USD 199,488,310 Russia Vnesh Restructured Loan Agreements, LIBOR
+ .8125% (3.2486%) 120,191,708
DEM 5,208,190 Russia Vnesheconombank Foreign Trade Obligation* 2,295,874
-------------
146,146,702
-------------
Yugoslavia -- 0.2%
USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 630,166
USD 1,852,004 Yugoslavia New Financing Agreement Tranche C* 833,396
-------------
1,463,562
-------------
TOTAL LOAN ASSIGNMENTS
(COST $171,681,905) 194,370,750
-------------
LOAN PARTICIPATIONS -- 5.8%
Algeria -- 1.6%
JPY 118,636,364 Algeria Tranche 1, JPY LIBOR + .8125% (1.4375%)
(Participation with Bank of America) 572,850
USD 2,000,000 Algeria Tranche 2, LIBOR + .8125% (7.00%)
(Participation with Salomon) 1,617,500
FRF 50,564,324 Algeria Tranche 3, FRF LIBOR + .8125% (4.3125%)
(Participation with Salomon) 5,418,229
FRF 40,000,000 Algeria Tranche 3, FRF LIBOR + .8125% (4.3125%)
(Participation with Salomon) 4,286,207
JPY 98,863,636 Algeria Tranche A, JPY LIBOR + 1.5% (2.125%)
(Participation with Bank of America) 688,673
-------------
12,583,459
-------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cameroon -- 0.5%
NLG 28,052,902 Cameroon Loan Agreement (Participation with Bank
of America and Salomon)* 3,837,419
-------------
Jamaica -- 0.7%
USD 5,812,500 Jamaica Refinancing Agreement Tranche B, LIBOR +
.81% (6.44%) (Participation with Chase
Manhattan Bank and Salomon) 5,056,875
-------------
Morocco -- 2.7%
JPY 384,300,844 Morocco Restructuring and Consolidating Agreement
Tranche A, Japanese Long Term Fixed Prime +
.2175% (3.0175%) (Participation with J.P. 2,395,606
Morgan)
JPY 2,971,603,837 Morocco Restructuring and Consolidating Agreement
Tranche A, Japanese Long Term Floating Prime +
.1175% (2.6175%) (Participation with Bankers
Trust Co. and J.P. Morgan) 18,524,009
-------------
20,919,615
-------------
Russia -- 0.2%
USD 2,000,000 International Investment Bank Loan Agreement* 1,130,000
-------------
Yugoslavia -- 0.1%
USD 2,100,336 Yugoslavia New Financing Agreement Tranche B
(Participation with Chase Manhattan Bank)* 945,151
-------------
TOTAL LOAN PARTICIPATIONS
(COST $40,802,330) 44,472,519
-------------
PROMISSORY NOTES -- 1.5%
Nigeria -- 0.2%
USD 3,000,000 Nigeria Promissory Notes, 5.09%, due 1/05/10 1,560,000
-------------
Russia -- 1.3%
USD 17,500,000 Russia Vnesheconombank Foreign Trade Obligation
Promissory Notes, 0.00%, due 6/30/99/(a)/ 10,062,500
-------------
TOTAL PROMISSORY NOTES
(COST $10,862,889) 11,622,500
-------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Principal Amount Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
CALL OPTIONS PURCHASED -- 0.0%
Options on Futures -- 0.0%
USD 500,000 Eurodollar, Expires 3/16/98, Strike 94.25 40,000
--------------
TOTAL CALL OPTIONS PURCHASED
(COST $31,300) 40,000
--------------
PUT OPTIONS PURCHASED -- 0.0%
Cross Currency Options -- 0.0%
USD 3,917,376 TRL Put/1.00 USD + 1.50 DEM Basket Call, Expires
5/12/98, Strike 545,000 20,217
USD 4,694,227 TRL Put/1.00 USD + 1.50 DEM Basket Call, Expires
5/26/98, Strike 565,000 16,000
--------------
36,217
--------------
Options on Commodities -- 0.0%
USD 200,000 NYMEX Crude Oil, Expires 6/05/98, Strike 16.2 170,000
--------------
Options on Futures -- 0.0%
USD 500,000 Eurodollar, Expires 3/16/98, Strike 94 2,500
--------------
TOTAL PUT OPTIONS PURCHASED
(COST $216,552) 208,717
--------------
<CAPTION>
Shares
- -----------------------------
<C> <S> <C>
RIGHTS AND WARRANTS -- 0.0%
Mexico -- 0.0%
75,017,000 United Mexican States Warrants, Expires --
6/30/03**
--------------
Nigeria -- 0.0%
14,000 Central Bank of Nigeria Payment Adjusted
Warrants, Expires 11/15/20 ** --
--------------
Venezuela -- 0.0%
72,125 Republic of Venezuela Recovery Warrants,
Expires 04/15/20 ** --
--------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
--------------
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value/Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS -- 3.5%
Cash Equivalents -- 0.1%
USD 748,633 BankBoston Eurodollar Time Deposit, 5.7875% due
3/2/98/(c)/ 748,633
USD 51,860 First Union National Bank of North Carolina
Eurodollar Time Deposit, 5.6250% due 3/2/98/(c)/ 51,860
293,007 Merrimac Cash Fund Premium Class/(c)/ 293,007
--------------
1,093,500
--------------
Commercial Paper -- 3.4%
USD 26,000,000 GE Capital Corp, 5.68%, due 3/2/98 26,000,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $27,093,500) 27,093,500
--------------
TOTAL INVESTMENTS -- 98.5%
(Cost $679,071,415) 759,760,732
Other Assets and Liabilities (net)-- 1.5% 11,205,735
--------------
TOTAL NET ASSETS -- 100% $ 770,966,467
==============
Notes to the Schedule of Investments:
DCB - Debt Conversion Bond
FLIRB - Front Loaded Interest Reduction Bond
PIK - Payment In Kind
PDI - Past Due Interest
144A - Securities exempt from registration under
Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
Variable and Step up rates - The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1998, which are
subject to change based on the terms of the
security, including varying reset dates.
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Notes to the Schedule of Investments -- continued
Currency Abbreviations:
<TABLE>
<S> <C>
ARP - Argentinian Peso JPY - Japanese Yen
BEF - Belgian Franc MYR - Malaysian Ringgit
BRL - Brazilian Real NLG - Netherlands Guilder
CHF - Swiss Franc SDR - Special Drawing Rights
DEM - German Mark THB - Thailand Baht
ECU - European Currency Unit TRL - Turkish Lira
FRF - French Franc TWD - New Taiwan Dollar
GBP - British Pound USD - United States Dollar
IDR - Indonesian Rupiah ZAR - South African Rand
</TABLE>
/(a)/ When-issued security.
/(b)/ Security has been segregated to cover margin requirements
on open financial futures contracts.
/(c)/ Represents investments of security lending collateral
(Note 1).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
See accompanying notes to the financial statements. 9
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $679,071,415) (Note 1) $759,760,732
Interest receivable 10,417,130
Receivable for Fund shares sold 10,015,682
Receivable for open swap contracts (Notes 1 and 6) 8,217,026
Cash (Note 1) 4,716,261
Receivable for open forward foreign currency contracts (Notes 1 and 6) 3,794,391
Receivable for expenses waived or borne by Manager (Note 2) 129,385
Receivable for variation margin on open futures contracts (Notes 1 and 6) 1,338
Miscellaneous receivable 44,870
------------
Total assets 797,096,815
------------
Liabilities:
Payable for investments purchased 19,107,269
Payable upon return of securities loaned (Note 1) 1,093,500
Payable for open forward foreign currency contracts (Notes 1 and 6) 4,171,698
Payable for Fund shares repurchased 1,173,565
Payable to affiliate for (Note 2):
Management fee 284,448
Shareholder service fee 71,856
Accrued expenses 184,205
Miscellaneous payable 43,807
------------
Total liabilities 26,130,348
------------
Net assets $770,966,467
============
Net assets consist of:
Paid-in capital $594,642,821
Accumulated undistributed net investment income 45,421,506
Accumulated undistributed net realized gain 42,383,504
Net unrealized appreciation 88,518,636
------------
$770,966,467
============
Net assets attributable to:
Class III shares $460,386,606
============
Class IV shares $310,579,861
============
Shares outstanding:
Class III 39,550,731
============
Class IV 26,699,294
============
Net asset value per share:
Class III $ 11.64
============
Class IV $ 11.63
============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest (including securities lending income of $26,470) $ 51,257,391
-------------
Total income 51,257,391
-------------
Expenses:
Management fee (Note 2) 2,823,080
Custodian fees 186,100
Legal fees 123,001
Audit fees 70,509
Transfer agent and dividend disbursing agent fees 40,123
Trustees fees (Note 2) 4,567
Registration fees 2,500
Miscellaneous 7,772
Fees waived or borne by Manager (Note 2) (1,087,585)
-------------
2,170,067
Shareholder service fee (Note 2)
Class I 15,103
Class II 4,453
Class III 783,908
Class IV 32,884
-------------
Net expenses 3,006,415
-------------
Net investment income 48,250,976
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 98,329,104
Closed futures contracts (649,931)
Closed swap contracts 18,246,291
Written options 3,395,950
Foreign currency, forward contracts and foreign currency related
transactions 23,534,700
-------------
Net realized gain 142,856,114
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (70,105,796)
Open futures contracts (806,571)
Open swap contracts 6,708,967
Foreign currency, forward contracts and foreign currency related
transactions (9,145,083)
-------------
Net unrealized loss (73,348,483)
-------------
Net realized and unrealized gain 69,507,631
-------------
Net increase in net assets resulting from operations $117,758,607
=============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 48,250,976 $ 53,277,149
Net realized gain 142,856,114 223,812,662
Change in net unrealized appreciation (depreciation) (73,348,483) 74,007,909
-------------- --------------
Net increase in net assets resulting from operations 117,758,607 351,097,720
-------------- --------------
Distributions to shareholders from:
Net investment income
Class I (615,704) --
Class II (162,060) --
Class III (37,765,550) (60,410,173)
-------------- --------------
Total distributions from net investment income (38,543,314) (60,410,173)
-------------- --------------
Net realized gains
Class I (2,479,219) --
Class II (728,281) --
Class III (156,588,472) (149,956,551)
-------------- --------------
Total distributions from net realized gains (159,795,972) (149,956,551)
-------------- --------------
(198,339,286) (210,366,724)
-------------- --------------
Net share transactions: (Note 5)
Class I 2,299,312 34,101
Class II 494,022 --
Class III (3,460,212) (200,761,783)
Class IV 296,725,667 --
-------------- --------------
Increase (decrease) in net assets resulting from net
share transactions 296,058,789 (200,727,682)
-------------- --------------
Total increase (decrease) in net assets 215,478,110 (59,996,686)
Net assets:
Beginning of period 555,488,357 615,485,043
-------------- --------------
End of period (including accumulated undistributed net
investment income of $45,421,506 and $21,594,553,
respectively) $ 770,966,467 $ 555,488,357
============== ==============
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from December 31, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ -----------------------------
<S> <C> <C>
Net asset value, beginning of period $14.08 $12.87
------ ------
Income from investment operations:
Net investment income 1.05+ 0.10
Net realized and unrealized gain 0.94 1.11
------ ------
Total from investment operations 1.99 1.21
------ ------
Less distributions to shareholders:
From net investment income (0.84) --
From net realized gains (4.25) --
------ ------
Total distributions (5.09) --
------ ------
Net asset value, end of period $10.98/(a)/ $14.08
====== ======
Total Return /(b)/ 15.42% 9.40%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 36
Net expenses to average daily net assets 0.66%* 0.71%*
Net investment income to average daily net
assets 9.27%* 6.06%*
Portfolio turnover rate 255% 152%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following $ 0.02 --/(c)/
per share amounts:
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/ All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(b)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(c)/ Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
See accompanying notes to the financial statements. 13
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
Period from March 21, 1997
(commencement of operations)
to January 9, 1998
--------------------------
<S> <C>
Net asset value, beginning of period $ 13.74
--------
Income from investment operations:
Net investment income 0.92+
Net realized and unrealized gain 1.42
--------
Total from investment operations 2.34
--------
Less distributions to shareholders:
From net investment income (0.84)
From net realized gains (4.25)
--------
Total distributions (5.09)
--------
Net asset value, end of period $ 10.99/(a)/
========
Total Return /(b)/ 18.34%
Ratios/Supplemental Data:
Net assets, end of period (000's) --
Net expenses to average daily net assets 0.60%*
Net investment income to average daily net assets 8.61%*
Portfolio turnover rate 255%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount: $ 0.02
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/ All Class II shares of the fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(b)/ Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
14 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-------------------------------------------
1998 1997 1996 1995*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.09 $ 11.76 $ 8.39 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income 1.13+ 1.48 1.35 0.48
Net realized and unrealized gain (loss) 1.51 6.40 3.84 (1.59)
-------- -------- -------- --------
Total from investment operations 2.64 7.88 5.19 (1.11)
-------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.84) (1.58) (1.17) (0.40)
From net realized gains (4.25) (3.97) (0.65) --
In excess of net realized gains -- -- -- (0.10)
-------- -------- -------- --------
Total distributions (5.09) (5.55) (1.82) (0.50)
-------- -------- -------- --------
Net asset value, end of period $ 11.64 $ 14.09 $ 11.76 $ 8.39
======== ======== ======== ========
Total Return /(a)/ 22.27% 74.32% 63.78% (11.65)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $460,387 $555,452 $615,485 $243,451
Net expenses to average daily net assets 0.53% 0.57% 0.50% 0.50%**
Net investment income to average daily net
assets 8.62% 8.35% 12.97% 10.57%**
Portfolio turnover rate 255% 152% 158% 104%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.03 $ 0.03 $ 0.02 $ 0.01
</TABLE>
* For the period from April 19, 1994 (commencement of operations) to
February 28, 1995.
** Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
See accompanying notes to the financial statements. 15
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
----------------------------
<S> <C>
Net asset value, beginning of period $ 10.99
---------
Income from investment operations:
Net investment income 0.10+
Net realized and unrealized gain 0.54
---------
Total from investment operations 0.64
---------
Net asset value, end of period $ 11.63
=========
Total Return /(a)/ 5.82%
Ratios/Supplemental Data:
Net assets, end of period (000's) $310,580
Net expenses to average daily net assets 0.50%*
Net investment income to average daily net assets 7.17%*
Portfolio turnover rate 255%
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
16 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks high total return by investing primarily in sovereign debt
of countries in Asia, Latin America, the Middle East, Southern Europe,
Eastern Europe and Africa.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares.
Effective January 9, 1998, Class I and Class II shares ceased operations
and all shares were exchanged for Class III shares. Additionally, Class IV
shares commenced operations on January 9, 1998.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a
17
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
security and has the power to override any price supplied by a source (by
taking a price supplied by another source) because the Manager has other
reasons to suspect that a price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. These prices may differ
from the value that would have been used had a broader market for the
securities existed and the differences could be material to the financial
statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1998.
18
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1998.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 1998, there were
no open written option contracts.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit
19
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
risk of both the borrower and the lender that is selling the loan
agreement. When the Fund purchases assignments from lenders it acquires
direct rights against the borrower on the loan. Direct indebtedness of
emerging countries involves a risk that the governmental entities
responsible for the repayment of the debt may be unable or unwilling to pay
the principal and interest when due.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate, total return and
credit default swap agreements. Interest rate swap agreements involve the
exchange by the Fund with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal. Total
return swap agreements involve commitments to pay interest in exchange for
a market linked return based on a notional amount. To the extent the total
return of the security or index underlying the transaction exceeds or falls
short of the offsetting interest rate obligation, the Fund will receive a
payment from or make a payment to the counterparty, respectively. Credit
default swaps involve the payment of a specified rate based on the notional
amount. The Fund receives payment upon default of the underlying security.
In connection with these agreements, cash may be set aside as collateral by
the Fund's custodian in accordance with the terms of the swap agreement. At
February 28, 1998, $4,460,100 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform and that there may be unfavorable
changes in the fluctuation of interest rates. See Note 6 for a summary of
open swap agreements as of February 28, 1998.
20
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain member firms of the New York
Stock Exchange. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. As with other extensions of credit, the Fund may bear
the risk of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. The Fund receives
compensation for lending its securities. At February 28, 1998, the Fund
loaned securities having a market value of $1,031,500 collateralized by
cash in the amount of $1,093,500, which was invested in short-term
instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency and swap transactions.
The following reclassification represents the cumulative amount necessary
to report the stated components of net assets on a tax basis, excluding
certain temporary differences, as of February 28, 1998. This
reclassification has no impact on net investment income, realized gain/loss
and net asset value of the Fund and is primarily attributable to certain
differences in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principles.
The
21
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
<TABLE>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
--------------------- ------------------------- ---------------------
<S> <C> <C>
$14,119,291 ($14,119,291) --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Income is not recognized and discounts are not amortized on
securities for which collection is not expected. In determining the net
gain or loss on securities sold, the cost of securities is determined on
the identified cost basis. Interest income on the U.S. Treasury inflation
indexed securities is accrued daily based upon an inflation adjusted
principal. Additionally, any increase in the principal or face amount of
these securities adjusted for inflation is recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .50% of the amount
invested. In the case of cash redemptions, the fee is .25% of the amount
redeemed. These fees may be reduced by 50% with respect to any portion of a
purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. These fees are allocated relative to each class' net assets on the
share transaction date. Purchase premiums are included as part of each
class' "shares sold" and redemption fees are included as part of each
class' "shares repurchased", respectively, as summarized in Note 5. For the
year ended February 28, 1998, the Fund received $1,503,863 in purchase
premiums and $306,964 in redemption fees. There is no premium for
reinvested distributions or in-kind transactions.
22
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Investment risk
Investments in emerging country debt present certain risks that are not
inherent in many other securities. Many emerging countries present elements
of political and/or economic instability, which may result in the fund's
inability to collect on a timely basis, or in full, principal and interest
payments. Further, countries may impose various types of foreign currency
regulations or controls which may impede the fund's ability to repatriate
amounts it receives. The fund may acquire interests in securities or bank
loans which are in default at the time of acquisition in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging country debt are relatively illiquid. Accordingly, the fund may
not be able to realize in an actual sale amounts approximating those used
to value its holdings.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares, .15%
for Class III shares and .10% for Class IV shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding custody fees, brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceed .35% of average daily net assets.
Prior to June 1, 1996, a similar waiver existed for annual expenses
exceeding .50%; thus the net annual expense ratio after the waiver for a
Class III shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $4,567. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
23
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------- -------------------
<S> <C> <C>
U.S. Government securities $ 9,019,334 $ --
Investments (non-U.S. Government securities) 1,560,237,208 1,347,685,526
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
$ 680,250,987 $ 84,889,882 $ 5,380,137 $ 79,509,745
</TABLE>
4. Principal shareholders
At February 28, 1998, 25.9% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from Period from December 31, 1996
March 1, 1997 to (commencement of operations) to
January 9, 1998 February 28, 1997
------------------------------ --------------------------------
Class I: Shares Amount Shares Amount
--------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 665,873 $ 9,485,099 2,566 $ 34,101
Shares issued to shareholders
in reinvestment of
distributions 224,120 2,611,210 -- --
Shares repurchased (892,559) (9,796,997) -- --
--------------- -------------- --------------- ---------------
Net increase (decrease) (2,566) $ 2,299,312 2,566 $ 34,101
=============== ============== =============== ===============
</TABLE>
24
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Share transactions -- continued
Period from March 21, 1997
(commencement of operations)
to January 9, 1998
------------------------------
Class II: Shares Amount
--------------- --------------
Shares sold 159,652 $ 2,197,620
Shares issued to shareholders
in reinvestment of
distributions 76,497 890,341
Shares repurchased (236,149) (2,593,939)
--------------- --------------
Net increase -- $ 494,022
=============== ==============
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------------------ ------------------------------
Class III: Shares Amount Shares Amount
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares sold 20,511,879 $ 265,135,023 11,310,056 $ 162,038,721
Shares issued to shareholders
in reinvestment of
distributions 15,802,080 183,720,164 14,440,766 185,738,098
Shares repurchased (36,173,053) (452,315,399) (38,680,281) (548,538,602)
--------------- -------------- --------------- --------------
Net increase (decrease) 140,906 $ (3,460,212) (12,929,459) $(200,761,783)
=============== ============== =============== ==============
<CAPTION>
Period from January 9, 1998
(commencement of operations)
to February 28, 1998
-----------------------------
Class IV: Shares Amount
--------------- -------------
<S> <C> <C>
Shares sold 26,699,294 $ 296,725,667
Shares issued to shareholders
in reinvestment of -- --
distributions
Shares repurchased -- --
--------------- -------------
Net increase 26,699,294 $ 296,725,667
=============== =============
</TABLE>
25
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
------------ ----------------- -------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Buys
12/14/98 IDR 25,000,000,000 $ 2,460,361 $ (2,539,639)
==================
Sales
8/11/98 ARP 7,000,000 6,911,476 22,650
3/16/98 BRL 5,882,500 5,174,219 (174,219)
3/26/98 CHF 9,000,000 6,155,109 (6,612)
4/09/98 DEM 40,000,000 22,096,249 (42,128)
4/16/98 FRF 370,000,000 60,938,753 303,403
4/17/98 GBP 600,000 985,351 2,771
4/03/98 JPY 3,675,000,000 29,240,076 (344,023)
3/20/98 MYR 10,765,000 2,925,769 (425,769)
4/17/98 MYR 18,702,500 5,072,403 (8,092)
12/14/98 MYR 18,950,000 5,004,034 (4,034)
4/27/98 SGD 8,728,000 5,379,530 (379,530)
3/23/98 THB 200,000,000 4,615,953 2,316,456
6/22/98 THB 100,000,000 2,258,044 1,149,111
6/15/98 TWD 168,000,000 5,231,363 (231,363)
5/18/98 ZAR 37,395,000 7,427,109 (16,289)
------------------
2,162,332
==================
</TABLE>
Short futures contracts
<TABLE>
<CAPTION>
Number
of Contract Net Unrealized
Contracts Type Expiration Date Value Appreciation
--------- ------------------------------- --------------- ------------- --------------
<C> <S> <C> <C> <C>
100 MATIF FRF Bond June 1998 $ 8,487,839 $ 17,936
50 US Treasury Bond June 1998 6,023,438 57,097
--------------
$ 75,033
==============
</TABLE>
At February 28, 1998, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
26
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Written option transactions
Puts
Principal Amount
of Contracts
(000's omitted) Premiums
------------------ ----------------
Outstanding, beginning of period $ -- $ --
Options written 148,900 5,924,975
Options exercised -- --
Options expired (148,800) (5,835,000)
Options sold (100) (89,975)
------------------ ----------------
Outstanding, end of period $ -- $ --
================== ================
Calls
Principal Amount
of Contracts
(000's omitted) Premiums
------------------ ----------------
Outstanding, beginning of period $ -- $ --
Options written 109,891 3,160,180
Options exercised (59,691) (1,829,180)
Options expired -- --
Options sold (50,200) (1,331,000)
------------------ ----------------
Outstanding, end of period $ -- $ --
================== ================
27
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
Credit Default Swaps
5,000,000 USD 2/09/99 Agreement with Union Bank of Switzerland $(39,957)
dated 2/04/98 to pay 2.45% per year times the
notional amount. The Fund receives payment
only upon a default event in Argentina, the
notional amount times the difference between
the par value and the then-market value of
Argentina Floating Rate Note due 3/31/05.
54,278,259 USD 2/26/99 Agreement with Credit Suisse Financial 9,229,773
(par value) Products dated 2/12/97 to purchase, for a set
price, a specified amount of Bulgaria FLIRB
Fixed/Floating Rate Note Series A due
7/28/12 and Bulgaria FLIRB Fixed/Floating
Rate Note Series B due 7/28/12. In the event
of default by Bulgaria, the agreement to
purchase the bonds is eliminated; in its
place, Credit Suisse Financial Products
acquires the option to sell the same amount
of bonds to the Fund for a lower set price.
15,000,000 USD 11/03/00 Agreement with Credit Suisse Financial (414,449)
Products dated 10/29/97 to pay 3.45% per year
times the notional amount. The Fund receives
payment only upon a default event in
Bulgaria, the notional amount times the
difference between the purchase cost of 59.50
USD and the then-market value of Bulgaria
FLIRB Note Series A due 7/28/12.
</TABLE>
28
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------ ---------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
10,000,000 USD 11/07/00 Agreement with Credit Suisse Financial $(426,071)
Products dated 11/04/97 to pay 3.50% per year
times the notional amount. The Fund receives
payment only upon a default event in Brazil,
the notional amount times the difference
between the purchase cost of 74.75 USD and
the then-market value of Brazil Debt
Conversion "DCB" Bond due 4/15/12.
21,500,000 USD 5/29/01 Agreement with Credit Suisse Financial (559,345)
Products dated 5/21/97 to pay 4.78% per year
times the notional amount. The Fund receives
payment only upon a default event in Ecuador,
the notional amount times the difference
between par value and the then-market value
of the Republic of Ecuador Past Due Interest
"PDI" Floating Rate Note due 2/27/15.
47,000,000 USD 5/29/01 Agreement with Credit Suisse Financial (1,856,004)
Products dated 5/23/97 to pay 3.30% per year
times the notional amount. The Fund receives
payment only upon a default event in Ecuador,
the notional amount times the difference
between the purchase cost of 60.25 USD and
the then-market value of the Republic of
Ecuador Past Due Interest "PDI" Floating Rate
Note due 2/27/15.
</TABLE>
29
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
25,000,000 USD 9/10/01 Agreement with Credit Suisse Financial $516,268
Products dated 9/05/97 to pay 1.75% per year
times the notional amount. The Fund receives
payment only upon a default event in Brazil,
the notional amount times the difference
between the purchase cost of 83.625 USD and
the then-market value of Brazil Debt
Conversion "DCB" Bond due 4/15/12.
Interest Rate Swap
60,000,000 MYR 12/16/00 Agreement with Morgan Guaranty Trust Company (243,533)
dated 12/12/97 to pay the notional amount
multiplied by 10.60% and to receive Floating
Rate KLIBOR adjusted by a specified spread.
Total Return Swaps
12,500,000 USD 3/16/98 Agreement with Chase Manhattan Bank dated (337,590)
2/10/98 to pay the notional amount multiplied
by the change in market value (including
accrued interest) of Russia Ministry of
Finance, 9.25% due 11/27/01 and to receive
the initial market value multiplied by 1
month LIBOR adjusted by a specified spread.
13,568,000 USD/ 3/20/98 Agreement with Morgan Guaranty Trust Company 339,678
7,933,470 USD dated 2/12/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Russia
Principal Floating Rate Note due 12/15/20,
and to pay initial market value multiplied
by 1 month LIBOR adjusted by a specific
spread.
</TABLE>
30
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------ ---------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
20,000,000 USD/ 3/26/98 Agreement with Morgan Guaranty Trust Company $1,127,127
24,053,611 USD dated 1/21/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of United
Mexican States, 11.50% due 5/15/26 and to
pay initial market value multiplied by 2
month LIBOR adjusted by a specific spread.
25,000,000 USD/ 4/06/98 Agreement with Bank of America dated 2/02/98 608,860
24,312,500 USD to receive the notional amount multiplied by
the change in market value (including
accrued interest) of Brazilian Republic
Bond, 10.125% due 5/15/27 and to pay initial
market value multiplied by a fixed rate of
3.625%.
5,000,000 ARP/ 4/08/98 Agreement with Morgan Guaranty Trust Company 253,359
5,013,264 USD dated 1/05/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic of
Argentina, 11.75% due 2/12/07 and to pay
initial market value multiplied by 3 month
LIBOR adjusted by a specific spread.
</TABLE>
31
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------ ---------- ----------------------------------------------- --------------
<S> <C> <C> <C>
11,878,906 USD/ 4/13/98 Agreement with Morgan Guaranty Trust Company $(476,862)
12,500,000 USD dated 1/07/98 to pay the notional amount
multiplied by the change in market value
(including accrued interest) of Russia
Ministry of Finance, 9.25% due 11/27/01 and
to receive the initial market value
multiplied by 4 month LIBOR adjusted by a
specified spread.
5,000,000 USD/ 4/17/98 Agreement with Morgan Guaranty Trust Company 81,350
4,674,260 USD dated 1/13/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Mexican
Discount Floating Rate Note Series B due
12/31/19 and to pay initial market value
multiplied by 3 month LIBOR adjusted by a
specific spread.
5,000,000 USD/ 4/17/98 Agreement with Morgan Guaranty Trust Company 80,591
4,661,306 USD dated 1/13/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Mexican
Discount Floating Rate Note Series C due
12/31/19 and to pay initial market value
multiplied by 3 month LIBOR adjusted by a
specific spread.
</TABLE>
32
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------ ---------- ----------------------------------------------- --------------
<S> <C> <C> <C>
25,000,000 USD/ 4/17/98 Agreement with Morgan Guaranty Trust Company $ 408,279
23,237,500 USD dated 1/13/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Mexican
Discount Floating Rate Note Series D due
12/31/19 and to pay initial market value
multiplied by 3 month LIBOR adjusted by a
specific spread.
30,000,000 USD/ 4/24/98 Agreement with Morgan Guaranty Trust Company (1,510,590)
30,000,000 USD dated 4/24/97 to pay the notional amount
multiplied by the J.P. Morgan Emerging
Markets Bond Index on 4/24/98, adjusted by a
specified spread, and to receive 4.78% times
the notional amount.
15,000,000 USD/ 5/05/98 Agreement with Credit Suisse Financial 622,459
9,014,063 USD Products dated 10/29/97 to receive the
notional amount multiplied by the change in
market value (including accrued interest) of
Republic of Bulgaria FLIRB Series A
Fixed/Floating Rate Notes due 7/28/12 and to
pay initial market value multiplied by 6
month LIBOR adjusted by a specific spread.
</TABLE>
33
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------ ---------- ----------------------------------------------- --------------
<S> <C> <C> <C>
25,000,000 USD/ 5/11/98 Agreement with Morgan Guaranty Trust Company $ 611,245
25,367,188 USD dated 2/03/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic of
Argentina, 9.75% due 9/19/27 and to pay
initial market value multiplied by 3 month
LIBOR adjusted by a specific spread.
68,500,000 USD 5/28/98 Agreement with Credit Suisse Financial 1,801,848
Products dated 11/25/97 to receive the
notional amount multiplied by the change in
market value (including accrued interest) of
Ecuador Past Due Interest "PDI" Bond due
2/28/15 and to pay initial market value
multiplied by 6 month LIBOR adjusted by a
specific spread.
10,000,000 USD/ 8/12/98 Agreement with Bear Stearns dated 2/10/98 to (66,067)
10,000,000 USD pay the notional amount multiplied by the
J.P. Morgan Emerging Markets Bond Index
(including accrued interest) and to receive
the notional amount multiplied by 6 month
LIBOR adjusted by a specified spread.
</TABLE>
34
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------ ---------- ----------------------------------------------- --------------
<S> <C> <C> <C>
3,917,376 USD/ 6/04/99 Agreement with Bank of America dated $(536,362)
625,189,248,812 TRL 6/26/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Indexed Linked Bond due 6/04/99 and to
pay initial market value multiplied by 3
month LIBOR adjusted by a specific
spread.
776,766 USD/ 6/04/99 Agreement with Bank of America dated (146,148)
116,727,003,674 TRL 11/13/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Indexed Linked Bond due 6/04/99 and to
pay initial market value multiplied by 3
month LIBOR adjusted by a specific
spread.
4,694,227 USD/ 11/26/99 Agreement with Bank of America dated (850,833)
900,000,000,000 TRL 11/25/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Indexed Linked Bond due 11/26/99 and to
pay initial market value multiplied by 3
month LIBOR adjusted by a specific
spread.
---------------
Net unrealized appreciation $8,217,026
===============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
35
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 39.63% of distributions as net capital gain dividends.
36
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Emerging Country Debt Fund returned 22.5% for
the fiscal year ended February 28, 1998, compared to 11.0% for the J.P.
Morgan Emerging Market Bond Index Plus. Consistent with the Fund's
investment objectives and policies, the Fund was substantially invested in
sovereign debt instruments of emerging countries throughout the period.
The past year was a volatile period for emerging country debt. Sovereign
spreads declined steadily until mid-October when the Asian crisis finally
affected emerging country debt around the world. Dramatic price declines
continued into November before the market stabilized. Through the end of
the fiscal year prices recovered somewhat as spreads declined to a point
about 150 basis points wider that the record low set in early October.
The Fund performed well in this environment, outperforming its benchmark by
11.5% for the fiscal year. The value was added through security selection
primarily, with secondary emphasis placed on active country allocation. The
Fund remained fully invested throughout the period and declined
significantly as spreads widened. The longer-dated, less-marketable
holdings we favor rose in price as liquidity premiums contracted in the
first half of the year, but widened dramatically when the effects of the
Asian problems spread. Losses during the market decline were limited by our
use of options. Our performance was helped by overweighting Bulgarian and
Ecuadorian debt and our decision to avoid exposure to the Philippines. On
the other hand, our large Russian debt position did poorly. Our
out-of-benchmark country positions in Costa Rica, the Ivory Coast, Jordan
and Turkey helped the Fund outperform. Our security selection was
especially strong in Brazil and Russia. Also, options positions in
Argentina, Brazil and Venezuela, plus a short position in the Thai Baht
were important to performance.
Outlook
The recent volatility in the emerging markets has created new opportunities
for debt buyers. Issues we favor, such as those with limited marketability,
have cheapened as a result of the turmoil and an increased emphasis by
investors on liquidity. The Fund has significant overweighted positions in
Bulgarian, Ecuadorian, Ivory Coast and Russian debt. It holds issues of
many countries not in the benchmark including: Algeria, Costa Rica, the
Dominican Republic, Jamaica, Jordan, Macedonia, South Africa, Turkey and
Yugoslavia. The outlook for these markets is generally good. Spreads are
significantly above their lows and opportunities to acquire undervalued
securities are relatively frequent, however it is unlikely the returns of
the Fund will match those of the past three years.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,00 Investment in
GMO Emerging Country Debt Fund Class III Shares and the JP Morgan Emerging
Market Bond Index Plus
As of February 28, 1998
-------------------------------
Average Annual Total Return
-------------------------------
Since
1 Year Inception
-------------------------------
Class 4/19/94
III 21.4% 33.6%
-------------------------------
1/9/98
Class
IV n/a 5.0%
-------------------------------
[LINE GRAPH APPEARS HERE]
GMO Emerging Country JP Morgan Emerging
Debt Fund Bond Index Plus
-------------------- ------------------
4/19/94 $9,950 $10,000
2/28/95 $8,792 $9,220
2/29/96 $14,364 $13,000
2/28/97 $25,040 $18,625
2/28/98 $30,616 $20,666
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 25 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Class III shares
are a redesignation of the single class of shares that has been offered by the
Fund since inception. Performance for Class IV shares may be different due to
lower shareholder service fees. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Global Balanced Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Balanced Allocation Fund
at February 28, 1998, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value($)/
Shares Description Value($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS -- 100.0%
894,975 GMO Core Fund (Class III Shares) 17,890,558
52,515 GMO Currency Hedged International Bond Fund (Class III
Shares) 559,808
777,661 GMO Currency Hedged International Core Fund (Class III
Shares) 9,269,719
1,441,136 GMO Domestic Bond Fund (Class III Shares) 14,786,051
399,457 GMO Emerging Country Debt Fund (Class III Shares) 4,649,674
412,532 GMO Emerging Markets Fund (Class III Shares) 3,943,805
454,741 GMO Evolving Countries Fund (Class III Shares) 3,915,324
175,790 GMO Growth Fund (Class III Shares) 769,959
284,628 GMO Inflation Indexed Bond Fund (Class III Shares) 2,857,668
216,642 GMO International Bond Fund (Class III Shares) 2,263,907
364,593 GMO International Core Fund (Class III Shares) 8,458,558
85,569 GMO International Small Companies Fund (Class III Shares) 1,045,659
467,544 GMO REIT Fund (Class III Shares) 6,040,668
400,368 GMO Small Cap Growth Fund (Class III Shares) 4,916,516
268,470 GMO Small Cap Value Fund (Class III Shares) 4,907,628
2,461,992 GMO U.S. Bond/Global Alpha A Fund (Class III Shares) 26,097,119
203,006 GMO Value Fund (Class III Shares) 2,909,076
--------------
TOTAL MUTUAL FUNDS (COST $115,747,483) 115,281,697
--------------
SHORT-TERM INVESTMENT -- 0.0%
Repurchase Agreement -- 0.0%
$ 10,195 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $10,199 and
an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.875%, with a maturity
date of 8/15/17 and with a market value of $10,399. 10,195
--------------
TOTAL SHORT-TERM INVESTMENT (COST $10,195) 10,195
--------------
TOTAL INVESTMENTS -- 100.0%
(Cost $115,757,678) 115,291,892
Other Assets and Liabilities (net) -- 0.0% (12,326)
--------------
TOTAL NET ASSETS -- 100% $ 115,279,566
==============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- -------------------------------------------------------------------------------
Assets:
Investments, at value (cost $115,757,678) (Note 1) $ 115,291,892
Receivable for expenses waived or borne by Manager (Note 2) 5,201
-------------
Total assets 115,297,093
-------------
Liabilities:
Accrued expenses 17,527
-------------
Total liabilities 17,527
-------------
Net assets $ 115,279,566
=============
Net assets consist of:
Paid-in capital $ 112,448,328
Accumulated undistributed net realized gain 3,297,024
Net unrealized depreciation (465,786)
-------------
$ 115,279,566
=============
Net assets attributable to:
Class III shares $ 115,279,566
=============
Shares outstanding:
Class III 9,707,961
=============
Net asset value per share:
Class III $ 11.87
=============
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends from investment company shares $ 2,722,142
Interest 5,156
------------
Total income 2,727,298
------------
Expenses:
Custodian and transfer agent fees 27,247
Audit fees 14,398
Registration fees 8,214
Legal fees 1,452
Trustees fees (Note 2) 535
Miscellaneous 363
Fees waived or borne by Manager (Note 2) (52,209)
------------
--
Shareholder service fee (Note 2)
Class I 14,890
Class II 21,509
------------
Net expenses 36,399
------------
Net investment income 2,690,899
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 251,382
Realized gain distributions from investment company shares 9,737,963
------------
Net realized gain 9,989,345
------------
Change in net unrealized appreciation (depreciation) on
investments (1,239,876)
------------
Net realized and unrealized gain 8,749,469
------------
Net increase in net assets resulting from operations $ 11,440,368
============
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from July 29, 1996
Year Ended (commencement of operations)
February 28, 1998 February 28, 1997
----------------- ----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,690,899 $ 64,042
Net realized gain 9,989,345 206,668
Change in net unrealized appreciation
(depreciation) (1,239,876) 774,090
------------- ------------
Net increase in net assets resulting
from operations 11,440,368 1,044,800
------------- ------------
Distributions to shareholders from:
Net investment income
Class I (612,518) (64,042)
Class II (1,668,937) --
Class III (409,444) --
------------- ------------
Total distributions from net
investment income (2,690,899) (64,042)
------------- ------------
In excess of net investment income
Class I (2,044) (1,958)
Class II (5,570) --
Class III (1,366) --
------------- ------------
Total distributions in excess of
net investment income (8,980) (1,958)
------------- ------------
Net realized gains
Class I (1,560,218) (48,900)
Class II (4,205,151) --
Class III (1,039,983) --
------------- ------------
Total distributions from net
realized gains (6,805,352) (48,900)
------------- ------------
(9,505,231) (114,900)
------------- ------------
Net share transactions: (Note 5)
Class I (5,680,394) 6,386,281
Class II (12,119,329) 13,891,398
Class III 109,936,573 --
------------- ------------
Increase in net assets resulting from
net share transactions 92,136,850 20,277,679
------------- ------------
Total increase in net assets 94,071,987 21,207,579
Net assets:
Beginning of period 21,207,579 --
------------- ------------
End of period (including accumulated
undistributed net investment
income of $0 and $0, respectively) $115,279,566 $21,207,579
============= ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Net asset value, beginning of period $11.19 $10.00
------- -------
Income from investment operations:
Net investment income /(b)/ 0.55+ 0.22
Net realized and unrealized gain 0.65 1.35
------- -------
Total from investment operations 1.20 1.57
------- -------
Less distributions to shareholders:
From net investment income (0.32) (0.22)
In excess of net investment income --/(d)/ --
From net realized gains (0.83) (0.16)
------- -------
Total distributions (1.15) (0.38)
------- -------
Net asset value, end of period $11.24/(c)/ $11.19
======= =======
Total Return /(a)/ 10.70% 15.85%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $6,848
Net expenses to average daily net assets 0.13%* 0.15%*
Net investment income to average daily net
assets /(b)/ 5.27%* 2.75%*
Portfolio turnover rate 18% 33%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.01 $ 0.03
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(d)/ The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from December 31, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ -----------------------------
<S> <C> <C>
Net asset value, beginning of period $11.19 $ 10.86
------- --------
Income from investment operations:
Net investment income /(b)/ 0.55+ --
Net realized and unrealized gain 0.66 0.33
------- --------
Total from investment operations 1.21 0.33
------- --------
Less distributions to shareholders:
From net investment income (0.33) --
In excess of net investment income --/(d)/ --
From net realized gains (0.83) --
------- --------
Total distributions (1.16) --
------- --------
Net asset value, end of period $11.24/(c)/ $ 11.19
======= ========
Total Return /(a)/ 10.73% 3.04%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $14,359
Net expenses to average daily net assets 0.07%* 0.07%*
Net investment income to average daily net 5.31%* (0.07)%*
assets /(b)/
Portfolio turnover rate 18% 33%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following $ 0.01 $ 0.01
per share amounts:
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ All Class II shares of the fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(d)/ The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from June 2, 1997
(commencement of operations)
to February 28, 1998
---------------------------
<S> <C>
Net asset value, beginning of period $ 11.56
---------
Income from investment operations:
Net investment income /(b)/ 0.17+
Net realized and unrealized gain 1.30
---------
Total from investment operations 1.47
---------
Less distributions to shareholders:
From net investment income (0.33)
In excess of net investment income --(c)
From net realized gains (0.83)
---------
Total distributions (1.16)
---------
Net asset value, end of period $ 11.87
=========
Total Return /(a)/ 13.31%
Ratios/Supplemental Data:
Net assets, end of period (000's) $115,280
Net expenses to average daily net assets 0.00%*
Net investment income to average daily
net assets /(b)/ 1.91%*
Portfolio turnover rate 18%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amount: $ 0.01
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- -------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Balanced Allocation Fund (the "Fund"), which commenced
operations on July 29, 1996, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO Global Balanced Index, a benchmark developed by the Manager. The
Fund will pursue its objective by investing primarily in Class III shares
of domestic equity, international equity, and fixed income funds of the
Trust.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I shares and Class II shares ceased
operations, and all shares were exchanged for Class III shares.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
8
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain bankers and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
classification of distributions from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------- ----------------------- -------------------
$8,980 ($42,779) $33,799
9
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
In addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions of
underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .35% of the amount
invested. In the case of cash redemptions, the fee is .11% of the amount
redeemed. Prior to June 30, 1997, the premium on cash purchases was .31%
and the fee on cash redemptions was .03%. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
These fees are allocated relative to each class' net assets on the share
transaction date. Purchase premiums are included as part of each class'
"shares sold" and redemption fees are included as part of each class'
"shares repurchased", respectively, as summarized in Note 5. For the year
ended February 28, 1998 the Fund received $241,798 in purchase premiums and
$786 in redemption fees. There is no premium for reinvested distributions
or in-kind transactions.
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
fees from the underlying funds in which the Fund invests. The Fund has
adopted a Shareholder Service Plan under which the Fund pays GMO a
shareholder service fee for client and
10
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .13%
for Class I shares and .07% for Class II shares. No shareholder service fee
is charged for Class III shares.
GMO has agreed to reimburse all expenses until further notice (excluding
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses). Prior to
November 25, 1996, GMO had agreed to reimburse these expenses to the extent
that the Fund's annual expenses exceeded .05% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $535. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$106,749,664 and $11,697,750 respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$ 115,795,661 $1,617,258 $2,121,027 $503,769
4. Principal shareholders
At February 28, 1998, 60.1% of the outstanding shares of the Fund were held
by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
11
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from July 29, 1996
Period from March 1, 1997 (commencement of operations)
Class I: to January 9, 1998 to February 28, 1997
-------------------------------- --------------------------------
Shares Amount Shares Amount
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 1,325,598 $ 16,081,830 601,548 $ 6,271,381
Shares issued to shareholders
in reinvestment of
distributions 185,366 2,100,511 10,580 114,900
Shares repurchased (2,123,092) (23,862,735) -- --
--------------- --------------- -------------- ---------------
Net increase/(decrease) (612,128) $ (5,680,394) 612,128 $ 6,386,281
=============== =============== ============== ===============
<CAPTION>
Period from December 31, 1996
Period from March 1, 1997 (commencement of operations)
Class II: to January 9, 1998 to February 28, 1997
------------------------------- --------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 3,870,787 $ 45,813,645 1,283,396 $ 13,891,398
Shares issued to shareholders
in reinvestment of
distributions 471,399 5,347,162 -- --
Shares repurchased (5,625,582) (63,280,136) -- --
-------------- -------------- -------------- ---------------
Net increase/(decrease) (1,283,396) $ (12,119,329) 1,283,396 $ 13,891,398
============== ============== ============== ===============
</TABLE>
Period from June 2, 1997
(commencement of operations)
Class III: to February 28, 1998
--------------------------------
Shares Amount
-------------- ---------------
Shares sold 9,599,238 $ 108,707,411
Shares issued to shareholders
in reinvestment of
distributions 127,806 1,450,793
Shares repurchased
(19,083) (221,631)
-------------- ---------------
Net increase 9,707,961 $ 109,936,573
============== ===============
12
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- -------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 23.96% of distributions as net capital gain dividends.
13
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
- -------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a
portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
twenty years. Mr. Inker has been with the firm for six years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Global Balanced Allocation Fund returned 13.3%
for the twelve months ended February 28, 1998. During that period the
benchmark (48.75% S&P 500/16.25% GMO EAFE-Lite Extended/35% Lehman
Aggregate) returned 23.0%.
We use GMO's long-term asset class forecasts to allocate the Global
Balanced Allocation Fund among various GMO mutual funds. In our view, the
U.S. stock market is significantly overvalued. It is notoriously difficult
to call the top of a major stock market bubble like the one that exists in
the U.S. today. We believe, however, that our key analysis has been
correct, having done a far more complete analysis of bullish competitive
data on the U.S. market and "new era" thinking than we have ever done. Our
research suggests that from the market's current valuation level
prospective returns for large capitalization U.S. stocks over the next 10
years will be very disappointing.
During the fiscal year, the Fund was underweight in U.S. stocks by 16%
relative to the benchmark. This allocation hurt the Fund's overall
performance due to the continuing rally of U.S. equities. Within U.S.
stocks, we tilted the portfolio towards the most attractively valued
sectors including small stocks, where we were 8% overweight, and real
estate investment trusts (REITs), where we were 6% overweight. For the
fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund
underperformed the S&P 500 Index by 21%. Although small stocks as measured
by the Russell 2000 underperformed the S&P 500, performance of the GMO
Small Cap Growth Fund and the GMO Small Cap Value Fund was strong,
providing returns comparable to that of the S&P 500. In addition, return
from our holding of the U.S. Core Fund exceeded that of the S&P 500
benchmark.
Our overweight of international stocks was unsuccessful in adding value.
Performance of the International Core Fund lagged the benchmark as the
rally in expensive multinationals continued. The GMO International Core
Fund returned 11.7%, underperforming the GMO EAFE-Lite Index by 7.2%.
Returns to the Fund were also hurt by our 5% relative weight in emerging
markets. The emerging markets as measured by the IFC Investable Index
performed poorly, down 21.8%, due to the crisis in Asian economies.
However, performance of the GMO Emerging Markets Fund was better at -12.9%.
The fund is overweight by approximately 9% in fixed income, with
allocations to international and emerging bonds along with U.S. fixed
income. Performance of most of our bond portfolios exceeded their
benchmarks.
Until we see a significant correction in U.S. equities, it is likely that
the Fund will maintain its bearish stance. The diversification of the Fund
into global bonds and emerging markets should benefit performance in the
current fiscal year. We also expect our U.S. portfolio to perform better
this year. Small stocks are poised to outperform, and REITs should do well
in the current market environment, providing more attractive yields and
valuations than those available from large cap U.S. equities.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global Balanced Allocation Fund "GBAF" Class III Shares
and the Lehman Index (50%)/MSCI World Index*(50%)
As of February 28, 1998
---------------------------
Average Annual Total Return
---------------------------
Since
1 Year Inception
---------------------------
7/29/96*
16.5% 20.8%
---------------------------
[LINE GRAPH APPEARS HERE]
Lehman Index
"GBAF" Class (50%)/MSCI World GMO Global Balanced
Date III Shares Index*(50%) Index
---- ------------- --------------- -------------------
7/29/96 $9,965 $10,000 $10,000
2/28/97 $11,532 $10,973 $11,627
2/28/98 $13,499 $12,863 $14,295
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 35 bp on the purchase and 11 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
* Performance is linked to Class I shares (originating share class) and is
converted to Class III shares on June 2, 1997 (commencement date of Class III
shares).
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Global (U.S.+)
Equity Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly in all material respects, the financial position of GMO
Global (U.S.+) Equity Allocation Fund at February 28, 1998, the results of
its operations for the year then ended, the changes in its net assets and
the financial highlights for the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at February 28, 1998
by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value
($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS -- 100.0%
724,106 GMO Core Fund (Class III Shares) 14,474,871
220,151 GMO Currency Hedged International Core Fund (Class III Shares) 2,624,203
152,830 GMO Emerging Country Debt Fund (Class III Shares) 1,778,937
272,766 GMO Emerging Markets Fund (Class III Shares) 2,607,640
180,132 GMO Evolving Countries Fund (Class III Shares) 1,550,936
125,546 GMO Growth Fund (Class III Shares) 549,893
76,575 GMO Inflation Indexed Bond Fund (Class III Shares) 768,817
56,603 GMO International Bond Fund (Class III Shares) 591,501
290,691 GMO International Core Fund (Class III Shares) 6,744,033
47,197 GMO International Small Companies Fund (Class III Shares) 576,743
243,416 GMO REIT Fund (Class III Shares) 3,144,931
248,726 GMO Small Cap Growth Fund (Class III Shares) 3,054,357
163,775 GMO Small Cap Value Fund (Class III Shares) 2,993,802
147,170 GMO U.S. Bond/Global Alpha A Fund (Class III Shares) 1,560,003
145,291 GMO Value Fund (Class III Shares) 2,082,015
-----------
TOTAL MUTUAL FUNDS (COST $44,322,244) 45,102,682
-----------
SHORT-TERM INVESTMENT -- 0.0%
Repurchase Agreement -- 0.0%
$ 9,322 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $9,326 and an
effective yield of 5.07%, collateralized by a U.S. Treasury
Obligation with a rate of 8.875%, with a maturity date of
8/15/17 and with a market value of $9,509. 9,322
-----------
TOTAL SHORT-TERM INVESTMENT (COST $9,322) 9,322
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $44,331,566) 45,112,004
Other Assets and Liabilities (net) -- 0.0% (11,004)
-----------
TOTAL NET ASSETS -- 100% $45,101,000
===========
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- -------------------------------------------------------------------------------
Assets:
Investments, at value (cost $44,331,566) (Note 1) $45,112,004
Receivable for expenses waived or borne by Manager (Note 2) 4,689
-----------
Total assets 45,116,693
-----------
Liabilities:
Accrued expenses 15,693
-----------
Total liabilities 15,693
-----------
Net assets $45,101,000
===========
Net assets consist of:
Paid-in capital $43,203,821
Accumulated undistributed net realized gain 1,116,741
Net unrealized appreciation 780,438
-----------
$45,101,000
===========
Net assets attributable to:
Class III shares $45,101,000
===========
Shares outstanding:
Class III 4,301,488
===========
Net asset value per share:
Class III $ 10.48
===========
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Dividends from investment company shares $ 935,681
Interest 1,240
----------
Total income 936,921
----------
Expenses:
Custodian and transfer agent fees 17,959
Audit fees 13,384
Registration fees 9,818
Legal fees 1,112
Trustees fees (Note 2) 354
Miscellaneous 168
Fees waived or borne by Manager (Note 2) (42,795)
----------
Shareholder service fee (Note 2) --
Class I 1,009
----------
Net expenses 1,009
----------
Net investment income 935,912
----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (518,339)
Realized gain distributions from investment company shares 6,983,109
----------
Net realized gain 6,464,770
----------
Change in net unrealized appreciation (depreciation) on investments 402,806
----------
Net realized and unrealized gain 6,867,576
----------
Net increase in net assets resulting from operations $7,803,488
==========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
November 26, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
----------------- ----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 935,912 $ 202,369
Net realized gain 6,464,770 672,205
Change in net unrealized appreciation
(depreciation) 402,806 377,632
----------- -----------
Net increase in net assets resulting
from operations 7,803,488 1,252,206
----------- -----------
Distributions to shareholders from:
Net investment income
Class I (27,511) --
Class III (908,401) (202,377)
----------- -----------
Total distributions from net
investment income (935,912) (202,377)
----------- -----------
In excess of net investment income
Class I (92) --
Class III (3,044) --
----------- -----------
Total distributions in excess of
net investment income (3,136) --
----------- -----------
Net realized gains
Class I (175,698) --
Class III (5,674,854) (134,918)
----------- -----------
Total distributions from net
realized gains (5,850,552) (134,918)
----------- -----------
(6,789,600) (337,295)
----------- -----------
Net share transactions: (Note 5)
Class I 138,452 --
Class III 13,162,081 29,871,668
----------- -----------
Increase in net assets resulting from
net share transactions 13,300,533 29,871,668
----------- -----------
Total increase in net assets 14,314,421 30,786,579
Net assets:
Beginning of period 30,786,579 --
----------- -----------
End of period (including accumulated
undistributed net investment loss
of $0 and $8, respectively) $45,101,000 $30,786,579
=========== ===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 30, 1997
(commencement of
operations) to
January 9, 1998
--------------------------
<S> <C>
Net asset value, beginning of period $10.24
------
Income from investment operations:
Net investment income/(b)/ 0.25+
Net realized and unrealized gain 0.93
------
Total from investment operations 1.18
------
Less distributions to shareholders:
From net investment income (0.26)
In excess of net investment income --/(d)/
From net realized gains (1.65)
------
Total distributions (1.91)
------
Net asset value, end of period $ 9.51/(c)/
======
Total Return/(a)/ 11.04%
Ratios/Supplemental Data:
Net assets, end of period (000's) -
Net expenses to average daily net assets 0.13%*
Net investment income to average daily net assets/(b)/ 3.18%*
Portfolio turnover rate 32%
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amount: $ 0.01
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(d)/ The per share distribution in excess of net investment income was $0.0008.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Year Ended November 26, 1996
February 28, (commencement of operations)
1998 to February 28, 1997
--------------- ---------------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.30 $ 10.00
------- --------
Income from investment operations:
Net investment income /(b)/ 0.26+ 0.12
Net realized and unrealized gain 1.83 0.38
------- --------
Total from investment operations 2.09 0.50
------- --------
Less distributions to shareholders:
From net investment income (0.26) (0.12)
In excess of net investment income --/(c)/ --
From net realized gains (1.65) (0.08)
------- --------
Total distributions (1.91) (0.20)
------- --------
Net asset value, end of period $ 10.48 $ 10.30
======= ========
Total Return /(a)/ 21.86% 5.09%
Ratios/Supplemental Data:
Net assets, end of period (000's) $45,101 $ 30,787
Net expenses to average daily net assets 0.00% 0.00%*
Net investment income to average daily net
assets /(b)/ 2.39% 3.21%*
Portfolio turnover rate 32% 10%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following $ 0.01 $ 0.01
per share amounts:
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ The per share distribution in excess of net investment income was $0.0009.
+ Computed using average shares outstanding throughout the period.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- -------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global (U.S.+) Equity Allocation Fund (the "Fund"), which commenced
operations on November 26, 1996, is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO Global (U.S.+) Equity Index, a benchmark developed by the Manager.
The Fund will pursue its objective by investing primarily in Class III
shares of domestic equity, international equity, and fixed income funds of
the Trust.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/ dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller.
7
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Collateral for certain tri-party agreements is held at the counterparty's
custodian in a segregated account for the benefit of the Fund and the
counterparty. In connection with transactions in repurchase agreements, if
the seller defaults and the value of the collateral declines or if the
seller enters insolvency proceedings, realization of collateral by the Fund
may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
classification of distributions received from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
----------------- ------------------------- -------------------
$3,144 $(34,764) $31,620
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
8
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
In addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions of
underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .47% of the amount
invested. In the case of cash redemptions, the fee is .15% of the amount
redeemed. Prior to June 30, 1997, the premium on cash purchases was .42%
and the fee on cash redemptions was .05%. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
These fees are allocated relative to each class' net assets on the share
transaction date. Purchase premiums are included as part of each class'
"shares sold" and redemption fees are included as part of each class'
"share repurchased", respectively, as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $62,159 in purchase premiums and
$4,107 in redemption fees. There is no premium for reinvested distributions
or in-kind transactions.
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
fees from the underlying funds in which the Fund invests. The Fund has
adopted a Shareholder Service Plan under which the Fund pays GMO a
shareholder service fee for client and shareholder service, reporting and
other support. Pursuant to the Shareholder Service Plan, the shareholder
service fee is calculated based on the average daily net assets of each
class at the annual rate of .13% for Class I shares and .07% for Class II
shares. No shareholder service fee is charged for Class III shares.
GMO has agreed to reimburse all expenses until further notice (excluding
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $354. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
9
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$26,850,766 and $12,424,264, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$ 45,039,580 $ 1,243,426 $ 1,171,002 $ 72,424
4. Principal shareholders
At February 28, 1998, 37.9% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
Period from April 30, 1997
(commencement of operations)
Class I: to January 9, 1998
----------------------------------
Shares Amount
---------------- ----------------
Shares sold 107,248 $ 1,151,341
Shares issued to shareholders in
reinvestment of distributions 20,607 203,301
Shares repurchased (127,855) (1,216,190)
---------------- ----------------
Net increase 0 $ 138,452
================ ================
10
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Share transactions -- continued
<TABLE>
<CAPTION>
Period from November 26, 1996
Year Ended (commencement of operations)
Class III: February 28, 1998 to February 28, 1997
-------------------------------- ------------------------------
Shares Amount Shares Amount
-------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 1,472,906 $ 15,143,599 3,086,368 $ 30,859,765
Shares issued to shareholders
in reinvestment of
distributions 192,315 1,900,758 -- --
Shares repurchased (352,601) (3,882,276) (97,500) (988,097)
-------------- ----------------- ------------- ---------------
Net increase 1,312,620 $ 13,162,081 2,988,868 $ 29,871,668
============== ================= ============= ===============
</TABLE>
11
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
48.02% of distributions as net capital gain dividends.
12
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a
portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
twenty years. Mr. Inker has been with the firm for six years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Global (U.S.+) Equity Allocation Fund returned
21.9% for the fiscal year ended February 28, 1998. During that period the
Fund's benchmark (75% S&P 500/25% GMO EAFE-Lite Extended) returned 30.0%.
We use GMO's long-term asset class forecasts to allocate the Global (U.S.+)
Equity Allocation Fund among various GMO mutual funds. In our view, the
U.S. stock market is significantly overvalued. It is notoriously difficult
to call the top of a major stock market bubble like the one that exists in
the U.S. today. We believe, however, that our key analysis has been
correct, having done a far more complete analysis of bullish competitive
data on the U.S. market and "new era" thinking than we have ever done. Our
research suggests that from the market's current valuation level
prospective returns for large capitalization U.S. stocks over the next 10
years will be very disappointing.
During the fiscal year, the Fund was underweight in U.S. stocks by 17%
relative to the benchmark. This allocation hurt the Fund's overall
performance due to the continuing rally of U.S. equities. Within U.S.
stocks, we tilted the portfolio towards the most attractively valued
sectors including small stocks, where we were 12% overweight, and real
estate investment trusts (REITs), where we were 8% overweight. For the
fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund
underperformed the S&P 500 Index by 21%. Although small stocks as measured
by the Russell 2000 underperformed the S&P 500, performance of the GMO
Small Cap Growth Fund and the GMO Small Cap Value Fund was strong,
providing returns comparable to that of the S&P 500. In addition, return
from our holding of the U.S. Core Fund exceeded that of the S&P 500
benchmark.
Our overweight of international stocks was unsuccessful in adding value.
Performance of the International Core Fund lagged the benchmark as the
rally in expensive multinationals continued. The GMO International Core
Fund returned 11.7%, underperforming the GMO EAFE-Lite Index by 7.2%. We
also diversified into emerging markets, which did not perform well. The
emerging markets as measured by the IFC Investable Index performed poorly,
down 21.8%, due to the crisis in Asian economies. However, performance of
the GMO Emerging Markets Fund was better at -12.9%.
The portfolio also maintained a 10% weight in fixed income. Because of our
very bearish view of the U.S. equity market, we believe a position in fixed
income will provide excellent protection in a potentially difficult year.
Until we see a significant correction in U.S. equities, it is likely that
the Fund will maintain its bearish stance. The diversification of the Fund
into fixed income and emerging markets should benefit performance in the
current fiscal year. We also expect our U.S. portfolio to perform better
this year. Small stocks are poised to outperform, and REITs should do well
in the current market environment, providing more attractive yields and
valuations than those available from large cap U.S. equities.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global (U.S.+) Equity Allocation Fund "GEAF" Class III Shares and
the MSCI World Index
As of February 28, 1998
-------------------------------
Average Annual Total Return
-------------------------------
Since
1 Year Inception
-------------------------------
Class 11/26/96
III 21.1% 21.2%
-------------------------------
[LINE GRAPH APPEARS HERE]
GMO Global (U.S.+)
GEAF Equity Index MSCI World Index
---- ------------------ ----------------
11/26/96 $9,953 $10,000 $10,000
2/28/97 $10,444 $10,388 $10,047
2/28/98 $12,727 $13,494 $12,467
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset value of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the state period and reflects a
transaction fee of 47 bp on the purchase and 15 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Global Bond Fund
(A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Bond Fund at February
28, 1998, the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS -- 96.8%
Brazil -- 2.4%
USD 2,021,645 Brazil Capitalization Bond, PIK, 8.00%, due 4/15/14 1,642,587
USD 1,000,000 Brazil Discount ZL Bond,
Variable Rate, 6 Mo. LIBOR + .81%, 6.69%, due
4/15/24 827,500
--------------
2,470,087
--------------
Bulgaria -- 0.6%
USD 2,000,000 Bulgaria Discount Series B Strips, Basket 2, 0.00%,
due 7/28/24 255,000
USD 500,000 Bulgaria FLIRB Series B,
Variable Rate, Step up, 2.75%, due 7/28/12 322,500
--------------
577,500
--------------
Canada -- 1.5%
CAD 2,000,000 Government of Canada Real Return, 4.25%, due 12/1/21 1,573,665
--------------
Denmark -- 3.2%
DKK 20,800,000 Kingdom of Denmark Bullet, 7.00%, due 11/15/07 3,398,870
--------------
Ecuador -- 0.3%
USD 500,000 Republic of Ecuador Par Bond,
Variable Rate, Step up, 3.50%, due 2/28/25 274,063
--------------
France -- 5.4%
FRF 23,650,000 Credit Foncier, 6.50%, due 10/13/08 4,202,339
ECU 1,000,000 Government of France, 8.25%, due 4/25/22 1,477,502
--------------
5,679,841
--------------
Germany -- 0.7%
ESP 100,000,000 Deutsche Ausgleichsbank, 8.60%, due 5/22/03 757,394
--------------
Greece -- 0.8%
GRD 250,000,000 Hellenic Republic,
Variable Rate, 12 mo. GTB + 1.50%, 11.00%, due
9/30/03 819,487
--------------
Jordan -- 0.3%
USD 500,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step up 144A, 5.00%, due 12/23/23 346,250
--------------
Mexico -- 0.7%
FRF 5,000,000 Mexico Par Bond, 6.63%, due 12/31/19 715,394
--------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
New Zealand -- 2.4%
NZD 4,500,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 2,506,558
--------------
Nigeria -- 0.3%
USD 500,000 Central Bank of Nigeria Par Bond,
Variable Rate, Step up, 6.25%, due 11/15/20 360,000
--------------
Supra National -- 3.4%
JPY 85,000,000 Asian Development Bank, 5.00%, due 2/5/03 794,962
AUD 6,900,000 European Bank Recon and Development, Zero Coupon,
due 2/10/28 707,966
GBP 1,000,000 International Bank Recon and Development, 11.50%,
due 11/9/03 2,026,842
--------------
3,529,770
--------------
Sweden -- 2.6%
SEK 5,000,000 Government of Sweden Index Linked Bond, 4.00%, due
12/1/20 692,696
SEK 16,100,000 Kingdom of Sweden, 6.00%, due 2/9/05 2,088,914
--------------
2,781,610
--------------
United States -- 71.8%
Asset Backed Securities -- 57.5%
USD 763,677 AFC Home Equity Loan Trust Series 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .22%, 5.85%, due
3/25/27 760,575
USD 5,000,000 Augusta Funding Series 96-F2,
Variable Rate, 3 mo. LIBOR + .30%, 144A, 6.06%,
due 4/15/06 5,000,000
USD 219,987 BCI Home Equity Loan 94-1 Class A1,
Variable Rate, 1 mo. LIBOR + .24%, 5.93%, due
3/29/44 219,987
USD 16,045,000 Discover Card Master Trust I 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 5.98%, due
10/16/04 16,185,393
USD 3,000,000 Eagle Pier Corp BV,
Variable Rate, 6 mo. LIBOR + .25%, 6.09%, due
10/03/01 3,010,500
USD 2,000,000 First Chicago Master Trust II 95-0 Class A,
Variable Rate, 1 mo. LIBOR + .23%, 5.86%, due
2/15/04 2,007,500
USD 5,000,000 First Deposit Master Trust Series 96-1 Class A,
Variable Rate, 1 mo. LIBOR +.17%, 5.76%, due
8/15/07 5,012,500
USD 4,000,000 National Premier Finance 95-2 Class A, 144A, 6.21%,
due 6/01/99 4,000,000
USD 2,000,000 National Premier Finance IX 96-1 Class A, 144A,
7.20%, due 7/01/00 2,042,000
USD 10,000,000 Pacific Life CBO 98-1 Class A2A,
Variable Rate, Step Up, 0.00%, due 1/15/10 9,782,812
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Asset Backed Securities -- continued
USD 5,000,000 Rhyno CBO Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 0.00%, due 9/15/09 5,322,655
USD 4,078,750 SMS Student Loan Trust 94-B Class A2,
Variable Rate, 1 mo. LIBOR + .30%, 5.93%, due
4/25/16 4,082,828
USD 3,000,000 Starvest CBO-1 Class A,
Variable Rate, 6 mo. LIBOR + .19% 144A, 5.81%,
due 7/30/11 2,964,000
--------------
60,390,750
--------------
U.S. Government -- 1.9%
USD 2,014,480 U.S. Treasury Inflation Indexed Note, 3.63%, due
7/15/02/(a)/ 2,003,777
--------------
U.S. Government Agency -- 12.4%
U.S. Government Agency Bonds/Notes -- 5.4%
USD 4,000,000 Agency for International Development Floater
(Support of India),
Variable Rate, 3 mo. LIBOR + .10%, 5.73%, due
2/01/27 4,014,375
USD 1,639,000 Ship Co 668, Series A, 8.50%, due 5/11/02 1,639,820
--------------
5,654,195
--------------
Structured Notes -- 7.0%
USD 2,750,000 Federal Home Loan Bank,
Variable Rate, ((.50 x 10YR CMT) + 1.25%), 4.42%,
due 3/16/98 2,745,875
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, (10.00% - 6 mo. LIBOR), 4.19%, due
9/22/03 4,600,000
--------------
7,345,875
--------------
13,000,070
--------------
Total United States 75,394,597
--------------
Venezuela -- 0.4%
USD 500,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due
3/31/20 437,500
--------------
TOTAL DEBT OBLIGATIONS (COST $101,256,330) 101,622,586
--------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Principal Amount Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CALL OPTIONS PURCHASED -- 1.9%
Cross Currency Options -- 0.2%
DEM 62,400,000 DEM Call/BEF Put, Expires 7/8/98, Strike 20.6 72,206
DEM 28,300,000 DEM Call/ITL Put, Expires 9/22/98, Strike 993 115,396
--------------
187,602
--------------
Options on Bonds -- 0.4%
SEK 113,000,000 Sweden Government Bond, Expires 4/30/98, Strike
100.677 434,702
--------------
Options on Currency -- 1.3%
USD 25,100,000 German Mark, Expires 9/17/98, Strike 1.725 1,307,710
USD 30,000,000 Japanese Yen, Expires 6/15/98, Strike 140 51,000
--------------
1,358,710
--------------
Options on Futures -- 0.0%
USD 250,000 Eurodollar, Expires 3/16/98, Strike 94.25 20,000
--------------
TOTAL CALL OPTIONS PURCHASED
(COST $2,051,319) 2,001,014
--------------
PUT OPTIONS PURCHASED -- 0.4%
Cross Currency Options -- 0.1%
DEM 28,300,000 DEM Put/ITL Call, Expires 9/22/98, Strike 993 71,732
USD 973,663 TRL Put/1.00 USD + 1.50 DEM Basket Call, Expires
5/12/98, Strike 545,000 5,025
--------------
76,757
--------------
Options on Currency -- 0.3%
USD 25,100,000 German Mark, Expires 9/17/98, Strike 1.725 351,400
--------------
Options on Futures -- 0.0%
USD 250,000 Eurodollar, Expires 3/16/98, Strike 94.00 1,250
--------------
TOTAL PUT OPTIONS PURCHASED
(COST $1,142,585) 429,407
--------------
<CAPTION>
Shares RIGHTS AND WARRANTS -- 0.0%
- ------------------
<S> <C> <C>
Mexico -- 0.0%
870,000 United Mexican States Warrants, Expires 6/30/03* --
--------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
--------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 4.7%
Cash Equivalents -- 2.9%
USD 3,090,000 BankBoston Eurodollar Time Deposit, 5.7875% due
3/2/98/(b)/ 3,090,000
--------------
Repurchase Agreements -- 1.8%
USD 1,868,787 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value of
$1,869,576 and an effective yield of 5.07%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.875%, with a maturity date of 8/15/17 and
with a market value of $1,906,163. 1,868,787
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $4,958,787) 4,958,787
--------------
TOTAL INVESTMENTS -- 103.8%
(Cost $109,409,021) 109,011,794
Other Assets and Liabilities (net) -- (3.8)% (3,959,718)
--------------
TOTAL NET ASSETS -- 100% $ 105,052,076
==============
Notes to the Schedule of Investments:
FLIRB - Front Loaded Interest Reduction Bond
GTB - Greek Treasury Bill
PIK - Payment In Kind
CMT - Constant Maturity Treasury Index
144A - Securities exempt from registration under
Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
Notes to the Schedule of Investments -- continued
Variable and Step up rates - The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1998, which are
subject to change based on the terms of the
security, including varying reset dates.
Currency Abbreviations
AUD - Australian Dollar GRD - Greek Drachma
BEF - Belgian Franc ITL - Italian Lira
CAD - Canadian Dollar JPY - Japanese Yen
CHF - Swiss Franc MYR - Malaysian Ringgit
DEM - German Mark NLG - Netherlands Guilder
DKK - Danish Krone NZD - New Zealand Dollar
ECU - European Currency Unit SEK - Swedish Krona
ESP - Spanish Peseta THB - Thailand Baht
FRF - French Franc TRL - Turkish Lira
GBP - British Pound USD - United States Dollar
(a) Security has been segregated to cover margin
requirements on open financial futures contracts.
(b) Represents investments of security lending
collateral (Note 1).
* Non-income producing security.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $109,409,021) (Note 1) $109,011,794
Cash (Note 1) 383,469
Interest receivable 1,031,109
Receivable for variation margin on open futures contracts (Notes 1 and 6) 3,801
Receivable for open forward foreign currency contracts (Notes 1 and 6) 2,124,139
Receivable for expenses waived or borne by Manager (Note 2) 26,422
------------
Total assets 112,580,734
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 3,090,000
Written options outstanding, at value (premiums $3,069,325) (Notes 1 and 6) 2,899,290
Payable for open forward foreign currency contracts (Notes 1 and 6) 1,343,640
Payable to affiliate for (Note 2):
Management fee 28,178
Shareholder service fee 12,040
Payable for open swap contracts (Notes 1 and 6) 89,797
Accrued expenses 65,713
------------
Total liabilities 7,528,658
------------
Net assets $105,052,076
============
Net assets consist of:
Paid-in capital $104,956,998
Distributions in excess of net investment income (549,020)
Accumulated undistributed net realized gain 318,404
Net unrealized appreciation 325,694
============
$105,052,076
============
Net assets attributable to:
Class III shares $105,052,076
============
Shares outstanding:
Class III 10,349,491
============
Net asset value per share:
Class III $ 10.15
============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- -------------------------------------------------------------------------------
Investment Income:
Interest (including securities lending income of $180) 5,567,990
-----------
Total income 5,567,990
-----------
Expenses:
Management fee (Note 2) 297,447
Custodian and transfer agent fees 102,228
Audit fees 53,766
Legal fees 8,308
Registration fees 6,447
Trustees fees (Note 2) 721
Miscellaneous 2,675
Fees waived or borne by Manager (Note 2) (310,242)
-----------
161,350
Shareholder service fee (Note 2)
Class I 13,476
Class III 120,157
-----------
Net expenses 294,983
-----------
Net investment income 5,273,007
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (718,532)
Closed futures contracts 2,841,656
Closed swap contracts 205,858
Written options 492,346
Foreign currency, forward contracts and foreign
currency related transactions (246,590)
-----------
Net realized gain 2,574,738
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (1,176,239)
Open futures contracts 214,709
Open swap contracts (89,797)
Written options 131,035
Foreign currency, forward contracts and foreign
currency related transactions 1,226,694
-----------
Net unrealized gain 306,402
-----------
Net realized and unrealized gain 2,881,140
-----------
Net increase in net assets resulting from operations $8,154,147
===========
8 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1998 1997
---------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 5,273,007 $3,974,892
Net realized gain 2,574,738 3,056,295
Change in net unrealized appreciation (depreciation) 306,402 364,425
------------ -----------
Net increase in net assets resulting from operations 8,154,147 7,395,612
------------ -----------
Distributions to shareholders from:
Net investment income
Class I (308,025) --
Class III (4,712,549) (3,484,400)
------------ -----------
Total distributions from net investment income (5,020,574) (3,484,400)
------------ -----------
Net realized gains
Class I (157,383) --
Class III (2,433,530) (2,181,543)
------------ -----------
Total distributions from net realized gains (2,590,913) (2,181,543)
------------ -----------
In excess of net realized gains
Class I (104,612) --
Class III (1,617,556) --
------------ -----------
Total distributions in excess of net realized gains (1,722,168) --
------------ -----------
(9,333,655) (5,665,943)
------------ -----------
Net share transactions: (Note 5)
Class I (684,405) 654,817
Class III 35,501,679 37,957,406
------------ -----------
Increase in net assets resulting from net share 34,817,274 38,612,223
transactions ------------ -----------
Total increase in net assets 33,637,766 40,341,892
Net assets:
Beginning of period 71,414,310 31,072,418
------------ -----------
End of period (including distributions in excess of
net investment income of $549,020 and accumulated
undistributed net investment income of $1,195,168, $105,052,076 $71,414,310
respectively) ============ ===========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from January 6, 1997
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $10.15 $10.29
------- -------
Income from investment operations:
Net investment income 0.55+ 0.09
Net realized and unrealized gain (loss) 0.44 (0.23)
------- -------
Total from investment operations 0.99 (0.14)
------- -------
Less distributions to shareholders:
From net investment income (0.55) --
From net realized gains (0.28) --
In excess of net realized gains (0.18) --
------- -------
Total distributions (1.01) --
------- -------
Net asset value, end of period $10.13/(a)/ $10.15
======= =======
Total Return /(b)/ 9.98% (1.36)%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 646
Net expenses to average daily net assets 0.47%* 0.47%*
Net investment income to average daily net assets 6.12%* 6.05%*
Portfolio turnover rate 103% 72%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.01
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
/(a)/ All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(b)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
10 See accompanying notes to the financial statements
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
February 28/29,
---------------------------------
1998 1997 1996 *
--------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.16 $ 9.89 $ 10.00
--------- -------- --------
Income from investment operations:
Net investment income 0.65 + 0.61 0.05
Net realized and unrealized gain (loss) 0.36 0.59 (0.16)
--------- -------- --------
Total from investment operations 1.01 1.20 (0.11)
--------- -------- --------
Less distributions to shareholders:
From net investment income (0.56) (0.57) --
From net realized gains (0.28) (0.36) --
In excess of net realized gains (0.18) -- --
--------- -------- --------
Total distributions (1.02) (0.93) --
--------- -------- --------
Net asset value, end of period $ 10.15 $ 10.16 $ 9.89
========= ======== ========
Total Return (a) 10.19% 12.01% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $105,052 $70,768 $31,072
Net expenses to average daily net assets 0.34% 0.34% 0.34%**
Net investment income to average daily net assets 6.21% 6.31% 6.16%**
Portfolio turnover rate 103% 72% 0%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.04 $ 0.04 $ 0.01
</TABLE>
* Period from December 28, 1995 (commencement of operations) to February 29,
1996.
** Annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- -------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks high total return by investing primarily in investment grade
bonds denominated in various currencies including U.S. dollars and
multicurrency units. The Fund generally seeks to provide a total return
greater than that provided by the global fixed income securities market.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares.
Effective January 9, 1998, Class I shares ceased operations, and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is
12
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
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 by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. At February 28, 1998, the
total value of these securities represented 18% of net assets. These prices
may differ from the value that would have been used had a broader market
for securities existed and the differences could be material to the
financial statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from the changes in the value of
the underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1998.
13
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1998.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for all open written
option contracts as of February 28, 1998.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
14
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a
market-linked return based on a notional amount. To the extent the total
return of the security an index underlying the transaction exceeds or falls
short or the offsetting interest rate obligation, the Fund will receive a
payment from or make a payment to the counterparty, respectively. In
connection with these agreements, cash may be set aside as collateral by
the Fund's custodian in accordance with the terms of the swap agreement. At
February 28, 1998, $383,469 in cash has been set aside. Swaps are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform and that there may be unfavorable
changes in the fluctuation of interest rates. See Note 6 for a summary of
open swap agreements as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1998, the Fund loaned securities having a market value of $3,014,783,
collateralized by cash in the amount of $3,090,000, which was invested in
short-term instruments.
15
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Distributions in
Excess of Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
------------------ ------------------------- ------------------
$(1,996,621) $1,996,621 $-
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on the U.S. Treasury inflation indexed securities is accrued daily based
upon an inflation adjusted principal. Additionally, any increase in the
principal or face amount of the securities adjusted for inflation is
recorded as income.
16
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium may be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. This fee is allocated relative to each class' net assets
on the share transaction date. Purchase premiums are included as part of
each class' "shares sold", as summarized in Note 5. For the year ended
February 28, 1998, the Fund received $50,316 in purchase premiums. There is
no premium for cash redemptions, reinvested distributions or in-kind
transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
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.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .35% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .19% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .34%;
thus the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
17
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $721. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
------------ -----------
U.S. Government securities $ 5,972,530 $ 6,133,193
Investments (non-U.S. Government
securities) 109,019,592 71,382,445
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$109,449,332 $1,601,404 $2,038,942 $437,538
4. Principal shareholders
At February 28, 1998, 76.2% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
18
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from January 6, 1997
Period from March 1, 1997 to (commencement of operations) to
January 9, 1998 February 28, 1997
------------------------------ --------------------------------
Class I: Shares Amount Shares Amount
------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 498,433 $ 5,013,156 63,643 $ 654,817
Shares issued to shareholders
in reinvestment of
distributions 56,872 570,020 - -
Shares repurchased (618,948) (6,267,581) - -
============= ================ ================ ===============
Net increase/(decrease) (63,643) $ (684,405) 63,643 654,817
============= ================ ================ ===============
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------------------ -------------------------------
Class III: Shares Amount Shares Amount
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 3,289,637 $ 34,819,662 4,047,314 $ 40,339,699
Shares issued to shareholders
in reinvestment of
distributions 724,057 7,256,147 435,009 4,467,251
Shares repurchased (627,568) (6,574,130) (662,011) (6,849,544)
============== ================ =============== ===============
Net increase 3,386,126 $ 35,501,679 3,820,312 $ 37,957,406
============== ================ =============== ===============
</TABLE>
19
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------- ----------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Buys
5/07/98 AUD 2,500,000 $ 1,705,558 $ 23,433
3/27/98 CAD 19,300,000 13,570,155 117,790
3/05/98 DEM 6,900,000 3,803,476 (109,069)
4/09/98 DEM 81,300,000 44,910,626 (109,747)
4/30/98 DEM 6,121,415 3,385,736 11,365
7/10/98 DEM 13,000,000 7,219,535 33,582
4/17/98 GBP 8,600,000 14,123,365 (16,327)
3/20/98 ITL 24,712,205,000 13,805,921 (351,408)
4/03/98 JPY 4,030,000,000 32,064,628 97,815
3/23/98 THB 60,000,000 1,384,786 (195,201)
6/22/98 THB 30,000,000 677,413 (99,085)
================
$ (596,852)
================
Sales
5/07/98 AUD 5,700,000 $ 3,888,671 $ (78,563)
7/10/98 BEF 268,143,460 7,211,626 (25,672)
3/27/98 CAD 1,200,000 843,740 (6,155)
3/20/98 DEM 25,100,000 13,848,620 308,709
4/09/98 DEM 7,700,000 4,253,528 2,863
4/30/98 ECU 3,100,000 3,383,276 (8,905)
4/17/98 GBP 1,600,000 2,627,603 (37,843)
4/03/98 JPY 3,720,000,000 29,598,118 (120,714)
3/20/98 MYR 3,965,500 1,077,765 (77,765)
4/17/97 MYR 7,481,000 2,028,961 (3,237)
3/05/98 NLG 7,775,610 3,800,177 112,369
3/12/98 NZD 4,500,000 2,637,167 38,579
3/23/98 THB 60,000,000 1,384,786 694,937
6/22/98 THB 30,000,000 677,413 344,733
================
$ 1,143,336
================
</TABLE>
20
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Forward cross currency contracts
<TABLE>
<CAPTION>
Net
Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
------------ --------------------------- -------------------------- ---------------
<S> <C> <C> <C>
7/10/98 BEF 477,511,650 DEM 23,100,000 $ (13,952)
5/14/98 CHF 4,665,984 DEM 5,800,000 (879)
4/30/98 DEM 140,640,500 ECU 71,500,000 245,793
4/24/98 DEM 12,000,000 ESP 1,019,460,000 (4,989)
4/23/98 DEM 5,039,225 GBP 1,700,000 4,901
3/20/98 DEM 10,200,000 ITL 10,053,960,000 (10,900)
3/06/98 DEM 23,300,000 SEK 102,874,896 7,531
3/23/98 DKK 83,850,800 DEM 22,000,000 5,247
4/30/98 ECU 34,200,000 DEM 67,351,564 (73,229)
5/22/98 FRF 122,009,888 DEM 36,400,000 21,850
3/06/98 SEK 96,215,507 DEM 21,900,000 52,642
---------------
$ 234,015
===============
<CAPTION>
Futures contracts
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
--------- ---------------------------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Buys
25 Australian Government Bond 3 YR March 1998 $ 2,015,451 $ 25,667
7 Australian Government Bond 10 YR March 1998 690,902 8,569
55 FRF MATIF Bond June 1998 4,668,312 (10,362)
8 German Government Bond March 1998 1,185,695 48,432
50 German Government Bond June 1998 7,369,958 (7,456)
108 U.S. Treasury Bond 30 YR March 1998 13,044,375 197,861
61 U.S. Treasury Bond 30 YR June 1998 7,348,594 (66,545)
48 U.K Gilt June 1998 4,222,030 (48,461)
-----------------
$ 147,705
=================
</TABLE>
21
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Futures contracts -- continued
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
--------- ---------------------------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Sales
48 MSE 3 mo. Bankers Acceptance March 1998 $ 8,011,804 $ (33,725)
3 Canadian Government Bond June 1998 262,500 (2)
4 Italian Government Bond 10 YR June 1998 528,073 322
6 Japanese Government Bond 10 YR June 1998 6,144,859 (14,352)
10 Spanish Government Bond 10 YR March 1998 706,100 (31,657)
57 Swiss Government Bond March 1998 4,862,633 (275,022)
40 Swiss Government Bond June 1998 3,423,004 24,288
118 U.S. Treasury Bond 10 YR June 1998 13,289,750 99,733
-----------------
$ (230,415)
=================
</TABLE>
At February 28, 1998, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
Written option transactions
<TABLE>
<CAPTION>
Puts Calls
Principal Principal
Amount of Amount of
Contracts Contracts
(000's omitted) Premiums (000's omitted) Premiums
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 4,000 $ 199,000 4,000 $ 170,400
Options written 73,805 1,689,153 102,932 1,873,438
Options closed (30) (26,993) -- --
Options exercised (8,000) (219,000) (2,832) (139,235)
Options expired (1,075) (115,450) (65,400) (361,988)
----------------- --------------- ----------------- ---------------
Outstanding, end
of period 68,700 $ 1,526,710 38,700 $ 1,542,615
================= =============== ================= ===============
</TABLE>
22
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Summary of written options outstanding
<TABLE>
<CAPTION>
Principal Amount
of Contracts Expiration
(000's omitted) Exercise Price Date Value
------------------ --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Calls
Canadian Dollar 13,600 1.4294 CAD 5/08/98 $ 96,560
Japanese Yen 25,100 113.65 JPY 9/17/98 2,090,830
Puts
Canadian Dollar 13,600 1.4294 CAD 5/08/98 153,680
Japanese Yen 25,100 113.65 JPY 9/17/98 252,000
Japanese Yen 30,000 117.18 JPY 6/15/98 306,220
================
$ 2,899,290
================
<CAPTION>
Swap agreements
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ----------- -------------------------------------------- --------------
<S> <C> <C> <C>
2,000,000 USD/ 5/04/98 Agreement with Morgan Guaranty Trust Company $ 40,053
1,179,438 USD dated 2/10/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) on the Russia
Principal Floating Rate Note due 12/15/20
and to pay the notional amount multiplied
by 3 month LIBOR adjusted by a specified
spread.
1,000,000 USD/ 5/11/98 Agreement with Morgan Guaranty Trust Company 24,450
1,014,687 USD dated 2/03/98 to receive the notional amount
multiplied by the change in market value
(including accrued interest) on the
Republic of Argentina 9.75%, due 9/19/27
and to pay the notional amount multiplied
by 3 month LIBOR adjusted by a specified
spread.
</TABLE>
23
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- -------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ------------- -------------------------------------------- --------------
<S> <C> <C> <C>
699,618 USD/ 5/14/99 Agreement with Bank of America dated 5/29/97 $ (270,555)
93,625,000,000 TRL to receive the notional amount multiplied by
the change in market value (including
accrued interest) on the Turkey Index
Linked Bond due 5/14/99 and to pay the
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
274,045 USD/ 6/04/99 Agreement with Bank of America dated 6/20/97 50,865
59,818,517,884 TRL to receive the notional amount multiplied by
the change in market value (including
accrued interest) on the Turkey Index
Linked Bond due 6/4/99 and to pay the
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
92,346 USD/ 6/04/99 Agreement with Bank of America dated 11/13/97 65,390
28,936,660,891 TRL to receive the notional amount multiplied by
the change in market value (including
accrued interest) on the Turkey Index
Linked Bond due 6/4/99 and to pay the
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
--------------
Net unrealized depreciation $ (89,797)
==============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
24
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- -------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 14.57% of distributions as net capital gain dividends.
The Fund has elected to defer to March 1, 1998 post-October losses of
$ 942,519.
25
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
- -------------------------------------------------------------------------------
Portfolio Managers
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Global Bond Fund returned 10.2% for the fiscal
year ended February 28, 1998, compared to 6.6% for the J.P. Morgan Global
Government Bond Index. Consistent with the Fund's investment objectives and
policies, the Fund was substantially invested in investment-grade, foreign
and domestic fixed income instruments throughout the period.
Many of the strategies implemented in the Fund were successful during the
fiscal year. It outperformed its benchmark by 3.6%, though absolute returns
were reduced somewhat due to the strength of the U.S. dollar. During the
year bond market and currency selection were positive. Although foreign
interest rates generally declined during the year, the strength of the U.S.
dollar meant that many foreign bond markets performed poorly when measured
in U.S. dollar terms. Exceptions to this occurred in Italy and the U.K.
whose bond markets had double-digit U.S. dollar returns. Strong returns
were shown as well in Australia, Sweden and the U.K. The Canadian dollar
was the only currency that produced a positive return versus the U.S.
dollar for the year ended February 28, 1998. Value was added during the
year by overweighting the Canadian, Swedish and U.K. bond markets, as well
as the Italian lira, Spanish peseta and the ECU. Additionally, the Fund
gained versus the benchmark as a result of underweighting the French,
Japanese, and Swiss bond markets, as well as the Belgian franc and the
Dutch guilder.
During the year the Fund held a position in emerging country sovereign
debt, emphasizing undervalued issues. This market had a somewhat volatile
year, buffeted by the financial problems in Asia. Returns came mainly from
bond yields as prices changed little from beginning to end. Our decision to
include emerging country debt exposure in the portfolio added value in all
but the third fiscal quarter.
Outlook
The Fund is structured to benefit from outperformance in the Australian,
Danish, French, German, Swedish and emerging bond markets. We expect
underperformance from the Italian, Japanese, Spanish and Swiss bond
markets. Our strategy maintains a market duration in each country. Strong
relative performance is expected from the Canadian dollar, Deutsche mark,
Italian lira, Spanish peseta and U.K. pound. The Belgian franc, Danish
krone, French franc, Japanese yen and U.S. dollar are expected to
underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global Bond Fund Class III Shares and the JP Morgan Global
Government Bond Index
As of February 28, 1998
--------------------------------
Average Annual Total Return
--------------------------------
Since
1 Year Inception
--------------------------------
Class 12/28/95
III 10.0% 9.6%
--------------------------------
[LINE GRAPH APPEARS HERE]
JP Morgan Global
GMO Global Bond Fund Gov't Bond Index
-------------------- ----------------
12/28/95 $9,985 $10,000
2/29/96 $9,875 $9,971
2/28/97 $11,061 $10,243
2/28/98 $12,188 $10,915
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single class
of shares that has been offered by the Fund since inception. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Inflation Indexed
Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Inflation Indexed Bond Fund at February 28, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for
the period from March 31, 1997 (commencement of operations) through
February 28, 1998, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 98.8%
New Zealand -- 2.2%
NZD 1,000,000 New Zealand Index Linked Bond 4.50%, due 2/15/16 557,013
-----------
United States -- 96.6%
U.S. Government -- 96.6%
USD 20,200,493 U.S. Treasury Inflation Indexed Note, 3.38%, due 1/15/07 19,708,106
USD 5,111,743 U.S. Treasury Inflation Indexed Note, 3.63%, due 7/15/02 5,084,584
-----------
24,792,690
-----------
TOTAL DEBT OBLIGATIONS (COST $25,578,548) 25,349,703
-----------
SHORT-TERM INVESTMENT -- 1.0%
Repurchase Agreement -- 1.0%
USD 254,438 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $254,545
and an effective yield of 5.07%, collateralized by a
U.S. Treasury Obligation with a rate of 8.875%, with a
maturity date of 8/15/17 and with a market value of
$259,526. 254,438
-----------
TOTAL SHORT-TERM INVESTMENT (COST $254,438) 254,438
-----------
TOTAL INVESTMENTS -- 99.8%
(Cost $25,832,986) 25,604,141
Other Assets and Liabilities (net) -- 0.2% 55,936
-----------
TOTAL NET ASSETS -- 100% $25,660,077
===========
Currency Abbreviations
NZD - New Zealand Dollar
USD - United States Dollar
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $25,832,986) (Note 1) $ 25,604,141
Dividends and interest receivable 108,834
Receivable for open forward foreign currency contracts (Notes 1 and 6) 8,573
------------
Total assets 25,721,548
------------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 39,284
Shareholder service fee 2,664
Accrued expenses 19,523
------------
Total liabilities 61,471
------------
Net assets $ 25,660,077
============
Net assets consist of:
Paid-in capital $ 25,889,022
Distributions in excess of net investment income (8,573)
Net unrealized depreciation (220,372)
------------
$ 25,660,077
============
Net assets attributable to:
Class III shares $ 25,660,077
============
Shares outstanding:
Class III 2,556,935
============
Net asset value per share:
Class III $ 10.04
============
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Operations --
Period from March 31, 1997 (commencement of operations) to February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest 684,863
---------
Total income 684,863
---------
Expenses:
Management fee (Note 2) 36,237
Audit fees 24,959
Custodian and transfer agent fees 7,712
Registration fees 1,511
Legal fees 268
Trustees fees (Note 2) 236
Miscellaneous 837
Fees waived or borne by Manager (Note 2) (57,239)
---------
14,521
Shareholder service fee (Note 2)
Class III 21,641
---------
Net expenses 36,162
---------
Net investment income 648,701
---------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (5,729)
Foreign currency, forward contracts and foreign currency related transactions 39,033
---------
Net realized gain 33,304
---------
Change in net unrealized appreciation (depreciation) on:
Investments (228,845)
Foreign currency, forward contracts and foreign currency related transactions 8,473
---------
Net unrealized loss (220,372)
---------
Net realized and unrealized loss (187,068)
---------
Net increase in net assets resulting from operations $ 461,633
=========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 31, 1997
(commencement of operations)
to February 28, 1998
----------------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 648,701
Net realized gain 33,304
Change in net unrealized appreciation (depreciation) (220,372)
-----------
Net increase in net assets resulting from operations 461,633
-----------
Distributions to shareholders from:
Net investment income
Class III (648,701)
-----------
In excess of net investment income
Class III (47,606)
-----------
Net realized gains
Class III (4,126)
-----------
Return of Capital
Class III (46,228)
-----------
(746,661)
-----------
Net share transactions: (Note 5)
Class III 25,945,105
-----------
Increase in net assets resulting from net share
transactions 25,945,105
-----------
Total increase in net assets 25,660,077
Net assets:
Beginning of period --
-----------
End of period (including accumulated distributions in
excess of net investment income of $8,573) $25,660,077
===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
Period from March 31, 1997
(commencement of operations)
to February 28, 1998
---------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
--------
Income from investment operations:
Net investment income 0.42+
Net realized and unrealized loss (0.04)
--------
Total from investment operations 0.38
--------
Less distributions to shareholders:
From net investment income (0.30)
In excess of net investment income (0.02)
From net realized gains --/(a)/
From tax return of capital (0.02)
--------
Total distributions (0.34)
--------
Net asset value, end of period $ 10.04
========
Total Return/(b)/ 3.77%
Ratios/Supplemental Data:
Net assets, end of period (000's) $25,660
Net expenses to average daily net assets 0.25%*
Net investment income to average daily net assets 4.48%*
Portfolio turnover rate 9%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount: $ 0.04
</TABLE>
+ Computed using average shares outstanding throughout the period.
/(a)/ The per share distribution in excess of net investment income was $0.002.
/(b)/ Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Inflation Indexed Bond Fund (the "Fund"), which commenced operations on
March 31, 1997, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks maximum total return by investing primarily in foreign and
U.S. government bonds that are indexed or otherwise linked to general
measures of inflation in the country of issue. A bond will be deemed to be
"linked" to general measures of inflation if, by such bond's terms,
principal or interest components change with general movements of inflation
in the country of issue.
Inflation indexed securities issued by the U.S. Treasury are fixed income
securities whose principal value is periodically adjusted according to the
rate of inflation. Inflation indexed bonds issued by a foreign government
are generally adjusted to reflect a comparable inflation index.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II, and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. 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 other persons acting
at their direction.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
6
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
7
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1998, the Fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
post-October losses and the differing treatments for foreign currency
transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
Distributions in
Excess of Net Accumulated Net
Investment Income Realized Gain Paid-in Capital
--------------------- ------------------------- ---------------------
<S> <C> <C>
$39,033 $(29,178) $(9,855)
</TABLE>
Distributions in excess of tax basis earnings and profits are reported in
the Fund's financial statements as a return of capital. Differences in the
recognition or classification of income for financial statement and tax
purposes which result in temporary over-distributions for financial
statement purposes are classified as distributions in excess of net
investment income or accumulated net realized gains.
8
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on the U.S. Treasury inflation indexed securities is accrued daily based
upon the inflation adjusted principal. Additionally, any increase in the
principal or face amount of the securities adjusted for inflation is
recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .10%
of the amount invested or redeemed. These fees may be reduced by 50% with
respect to any portion of a purchase or redemption that is offset by a
corresponding redemption or purchase, respectively, occurring on the same
day. All purchase premiums and redemption fees are paid to and recorded by
the Fund as paid-in capital. These fees are allocated relative to each
class' net assets on the share transaction date. Purchase premiums are
included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the period ended February 28, 1998, the Fund
received $27,017 in purchase premiums and $1,411 in redemption fees. There
is no premium for reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, and .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .10% of average daily net assets. The Fund's
portion of the fee paid by the Trust to the unaffiliated Trustees during
the period ended February 28, 1998 was $236. No remuneration is paid to any
Trustee or officer who is affiliated with the Manager.
9
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the period ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
Purchases Proceeds
-------------------- --------------------
<S> <C> <C>
U.S. Government securities $ 26,132,604 $ 1,339,781
Investments (non-U.S. Government securities) 614,298 -
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held was
as follows:
<TABLE>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
--------------------- --------------------- ---------------------- --------------------
<S> <C> <C> <C>
$25,832,986 $0 $228,845 $228,845
</TABLE>
4. Principal shareholders
At February 28, 1998, 47.5% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums and redemption fees received by the
Fund, were as follows:
Period from March 31, 1997
(commencement of operations) to
Class III: February 28, 1998
----------------------------------
Shares Amount
--------------- -----------------
Shares sold 2,662,887 $ 27,016,765
Shares issued to shareholders in
reinvestment of distributions 33,789 338,906
Shares repurchased (139,741) (1,410,566)
--------------- -----------------
Net increase 2,556,935 $ 25,945,105
=============== =================
10
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts sold
<TABLE>
<CAPTION>
Settlement Units of Net Unrealized
Date Deliver Currency Value Appreciation
-------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C>
3/12/98 NZD 1,000,000 $ 586,037 $ 8,573
================
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any margin requirements on open futures contracts.
11
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 1998 post-October losses of
$9,855.
12
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Inflation Indexed Bond Fund returned 3.8% for
the period from the Fund's inception on March 31, 1997 through the fiscal
year end of February 28, 1998, compared to 3.9% for the Lehman Brothers
Inflation Notes Index. Consistent with the Fund's investment objectives and
policies, the Fund was substantially invested, throughout the period, in
U.S. government and foreign bonds that are indexed or otherwise linked to
general measures of inflation in the country of issue.
The fund modestly underperformed its benchmark by 0.1% over the period from
the Fund's inception on March 31, 1997 through the fiscal year end on
February 28, 1998. Although interest rates fell in the United States over
this period, real yields rose. Real yields in the United States began the
period at approximately 3.57%, climbing to nearly 3.70% by the end. The
fund maintains an interest rate exposure quite similar to that of its
benchmark, however it owns securities of foreign countries that are not in
the benchmark. Currently the only foreign holding is an inflation indexed
bond issued by the government of New Zealand, maturing in 2016.
Outlook
The Fund will continue to focus on attractive inflation-indexed issues of
the U.S. government, but will also attempt to broaden its foreign exposure.
The Fund may also enter into interest rate swaps as a means of
outperforming its benchmark.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Inflation Indexed Bond Fund Class III Shares and the
Lehman Brothers Inflation
Notes Index
As of February 28, 1998
-------------------------------
Average Annual Total Return
-------------------------------
Since
Inception
1 Year 3/31/97
-------------------------------
Class n/a 3.6%
III -------------------------------
[LINE GRAPH APPEARS HERE]
GMO Inflation Lehman Brothers
Indexed Bond Fund Inflation
Date Class III Shares Notes Index
---- ----------------- ------------------
3/31/97 $9,990 $10,000
2/28/98 $10,356 $10,390
Performance shown is net of all fees after reimbuRsement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 10 bp on the purchase and 10 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO International Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
International Bond Fund at February 28, 1998, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at February 28, 1998
by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 94.5%
Argentina -- 0.3%
USD 1,000,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.50%, due 3/31/23 758,125
--------------
Australia -- 1.9%
GBP 2,000,000 Commonwealth Bank Australia Series EMTN, 8.13%, due
12/07/06 3,584,431
AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 9/14/07 2,007,239
--------------
5,591,670
--------------
Austria -- 1.9%
CAD 7,000,000 Autobahn Schnell, 8.50%, due 3/03/03 5,506,254
--------------
Brazil -- 1.3%
USD 4,620,904 Brazil Capitalization Bond, PIK, 8.00%, due 4/15/14 3,754,484
--------------
Bulgaria -- 1.5%
USD 1,000,000 Bulgaria Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + 1.31%, 7.06%, due 7/28/24 805,000
USD 5,000,000 Bulgaria Discount Series B Strips, Basket 2, 0.00%, due 7/28/24 637,500
USD 15,000,000 Bulgaria Discount Strips, 0.00%, due 7/28/24 2,887,500
--------------
4,330,000
--------------
Canada -- 4.3%
CAD 750,000 Government of Canada, 10.25%, due 3/15/14 778,299
CAD 5,000,000 Government of Canada Real Return, 4.25%, due 12/01/21 3,934,162
CAD 3,000,000 Government of Canada Real Return, 4.25%, due 12/01/26 2,237,479
CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,692,664
CAD 5,000,000 Societe Quebec D'Ass D'Eaux, 8.13%, due 8/11/03 3,862,774
--------------
12,505,378
--------------
Cayman Islands -- 0.5%
CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 6/01/08 1,541,596
--------------
Denmark -- 4.8%
DKK 85,600,000 Kingdom of Denmark Bullet, 7.00%, due 11/15/07 13,987,656
--------------
Ecuador -- 0.4%
USD 2,000,000 Republic of Ecuador Par Bond,
Variable Rate, Step up, 3.50%, due 2/28/25 1,096,250
--------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
France -- 5.7%
FRF 14,000,000 Auxiliare Credit Foncier, 10.00%, due 4/20/01 2,639,384
SEK 10,000,000 Credit Foncier, 6.50%, due 2/22/99 1,259,930
ECU 2,000,000 Credit Foncier, 8.38%, due 3/17/04 2,502,062
ECU 7,000,000 Government of France, 8.25%, due 4/25/22 10,342,511
--------------
16,743,887
--------------
Germany -- 5.1%
DEM 1,000,000 Bundesrepublic Deutschland, 6.00%, due 6/20/16 595,933
ESP 250,000,000 Deutsche Ausgleichsbank, 8.60%, due 5/22/03 1,893,484
GBP 2,000,000 KFW International Finance, 10.63%, due 9/03/01 3,653,584
ESP 280,000,000 KFW International Finance, 8.60%, due 5/20/03 2,119,794
GBP 3,000,000 Schweiz Bankgesellschaft, Zero Coupon, due 3/31/06 2,922,208
DEM 6,500,000 Westdeutsche LB, 5.25%, due 10/14/05 3,648,281
--------------
14,833,284
--------------
Greece -- 0.8%
GRD 750,000,000 Hellenic Republic,
Variable Rate, 12 mo. GTB + 1.50%, 11.00%, due 9/30/03 2,458,461
--------------
Italy -- 0.8%
ITL 1,550,000,000 BTPS, 8.50%, due 8/01/04 1,022,275
ITL 1,700,000,000 BTPS, 9.00%, due 11/01/23 1,358,043
--------------
2,380,318
--------------
Japan -- 6.7%
GBP 2,000,000 Export Import Bank of Japan, 10.75%, due 5/15/01 3,628,886
JPY 400,000,000 Japan Development Bank, 6.50%, due 9/20/01 3,797,989
GBP 2,000,000 Japan Finance Corp Municipal Enterprises, 9.13%, due 2/16/05 3,721,090
USD 1,030,000 Japan Highway Public Corporation, 7.63%, due 9/22/04 1,110,340
GBP 4,000,000 Kobe City, 9.50%, due 10/20/04 7,514,626
--------------
19,772,931
--------------
Jordan -- 0.2%
USD 1,000,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step up 144A, 5.00%, due 12/23/23 692,500
--------------
Mexico -- 0.7%
FRF 15,000,000 Mexico Par Bond, 6.63%, due 12/31/19 2,146,183
--------------
New Zealand -- 1.7%
NZD 8,800,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 4,901,714
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norway -- 0.3%
SEK 6,300,000 A/S Eksportfinans, 7.50%, due 8/16/01 840,850
--------------
Supra National -- 5.4%
JPY 175,000,000 Asian Development Bank, 5.00%, due 2/05/03 1,636,686
AUD 21,000,000 European Bank Recon and Development, Zero Coupon,
due 2/10/28 2,154,679
ITL 5,000,000,000 European Investment Bank, 12.20%, due 2/18/03 3,647,769
CAD 700,000 European Investment Bank, 8.50%, due 8/30/05 569,070
GBP 1,755,000 European Investment Bank, 8.75%, due 8/25/17 3,652,464
GBP 2,000,000 International Bank Recon and Development, 11.50%,
due 11/09/03 4,053,683
--------------
15,714,351
--------------
Sweden -- 6.5%
SEK 20,000,000 Government of Sweden Index Linked Bond, 4.00%, due
12/01/20 2,770,783
SEK 126,100,000 Kingdom of Sweden, 6.00%, due 2/09/05 16,360,995
--------------
19,131,778
--------------
United Kingdom -- 1.4%
GBP 2,000,000 Guaranteed Export Financial Corp, 12.88%, due
9/29/02 4,058,623
--------------
United States -- 42.0%
Asset Backed Securities -- 36.8%
USD 3,818,387 AFC Home Equity Loan Trust Series 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .22%, 5.85%, due
3/25/27 3,802,875
USD 5,000,000 Augusta Funding Series 96-F2,
Variable Rate, 3 mo. LIBOR + .30%, 144A, 6.06%,
due 4/15/06 5,000,000
USD 5,000,000 Big Flower Press Receivables Master Trust 96-2
Class A, Variable Rate, LIBOR + .25%, 5.88%, due
4/25/03 5,000,000
USD 2,395,000 Brazos Student Loan Finance Corp Series 96-A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%,
5.78%, due 12/01/02 2,385,645
USD 6,000,000 Circuit City Credit Card Master Trust 96-1 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 5.80%, due
10/15/06 5,990,625
USD 3,297,386 CS First Boston Mortgage Securities Corp., Series
96-1 Class A1, Variable Rate, 3 mo. LIBOR + .23%,
5.98%, due 7/28/29 3,299,364
USD 14,000,000 Discover Card Master Trust I 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 5.98%, due
10/16/04 14,122,500
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 1,500,000 First International Funding Co,
Variable Rate, 3 mo. LIBOR + .55%, 6.46%, due
6/03/98 1,504,500
USD 5,000,000 First USA Credit Card Master Trust 94-4 Class A,
Variable Rate, 1 mo. LIBOR + .37%, 6.00%, due
8/15/03 5,035,938
USD 9,000,000 National Premier Finance 95-2 Class A, 144A,
6.21%, due 6/01/99 9,000,000
USD 5,000,000 National Premier Finance IX 96-1 Class A, 144A,
7.20%, due 7/01/00 5,105,000
USD 10,000,000 Navistar Financial Dealer Note Master Trust 97-1
Class A, Variable Rate, 1 mo. LIBOR + .15%,
5.81%, due 8/25/03 10,003,000
USD 10,000,000 Northstar CBO Series 97-2 Class A2, 6.62%, due
7/15/09 10,957,810
USD 10,000,000 Rhyno CBO Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 0.00%, due 9/15/09 10,645,313
USD 5,966,000 SMS Student Loan Trust 94-A Certificates, Variable
Rate, 1 mo. LIBOR + .70%, 6.33%, due 7/26/21 6,010,745
USD 5,000,000 Society Student Loan Trust 93-A Class B, Variable
Rate, 1 mo. LIBOR + .75%, 6.38%, due 7/25/03 5,007,813
USD 5,000,000 Starvest CBO-1 Class A, Variable Rate, 6 mo. LIBOR +
.19% 144A, 5.81%, due 7/30/11 4,940,000
--------------
107,811,128
--------------
Corporate Debt -- 0.6%
SEK 14,000,000 Toyota Motor Credit, 7.50%, due 8/06/01 1,859,288
--------------
U.S. Government -- 1.3%
USD 4,028,960 U.S. Treasury Inflation Indexed Note, 3.63%, due
7/15/02(a) 4,007,554
--------------
U.S. Government Agency -- 3.2%
USD 2,800,396 Agency for International Development Floater (Support
of Honduras), Variable Rate, 3 mo. U.S. Treasury
Bill x 117%, 5.98%, due 10/01/11 2,797,333
USD 1,000,000 Agency for International Development Floater
(Support of India), Variable Rate, 3 mo. LIBOR +
.10%, 5.73%, due 2/01/27 1,003,594
USD 1,905,361 Agency for International Development Floater (Support
of Morocco), Variable Rate, 6 mo. U.S. Treasury
Bill + .45%, 5.69%, due 11/15/14 1,896,132
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Agency -- continued
USD 266,667 Agency for International Development Floater (Support of Peru),
Variable Rate, 3 mo. U.S. Treasury Bill x 114%, 5.13%, due
2/01/02 264,875
USD 3,601,161 Agency for International Development Floater (Support of Peru),
Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 5.59%, due
5/01/14 3,576,966
--------------
9,538,900
--------------
Total United States 123,216,870
--------------
Venezuela -- 0.3%
USD 1,000,000 Republic of Venezuela Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due 3/31/20 875,000
--------------
875,000
--------------
TOTAL DEBT OBLIGATIONS (COST $270,488,071) 276,838,163
--------------
LOAN ASSIGNMENTS -- 0.4%
Ivory Coast -- 0.4%
FRF 15,000,000 Ivory Coast Credit Agreement* 1,096,185
--------------
1,096,185
--------------
Russia -- 0.0%
USD 46,950 Russia Vnesh Restructured Loan Agreements, LIBOR + .8125%
(3.2486%) 28,287
--------------
28,287
--------------
TOTAL LOAN ASSIGNMENTS (COST $611,702) 1,124,472
--------------
Shares
- ----------------------------
PREFERRED STOCKS -- 1.7%
United States -- 1.7%
5,000 Bear Stearns Managed Income Securities Plus Fund 13.27% 4,987,850
--------------
TOTAL PREFERRED STOCKS (COST $4,933,793) 4,987,850
--------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Principal Amount Description Value ($)
- --------------------------------------------------------------------------------------------------
CALL OPTIONS PURCHASED -- 2.3%
Cross Currency Options -- 0.2%
DEM 224,400,000 DEM Call/BEF Put, Expires 7/8/98, Strike 20.6 259,664
DEM 102,200,000 DEM Call/ITL Put, Expires 9/22/98, Strike 993 416,729
-------------
676,393
-------------
Options on Bonds -- 0.4%
SEK 313,000,000 Sweden Government Bond, Expires 4/30/98, Strike
100.677 1,204,086
-------------
Options on Currency -- 1.7%
USD 90,600,000 German Mark, Expires 9/17/98, Strike 1.725 4,720,260
USD 100,000,000 Japanese Yen, Expires 6/15/98, Strike 140 170,000
-------------
4,890,260
-------------
Options on Futures -- 0.0%
USD 750,000 Eurodollar, Expires 3/16/98, Strike 94.25 60,000
-------------
TOTAL CALL OPTIONS PURCHASED
(COST $7,050,274) 6,830,739
-------------
PUT OPTIONS PURCHASED -- 0.5%
Cross Currency Options -- 0.1%
DEM 102,200,000 DEM Put/ITL Call, Expires 9/22/98, Strike 993 259,047
USD 2,781,893 TRL Put/1.00 USD + 1.50 DEM Basket Call, Expires
5/12/98, Strike 545,000 14,357
-------------
273,404
-------------
Options on Currency -- 0.4%
USD 90,600,000 German Mark, Expires 9/17/98, Strike 1.725 1,268,400
-------------
Options on Futures -- 0.0%
USD 750,000 Eurodollar, Expires 3/16/98, Strike 94 3,750
-------------
TOTAL PUT OPTIONS PURCHASED
(COST $4,102,074) 1,545,554
-------------
<CAPTION>
Shares RIGHTS AND WARRANTS -- 0.0%
-------------
<S> <C> <C>
Mexico -- 0.0%
1,740,000 United Mexican States Warrants, Expires 6/30/03 ** --
-------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares/Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Venezuela -- 0.0%
19,280 Republic of Venezuela Recovery Warrants,
Expires 04/15/20 ** --
-------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-------------
SHORT-TERM INVESTMENTS -- 1.2%
Commercial Paper -- 1.2%
USD 3,500,000 GE Capital Corp, 5.68% due 3/02/98 3,500,000
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $3,500,000) 3,500,000
-------------
TOTAL INVESTMENTS -- 100.6%
(Cost $290,685,914) 294,826,778
Other Assets and Liabilities (net)-- (0.6)% (1,804,636)
-------------
TOTAL NET ASSETS-- 100% $ 293,022,142
=============
Notes to the Schedule of Investments:
EMTN - Euromarket Medium Term Note
GTB - Greek Treasury Bill
PIK - Payment In Kind
144A - Securities exempt from registration under Rule
144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
Variable and Step up rates - The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1998, which are
subject to change based on the terms of the
security, including varying reset dates.
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Notes to the Schedule of Investments -- continued
<S> <C>
Currency Abbreviations
AUD - Australian Dollar GRD - Greek Drachma
BEF - Belgian Franc ITL - Italian Lira
CAD - Canadian Dollar JPY - Japanese Yen
CHF - Swiss Franc MYR - Malaysian Ringgit
DEM - German Mark NLG - Netherlands Guilder
DKK - Danish Krone NZD - New Zealand Dollar
ECU - European Currency Unit SEK - Swedish Krona
ESP - Spanish Peseta THB - Thailand Baht
FRF - French Franc TRL - Turkish Lira
GBP - British Pound USD - United States Dollar
/(a)/ Security has been segregated to cover margin
requirements on open financial futures contracts.
* Non-performing. Borrower not currently paying
interest.
** Non-income producing security.
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $290,685,914) (Note 1) $294,826,778
Cash (Note 1) 1,463,717
Interest receivable 4,841,459
Receivable for open forward foreign currency contracts (Notes 1 and 6) 6,437,793
Receivable for expenses waived or borne by Manager (Note 2) 62,113
-------------
Total assets 307,631,860
-------------
Liabilities:
Written options outstanding, at value (premiums $10,751,065) (Notes 1 and 6) 10,193,340
Payable for open forward foreign currency contracts (Notes 1 and 6) 3,865,210
Payable to affiliate for (Note 2):
Management fee 89,823
Shareholder service fee 32,527
Payable for open swap contracts (Notes 1 and 6) 175,254
Payable for variation margin on open futures contracts (Notes 1 and 6) 151,739
Accrued expenses 101,825
-------------
Total liabilities 14,609,718
-------------
Net assets $293,022,142
-------------
Net assets consist of:
Paid-in capital $290,950,860
Distributions in excess of net investment income (5,912,581)
Accumulated undistributed net realized gain 1,228,165
Net unrealized appreciation 6,755,698
=============
$293,022,142
=============
Net assets attributable to:
Class III shares $293,022,142
=============
Shares outstanding:
Class III 28,048,515
=============
Net asset value per share:
Class III $ 10.45
=============
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income:
Interest (including securities lending income of $3,025) $17,594,851
Dividends 497,625
------------
Total income 18,092,476
------------
Expenses:
Management fee (Note 2) 1,090,298
Custodian and transfer agent fees 194,162
Audit fees 55,709
Legal fees 15,919
Registration fees 11,820
Trustees fees (Note 2) 2,529
Miscellaneous 3,324
Fees waived or borne by Manager (Note 2) (692,754)
------------
681,007
Shareholder service fee (Note 2)
Class III 407,680
------------
Net expenses 1,088,687
------------
Net investment income 17,003,789
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 2,258,957
Closed futures contracts 4,678,102
Closed swap contracts 588,168
Written options 1,797,176
Foreign currency, forward contracts and foreign currency related
transactions (10,834,552)
------------
Net realized loss (1,512,149)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (6,948,715)
Open futures contracts 854,186
Open swap contracts (175,254)
Written options 430,975
Foreign currency, forward contracts and foreign currency related
transactions 7,625,704
------------
Net unrealized gain 1,786,896
------------
Net realized and unrealized gain 274,747
------------
Net increase in net assets resulting from operations $17,278,536
============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February
1998 28, 1997
---------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $17,003,789 $14,716,597
Net realized gain (loss) (1,512,149) 15,665,683
Change in net unrealized appreciation (depreciation) 1,786,896 (7,800,186)
------------ ------------
Net increase in net assets resulting from operations 17,278,536 22,582,094
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (14,355,792) (15,718,077)
------------ ------------
Net realized gains
Class III (2,663,260) (10,685,120)
------------ ------------
In excess of net realized gains
Class III (9,216,709) (2,935,300)
------------ ------------
(26,235,761) (29,338,497)
------------ ------------
Net share transactions: (Note 5)
Class III 66,196,244 48,619,210
------------ ------------
Increase in net assets resulting from net share 66,196,244 48,619,210
transactions
------------ ------------
Total increase in net assets 57,239,019 41,862,807
Net assets:
Beginning of period 235,783,123 193,920,316
------------ ------------
End of period (including distributions in excess of
net investment income of $5,912,581 and
undistributed net investment income of $5,273,327,
respectively) $293,022,142 $235,783,123
============ ============
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
---------------------------------------------------
1998 1997 1996 1995 1994*
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.78 $ 10.92 $ 9.64 $ 9.96 $ 10.00
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income 0.59 0.71 0.62 0.98 0.08
Net realized and unrealized gain
(loss) 0.08 0.65 1.55 (0.21) (0.12)
-------- -------- -------- -------- -------
Total from investment operations 0.67 1.36 2.17 0.77 (0.04)
-------- -------- -------- -------- -------
Less distributions to shareholders:
From net investment income (0.54) (0.81) (0.59) (0.75) --
From net realized gains (0.10) (0.54) (0.30) (0.34) --
In excess of net realized gains (0.36) (0.15) -- -- --
-------- -------- -------- -------- -------
Total distributions (1.00) (1.50) (0.89) (1.09) --
-------- -------- -------- -------- -------
Net asset value, end of period $ 10.45 $ 10.78 $ 10.92 $ 9.64 $ 9.96
======== ======== ======== ======== =======
Total Return/(a)/ 6.32% 12.39% 22.72% 8.23% (0.40)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $293,022 $235,783 $193,920 $151,189 $39,450
Net expenses to average daily
net assets 0.40% 0.40% 0.40% 0.40% 0.40%**
Net investment income to average
daily net assets 6.24% 6.93% 8.17% 7.51% 5.34%**
Portfolio turnover rate 105% 95% 99% 141% 14%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts: $ 0.02 $ 0.02 $ 0.01 $ 0.02 $ 0.01
</TABLE>
* For the period from December 22, 1993 (commencement of operations) to
February 28, 1994.
/(a)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
** Annualized.
12 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks high total return by investing primarily in investment grade
bonds denominated in various currencies including U.S. dollars and
multicurrency units. The Fund generally seeks to provide a total return
greater than that provided by the international fixed income securities
market.
On June 1, 1996, the Fund began to offer three classes of shares: Class I,
Class II and Class III. The principal economic difference among the classes
of shares is the level of shareholder service fee borne by the classes.
Eligibility for and automatic conversion between the various classes of
shares is generally based on the total amount of assets invested with GMO,
as more fully outlined in the Trust's prospectus. Class III shares are the
continuation of the Trust's shares that existed prior to June 1, 1996, and
bear the same total operating expenses (after the voluntary expense waiver)
as those shares. Effective January 9, 1998, Class I and Class II shares
ceased to be offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. 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 by
13
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. At February 28, 1998, the
total value of these securities represented 9% of net assets. These prices
may differ from the value that would have been used had a broader market
for securities existed and the differences could be material to the
financial statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from the changes in the value of
the underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1998.
14
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1998.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1998.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit
15
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
risk of both the borrower and the lender that is selling the loan
agreement. When the Fund purchases assignments from lenders it acquires
direct rights against the borrower on the loan. Direct indebtedness of
emerging countries involves a risk that the governmental entities
responsible for the repayment of the debt may be unable or unwilling to pay
the principal and interest when due.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return based on a notional amount. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. In connection
with these agreements, cash may be set aside as collateral by the Fund's
custodian in accordance with the terms of the swap agreement. At February
28, 1998, $1,099,769 in cash has been set aside. Swaps are marked to market
daily based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there is no liquid
market for these agreements, that the counterparty to the agreements may
default on its obligation to perform and that there may be unfavorable
changes in the fluctuation of interest rates. See Note 6 for a summary of
open swap agreements as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
16
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements--(Continued)
February 28, 1998
- --------------------------------------------------------------------------------
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1998, there were no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
Distributions in Excess
of Net Investment Accumulated Undistributed
Income Net Realized Gain Paid-in Capital
----------------------- -------------------------- ---------------------
<S> <C> <C>
($13,833,905) $13,833,925 ($20)
</TABLE>
17
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on the U.S. Treasury inflation indexed securities is accrued daily based
upon an inflation adjusted principal. Additionally, any increase in the
principal or face amount of these securities adjusted for inflation is
recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium may be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1998, the Fund received $99,991 in purchase
premiums. There is no premium for cash redemptions, reinvested
distributions or in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
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.
18
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. Effective June 1, 1996, the Fund adopted a
Shareholder Service Plan under which the Fund pays GMO a shareholder
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .28% for Class I shares, .22% for Class II shares and
.15% for Class III shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .25% of average daily net assets. Prior to
June 1, 1996, a similar waiver existed for annual expenses exceeding .40%;
thus the net annual expense ratio after the waiver for a Class III
shareholder is unchanged.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998, was $2,529. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------- ------------------
<S> <C> <C>
U.S. Government securities $ 11,978,048 $ 7,888,918
Investments (non-U.S. Government securities) 310,110,352 249,981,938
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
--------------------- ----------------------- ---------------------- --------------------
<S> <C> <C> <C>
$ 290,748,365 $12,803,891 $8,725,478 $4,078,413
</TABLE>
4. Principal shareholders
At February 28, 1998, 45% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1998 February 28, 1997
------------------------------ ------------------------------
Class III: Shares Amount Shares Amount
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Shares sold 9,447,927 $ 103,640,468 9,398,594 $ 108,940,870
Shares issued to shareholders in
reinvestment of distributions 2,082,876 21,695,786 2,130,615 23,653,871
Shares repurchased (5,355,799) (59,140,010) (7,421,298) (83,975,531)
---------------- -------------- ---------------- --------------
Net increase 6,175,004 $ 66,196,244 4,107,911 $ 48,619,210
================ ============== ================ ==============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
-------------- ------------------- --------------------- ----------------- ------------------
Buys
<S> <C> <C> <C> <C>
5/07/98 AUD 7,300,000 $ 4,980,228 $ 68,423
3/27/98 CAD 40,700,000 28,616,855 279,969
4/09/98 DEM 298,600,000 164,948,499 (181,678)
4/17/98 GBP 12,300,000 20,199,696 7,592
3/20/98 ITL 94,910,620,000 53,023,537 (1,349,630)
4/03/98 JPY 14,450,000,000 114,971,184 559,949
3/23/98 THB 200,000,000 4,615,953 (650,670)
6/22/98 THB 100,000,000 2,258,044 (330,282)
------------------
$ (1,596,327)
==================
</TABLE>
20
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Forward currency contracts--continued
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
--------------- ------------------ -------------------- -------------------------------------
<S> <C> <C> <C>
Sales
5/07/98 AUD 16,500,000$ 11,256,680$ (227,420)
3/27/98 CAD 5,200,000 3,656,207 (24,599)
3/20/98 DEM 96,400,000 53,187,529 1,185,637
4/09/98 DEM 21,000,000 11,600,531 20,941
4/17/98 GBP 4,300,000 7,061,682 (101,702)
4/03/98 JPY 11,360,000,000 90,385,651 (346,473)
3/20/98 MYR 11,896,500 3,233,294 (233,294)
4/17/98 MYR 22,443,000 6,086,884 (9,711)
3/12/98 NZD 8,800,000 5,157,126 75,442
3/23/98 THB 200,000,000 4,615,953 2,316,456
6/22/98 THB 100,000,000 2,258,044 1,149,111
------------------
$ 3,804,388
==================
<CAPTION>
Forward cross currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
------------- ------------------------------- ----------------------------- -----------------
<S> <C> <C> <C>
7/10/98 BEF 1,531,758,150 DEM 74,100,000$ (44,754)
5/14/98 CHF 12,871,680 DEM 16,000,000 (2,425)
3/06/98 DEM 62,500,000 SEK 275,159,627 (78,774)
3/20/98 DEM 16,200,000 ITL 15,950,020,000 (27,386)
4/23/98 DEM 15,117,675 GBP 5,100,000 14,702
4/24/98 DEM 41,600,000 ESP 3,534,128,000 (17,294)
4/30/98 DEM 392,416,500 ECU 199,500,000 685,815
7/10/98 DEM 28,800,000 BEF 594,040,896 (17,523)
3/23/98 DKK 245,073,020 DEM 64,300,000 15,335
5/22/98 FRF 203,796,736 DEM 60,800,000 36,497
3/05/98 NLG 10,592,860 DEM 9,400,000 4,495
3/06/98 SEK 359,490,884 DEM 81,500,000 17,429
4/30/98 ECU 112,800,000 DEM 222,178,041 (221,595)
-----------------
$ 364,522
=================
</TABLE>
21
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Futures contracts
<TABLE>
<CAPTION>
Net
Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
---------- ------------------------------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Buys
79 Australian Government Bond 3 yr March 1998 $ 6,368,825 $ 80,331
38 Australian Government Bond 10 yr March 1998 3,750,609 72,576
6 Japanese Government Bond 10 yr June 1998 6,144,858 13,332
125 German Government Bond March 1998 18,526,490 756,747
114 German Government Bond June 1998 16,803,505 (16,221)
346 MATIF National Bond June 1998 29,367,924 (67,247)
18 U.K. Gilt June 1998 1,583,261 (18,175)
===============
$ 821,343
===============
Sales
73 Canadian Government Bond June 1998 $ 6,387,500 $ (41)
140 MSE 3 mo. Bankers Acceptance March 1998 23,367,763 (98,364)
60 Italian Government Bond 10 yr June 1998 7,921,093 4,824
95 Spanish Government Bond MEFSA 10 yr March 1998 6,707,951 (285,530)
71 Spanish Government Bond MEFSA 10 yr June 1998 4,993,949 12,159
165 Swiss Government Bond March 1998 14,076,043 (801,780)
106 Swiss Government Bond June 1998 9,070,959 64,183
47 U.S. Long Bond June 1998 5,662,031 53,046
195 U.S. Treasury Bond 10 yr June 1998 21,961,875 164,811
===============
$ (886,692)
===============
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to cover
any margin requirements on open futures contracts.
22
<PAGE>
GMO International Bond Fund
(A series of GMO Trust)
Notes to Financial Statements--(Continued)
February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Written option transactions
Puts Calls
Principal Principal
Amount of Amount of
Contracts Contracts
(000's omitted) Premiums (000's omitted) Premiums
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 13,000 $ 646,750 13,000 $ 553,800
Options written 242,025 5,847,375 357,916 6,579,892
Options closed (100) (89,975) -- --
Options exercised (21,000) (686,750) (9,266) (352,754)
Options expired (5,225) (406,350) (232,950) (1,340,923)
--------------- ---------------- ---------------- ---------------
Outstanding, end
of period 228,700 $ 5,311,050 128,700 $ 5,440,015
=============== ================ ================ ===============
<CAPTION>
Summary of written options outstanding
Principal
Amount of
Contracts Expiration
(000's omitted) Exercise Price Date Value
----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Calls
Canadian Dollar 38,100 1.4294 CAD 5/08/98 $ 270,510
Japanese Yen 90,600 113.65 JPY 9/17/98 7,546,980
Puts
Canadian Dollar 38,100 1.4294 CAD 5/08/98 430,530
Japanese Yen 90,600 113.65 JPY 9/17/98 1,105,320
Japanese Yen 100,000 117.18 JPY 6/15/98 840,000
================
$ 10,193,340
================
</TABLE>
23
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- --------------------------------------------- ----------------
<C> <C> <S> <C>
9,600,000 USD/ 5/04/98 Agreement with Morgan Guaranty Trust $ 192,252
5,661,304 USD Company dated 2/10/98 to receive the
notional amount multiplied by the change
in market value (including accrued
interest) on the Russia Principal
Floating Rate Note due 12/15/20 and to
pay the notional amount multiplied by 3
month LIBOR adjusted by a
specified spread.
3,000,000 USD/ 5/11/98 Agreement with Morgan Guaranty Trust 73,349
3,044,063 USD Company dated 2/03/98 to receive the
notional amount multiplied by the change
in market value (including accrued
interest) on the Republic of Argentina
9.75%, 9/19/27 and to pay the notional
amount multiplied by 3 month LIBOR
adjusted by a specified spread.
1,998,907 USD/ 5/14/99 Agreement with Bank of America dated (773,012)
267,500,000,000 TRL 5/29/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) on the
Turkey Index Linked Bond due 5/14/99 and
to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified
spread.
782,986 USD/ 6/04/99 Agreement with Bank of America dated 145,329
170,910,054,657 TRL 6/20/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) on the
Turkey Index Linked Bond due 6/04/99 and
to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified
spread.
</TABLE>
24
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements--(Continued)
February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Swap agreements -- continued
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- --------------------------------------------- ----------------
<S> <C> <C> <C>
263,846 USD/ 6/04/99 Agreement with Bank of America dated $ 186,828
82,676,302,839 TRL 11/13/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) on the
Turkey Index Linked Bond due 6/04/99 and
to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified
spread.
----------------
Net unrealized depreciation $ (175,254)
================
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
25
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 24.66% of distributions as net capital gain dividends.
The Fund has elected to defer to March 1, 1998 post-October losses of
$1,990,368.
26
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the International Bond Fund returned 6.3% for the
fiscal year ended February 28, 1998, compared to 3.7% for the J.P. Morgan
Non-U.S. Government Bond Index. Consistent with the Fund's investment
objectives and policies, the Fund was substantially invested in
investment-grade, foreign and domestic, fixed income instruments throughout
the period.
Many of the strategies implemented in the Fund were successful during the
fiscal year. It outperformed its benchmark by 2.6%, though absolute returns
were fairly modest due to the strength of the U.S. dollar. During the year
bond market and currency selection were positive. Although foreign interest
rates generally declined during the year, the strength of the U.S. dollar
meant that many foreign bond markets performed poorly when measured in U.S.
dollar terms. Exceptions to this occurred in Italy and the U.K. whose bond
markets had double-digit U.S. dollar returns. Strong returns were shown as
well in Australia, Sweden and the U.K. The Canadian dollar was the only
currency that produced a positive return versus the U.S. dollar for the
year ended February 28, 1998. Value was added during the year by
overweighting the Canadian, Swedish and U.K. bond markets, as well as the
Italian lira, Spanish peseta and the ECU. Additionally, the Fund gained
versus the benchmark as a result of underweighting the French, Japanese,
and Swiss bond markets, as well as the Belgian franc and the Dutch guilder.
During the year the Fund held a position in emerging country sovereign
debt, emphasizing undervalued issues. This market had a somewhat volatile
year, buffeted by the financial problems in Asia. Returns came mainly from
bond yields as prices changed little from beginning to end. Our decision to
include emerging country debt exposure in the portfolio added value in all
but the third fiscal quarter.
Outlook
The Fund is structured to benefit from outperformance in the Australian,
Danish, French, German, Swedish and emerging bond markets. We expect
underperformance from the Italian, Japanese, Spanish and Swiss bond
markets. Our strategy maintains a market duration in each country. Strong
relative performance is expected from the Canadian dollar, Deutsche mark,
Italian lira, Spanish peseta and U.K. pound. The Belgian franc, Danish
krone, French franc, Japanese yen and U.S. dollar are expected to
underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO International Bond Fund Class III Shares and the JP Morgan Non-U.S.
Government Bond Index
As of February 28, 1998
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 12/22/93
--------------------------------
Class 6.2% 11.5%
III --------------------------------
[LINE GRAPH APPEARS HERE]
GMO International JP Morgan Non-U.S.
Bond Fund Class Government
Date III Shares Bond Index
---- ----------------- ------------------
12/22/93 $9,985 $10,000
2/28/94 $9,945 $9,934
2/28/95 $10,764 $10,930
2/29/96 $13,198 $12,339
2/28/97 $14,848 $12,550
2/28/98 $15,786 $13,008
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Class III shares are a redesignation of the single
class of shares that has been offered by the Fund since inception. Past
performance is not indicative of future performance. Information is unaudited.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO International
Equity Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Equity Allocation
Fund at February 28, 1998, the results of its operations for the year then
ended, the changes in its net assets and the financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS -- 100.0%
246,673 GMO Emerging Country Debt Fund (Class III Shares) 2,871,278
1,423,325 GMO Emerging Markets Fund (Class III Shares) 13,606,983
526,014 GMO Evolving Countries Fund (Class III Shares) 4,528,979
63,894 GMO Inflation Indexed Bond Fund (Class III Shares) 641,494
120,926 GMO International Bond Fund (Class III Shares) 1,263,676
2,552,633 GMO International Core Fund (Class III Shares) 59,221,082
263,440 GMO International Small Companies Fund (Class III Shares) 3,219,237
48,710 GMO U.S. Bond/Global Alpha A Fund (Class III Shares) 516,328
-----------
TOTAL MUTUAL FUNDS (COST $92,041,374) 85,869,057
-----------
SHORT-TERM INVESTMENT -- 0.0%
Repurchase Agreement -- 0.0%
$ 19,924 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $19,933 and
an effective yield of 5.07%, collateralized by a U.S.
Treasury Obligation with a rate of 8.875%, with a maturity
date of 8/15/17 and with an aggregate market value of
$20,323. 19,924
-----------
TOTAL SHORT-TERM INVESTMENT (COST $19,924) 19,924
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $92,061,298) 85,888,981
Other Assets and Liabilities (net)-- 0.00% (13,474)
-----------
TOTAL NET ASSETS-- 100% $85,875,507
===========
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $92,061,298) (Note 1) $85,888,981
Receivable for expenses waived or borne by Manager (Note 2) 5,550
-----------
Total assets 85,894,531
-----------
Liabilities:
Accrued expenses 19,024
-----------
Net assets $85,875,507
===========
Net assets consist of:
Paid-in capital $87,829,911
Accumulated undistributed net realized gain 4,217,913
Net unrealized depreciation (6,172,317)
-----------
$85,875,507
===========
Net assets attributable to:
Class III shares $85,875,507
===========
Shares outstanding:
Class III 8,435,792
===========
Net asset value per share:
Class III $ 10.18
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Dividends from investment company shares $2,252,506
Interest 2,688
----------
Total income 2,255,194
----------
Expenses:
Custodian and transfer agent fees 31,443
Registration fees 13,661
Audit fees 13,474
Legal fees 1,712
Trustees fees (Note 2) 625
Miscellaneous 526
Fees waived or borne by Manager (Note 2) (61,441)
----------
--
Shareholder service fee (Note 2)
Class I 3,878
Class II 9,691
----------
Net expenses 13,569
----------
Net investment income 2,241,625
----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (676,793)
Realized gain distributions from investment company shares 8,728,729
----------
Net realized gain 8,051,936
----------
Change in net unrealized appreciation (depreciation) on investments (6,728,168)
----------
Net realized and unrealized gain 1,323,768
----------
Net increase in net assets resulting from operations $3,565,393
==========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from October 11, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
--------------- -------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,241,625 $ 258,062
Net realized gain 8,051,936 831,547
Change in net unrealized appreciation
(depreciation) (6,728,168) 555,851
----------- -----------
Net increase in net assets resulting from
operations 3,565,393 1,645,460
----------- -----------
Distributions to shareholders from:
Net investment income
Class I (195,254) --
Class II (430,549) (98,709)
Class III (1,615,822) (159,298)
----------- -----------
Total distributions from net investment income (2,241,625) (258,007)
----------- -----------
In excess of net investment income
Class I (355) --
Class II (783) --
Class III (2,939) --
----------- -----------
Total distributions in excess of net
investment income (4,077) --
----------- -----------
Net realized gains
Class I (338,565) --
Class II (872,870) (44,198)
Class III (3,087,812) (71,327)
----------- -----------
Total distributions from net realized gains (4,299,247) (115,525)
----------- -----------
(6,544,949) (373,532)
----------- -----------
Net share transactions: (Note 5)
Class I 1,138,414 --
Class II (13,394,265) 15,022,907
Class III 55,162,012 29,654,067
----------- -----------
Increase in net assets resulting from net share
transactions 42,906,161 44,676,974
----------- -----------
Total increase in net assets 39,926,605 45,948,902
Net assets:
Beginning of period 45,948,902 --
----------- -----------
End of period (including accumulated
distributions in excess of net investment
income of $0 and $0, respectively) $85,875,507 $45,948,902
=========== ===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 1, 1997
(commencement of operations)
to January 9, 1998
----------------------------
<S> <C>
Net asset value, beginning of period $10.17
------
Income from investment operations:
Net investment income/(b)/ 0.45+
Net realized and unrealized loss (0.65)
------
Total from investment operations (0.20)
------
Less distributions to shareholders:
From net investment income (0.29)
In excess of net investment income --/(d)/
From net realized gains (0.58)
------
Total distributions (0.87)
------
Net asset value, end of period $ 9.10/(c)/
======
Total Return/(a)/ (2.40)%
Ratios/Supplemental Data:
Net assets, end of period (000's) --
Net expenses to average daily net assets 0.13%*
Net investment income to average daily net assets/(b)/ 5.49%*
Portfolio turnover rate 16%
Fees and expenses voluntarily waived or borne by the Manager consisted of
the following per share amount: $ 0.01
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(d)/ The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from December 23, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ -----------------------------
<S> <C> <C>
Net asset value, beginning of period $10.41 $ 10.10
------ -------
Income from investment operations:
Net investment income/(b)/ 0.30+ --
Net realized and unrealized gain (loss) (0.74) 0.41
------ -------
Total from investment operations (0.44) 0.41
------ -------
Less distributions to shareholders:
From net investment income (0.29) (0.07)
In excess of net investment income --/(e)/ --
From net realized gains (0.58) (0.03)
------ -------
Total distributions (0.87) (0.10)
------ -------
Net asset value, end of period $ 9.10/(c)/ $ 10.41
====== =======
Total Return/(a)/ (4.65)% 4.07%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $15,490
Net expenses to average daily net assets 0.07%* 0.07%*
Net investment income to average daily net assets/(b)/ 3.23%* (0.07)%*
Portfolio turnover rate 16% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.01 /(d)/
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ All Class II shares of the fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(d)/ Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
/(e)/ The per share distribution in excess of net investment income was
$0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from October 11, 1996
Year Ended (commencement of operations)
February 28, 1998 to February 28, 1997
----------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period $10.41 $10.00
------ -------
Income from investment operations:
Net investment income /(b)/ 0.33+ 0.10
Net realized and unrealized gain 0.31 0.41
------ -------
Total from investment operations 0.64 0.51
------ -------
Less distributions to shareholders:
From net investment income (0.29) (0.07)
In excess of net investment income -- /(c)/ --
From net realized gains (0.58) (0.03)
------ -------
Total distributions (0.87) (0.10)
------ -------
Net asset value, end of period $10.18 $ 10.41
====== =======
Total Return /(a)/ 6.73% 5.11%
Ratios/Supplemental Data:
Net assets, end of period (000's) $85,876 $30,459
Net expenses to average daily net assets 0.00% 0.01%*
Net investment income to average daily net assets /(b)/ 3.13% 3.60%*
Portfolio turnover rate 16% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.01 $ 0.01
</TABLE>
/(a)/ Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/ Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
/(c)/ The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Equity Allocation Fund (the "Fund"), which commenced
operations on October 11, 1996, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO EAFE-Lite Extended Index, a benchmark developed by the Manager. The
Fund will pursue its objective by investing primarily in Class III shares
of international equity and fixed income funds of the Trust.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I shares and Class II shares ceased
operations and all shares were exchanged for Class III shares.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated
8
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
account for the benefit of the Fund and the counterparty. In connection
with transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
classification of distributions from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
--------------------- ------------------------- ---------------------
$4,077 $(250,853) $246,776
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
9
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
In addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions of
underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .80% of the amount
invested. In the case of cash redemptions, the fee is .11% of the amount
redeemed. Prior to June 30, 1997, the fee on cash redemptions was .10%. All
purchase premiums and redemption fees are paid to and recorded by the Fund
as paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1998, the Fund received $249,442 in
purchase premiums and $5,400 in redemption fees. There is no premium for
reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
fees from the underlying funds in which the Fund invests. The Fund has
adopted a Shareholder Service Plan under which the Fund pays GMO a
shareholder service fee for client and shareholder service, reporting and
other support. Pursuant to the Shareholder Service Plan, the shareholder
service fee is calculated based on the average daily net assets of each
class at the annual rate of .13% for Class I shares and .07% for Class II
shares. No shareholder service fee is charged for Class III shares.
GMO has agreed to reimburse all expenses until further notice (excluding
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses). Prior to
November 25, 1996, GMO had agreed to reimburse these expenses to the extent
that the Fund's annual expenses exceeded .05% of average daily net assets.
10
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $625. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$58,443,650 and $11,127,527, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
$92,635,775 $149,748 $6,896,542 $6,746,794
</TABLE>
4. Principal shareholders
At February 28, 1998, 41% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
Period from April 1, 1997
(commencement of operations)
Class I: to January 9, 1998
-----------------------------
Shares Amount
------------ --------------
Shares sold 679,610 $ 7,302,827
Shares issued to shareholders in
reinvestment of distributions 56,235 534,174
Shares repurchased (735,845) (6,698,587)
------------ --------------
Net increase -- $ 1,138,414
============ ==============
11
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Share transactions - continued
<TABLE>
<CAPTION>
Period from December 23, 1996
Period from March 1, 1997 (commencement of operations)
Class II: to January 9, 1998 to February 28, 1997
----------------------------- ------------------------------
Shares Amount Shares Amount
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold -- $ 64,521 1,473,267 $ 14,880,000
Shares issued to shareholders in reinvestment
of distributions 135,087 1,304,202 14,234 142,907
Shares repurchased (1,622,588) (14,762,988) -- --
------------ -------------- ------------- -------------
Net increase/(decrease) (1,487,501) $ (13,394,265) 1,487,501 $ 15,022,907
============ ============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Period from October 11, 1996
Year Ended (commencement of operations)
Class III: February 28, 1998 to February 28, 1997
----------------------------- -------------------------------
Shares Amount Shares Amount
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold 5,640,062 $ 56,708,756 2,910,529 $ 29,506,688
Shares issued to shareholders in reinvestment
of distributions 388,075 3,750,538 14,679 147,379
Shares repurchased (517,553) (5,297,282) -- --
------------ -------------- ------------- --------------
Net increase 5,510,584 $ 55,162,012 2,925,208 $ 29,654,067
============ ============== ============= ==============
</TABLE>
12
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the fund has designated
29.58% of distributions as net capital gain dividends.
13
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a
portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
twenty years. Mr. Inker has been with the firm for six years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the International Equity Allocation Fund returned
6.7% for the twelve months ended February 28, 1998. The Fund's benchmark,
the GMO EAFE-Lite Extended Index, returned 15.4%.
We use GMO's long-term asset class forecasts to allocate the International
Equity Allocation Fund among various GMO mutual funds. Our research
suggests that the next several years will be somewhat more difficult for
developed international stock markets than the recent past, with real
returns likely to average 3 to 4% per year. Our forecast for emerging
equities, however, is better. We expect emerging equities to rebound
significantly from current depressed levels, and our forecast is for
emerging markets to provide real returns of 6 to 7% annually over the next
10 years.
Performance of the International Core Fund lagged the benchmark during the
fiscal year as the rally in expensive multinationals continued. The GMO
International Core Fund returned 11.7%, underperforming the GMO EAFE-Lite
Index by 7.2%. Our diversification into emerging markets was also
unsuccessful in adding value. The emerging markets as measured by the IFC
Investable Index performed poorly, down 21.8%, due to the crisis in Asian
economies. However, performance of the GMO Emerging Markets Fund was
somewhat better at -12.9%.
The Fund also had a 5% weight in fixed income. While the allocation
decision to fixed income investments detracted from the Fund performance,
performance of the underlying bond funds was strong relative to their
benchmarks.
We expect the Fund's diversification into fixed income and emerging markets
to benefit performance in the current fiscal year. We believe both fixed
income and emerging markets have better return potential than international
developed markets. In addition, we expect our tilt in favor of smaller,
less expensive international stocks in our International Core Fund will
produce better returns relative to the benchmark this year.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO International Equity Allocation Fund "IEAF" Class III Shares Index and
the MSCI World Index
As of February 28, 1998
-------------------------------
Average Annual Total Return
-------------------------------
Since
1 Year Inception
-------------------------------
Class 10/11/96
III 5.8% 8.0%
-------------------------------
[LINE GRAPH APPEARS HERE]
GMO International Equity GMO EAFE-LITE
Date Allocation Fund Extended Index MSCI World Index
- -------- ------------------------ ---------------- ----------------
10/11/96 $9,920 $10,000 $10,000
2/28/97 $10,416 $10,375 $10,636
2/28/98 $11,118 $11,970 $13,198
Performance shown as net of all fees after reimbursement from the manager.
Returns and net asset values of trust investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 80 bp on the purchase and 11 bp on the redemption Transaction
fees are paid to the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Bond/Global Alpha A Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
U.S. Bond/Global Alpha A Fund at February 28, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for
the period from April 30, 1997 (commencement of operations) through
February 28, 1998, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 96.8%
Albania -- 1.2%
USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, due 8/31/25 2,702,346
--------------
Argentina -- 0.3%
USD 1,000,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.50%, due 3/31/23 758,125
--------------
Brazil -- 1.4%
USD 4,043,291 Brazil Capitalization Bond, PIK, 8.00%, due 4/15/14 3,285,174
--------------
Bulgaria -- 0.1%
USD 2,000,000 Bulgaria Discount Series B Strips, Basket 2, 0.00%,
due 7/28/24 255,000
--------------
Denmark -- 0.9%
DKK 13,100,000 Kingdom of Denmark Bullet, 7.00%, due 11/15/07 2,140,634
--------------
Germany -- 0.9%
GBP 2,000,000 Schweiz Bankgesellschaft, Zero Coupon, due 3/31/06 1,948,139
--------------
Mexico -- 3.2%
FRF 44,500,000 Mexico Par Bond, 6.63%, due 12/31/19 6,367,009
USD 1,000,000 Mexico Par Bond Series B, 6.25%, due 12/31/19 843,750
--------------
7,210,759
--------------
New Zealand -- 3.2%
NZD 13,000,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 7,241,169
--------------
Supra National -- 2.4%
AUD 17,700,000 European Bank Recon and Development, Zero Coupon,
due 2/10/28 1,816,087
ITL 5,000,000,000 European Investment Bank, 12.20%, due 2/18/03 3,647,769
--------------
5,463,856
--------------
Sweden -- 4.2%
SEK 74,600,000 Kingdom of Sweden, 6.00%, due 2/09/05 9,679,067
--------------
United States -- 79.0%
Asset Backed Securities -- 64.3%
USD 4,582,065 AFC Home Equity Loan Trust Series 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .22%, 5.85%, due 3/25/27 4,563,450
USD 2,472,296 Americredit Automobile Receivables Trust Series
96-B Class A, 6.50%, due 1/12/02 2,483,884
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 20,500,000 Big Flower Receivables Master Trust 96-2 Class A,
Variable Rate, LIBOR +.25%, 5.88%, due 4/25/03 20,499,999
USD 18,145,000 Brazos Student Loan Finance Corp Series 96-A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 5.78%, due
12/01/02 18,074,121
USD 8,450,000 Discover Card Master Trust I 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 5.98%, due 10/16/04 8,523,938
USD 5,000,000 First Chicago Master Trust II 95-0 Class A,
Variable Rate, 1 mo. LIBOR + .23%, 5.86%, due 2/15/04 5,018,750
USD 20,000,000 First Chicago Master Trust II 96-S Class A,
Variable Rate, 1 mo. LIBOR + .13%, 5.75%, due 8/15/04 20,005,999
USD 10,000,000 First North American National Bank 97-2 Class A,
Variable Rate, 1 mo. LIBOR +.21%, 5.84%, due 3/15/06 10,004,000
USD 5,000,000 First USA Credit Card Master Trust 97-4 Class A,
Variable Rate, 1 mo. LIBOR + .21%, 5.84%, due 2/17/10 5,006,250
USD 2,746,232 Keycorp Student Loan Trust 94-B Class A,
Variable Rate, 1 mo. LIBOR + .29%, 5.92%, due 8/27/18 2,761,336
USD 8,538,038 Keystone Auto Grantor Trust Series 1996-A Class A,
144A, 6.60%, due 12/15/02 8,674,647
USD 10,000,000 Navistar Financial Dealer Note Master Trust 90-A
Class A3, Variable Rate, 1 mo. LIBOR + .90%, 6.55%, due 1/25/03 10,000,000
USD 9,500,000 Navistar Financial Dealer Note Master Trust 95-1
Class A, Variable Rate, 1 mo. LIBOR + .30%, 5.96%, due 8/25/07 9,655,859
USD 5,000,000 Northstar CBO Series 97-2 Class A2, 6.62%, due 7/15/09 5,478,905
USD 6,926,243 Signet Student Loan Trust Series 96-A Class A-1,
Variable Rate, 1 mo. LIBOR + .09%, 5.72%, due 1/25/05 6,924,079
USD 6,188,507 Society Student Loan Trust 94-A Class A2,
Variable Rate, 1 mo. LIBOR +.33%, 6.00%, due 12/29/03 6,196,242
USD 3,000,000 Starvest CBO-1 Class A,
Variable Rate, 6 mo. LIBOR + .19% 144A, 5.82%, due
7/30/11 2,964,000
--------------
146,835,459
--------------
U.S. Government -- 14.7%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 2/15/10 4,872,139
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 2/15/12 4,272,199
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 8/15/12 4,136,758
USD 10,000,000 U.S. Treasury Bond, 6.25%, due 8/15/23/(a)/ 10,334,370
USD 5,090,850 U.S. Treasury Inflation Indexed Note, 3.38%, due 1/15/07 4,966,761
USD 5,036,200 U.S. Treasury Inflation Indexed Note, 3.63%, due 7/15/02/(a)/ 5,009,443
--------------
33,591,670
--------------
Total United States 180,427,129
--------------
TOTAL DEBT OBLIGATIONS (COST $218,592,835) 221,111,398
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS -- 1.8%
United States -- 1.8%
4,000 Bear Stearns Managed Income Securities Plus Fund 13.27% 3,990,280
----------------
TOTAL PREFERRED STOCKS (COST $3,949,109) 3,990,280
----------------
Principal Amount
---------------------
CALL OPTIONS PURCHASED -- 1.9%
Cross Currency Options -- 0.2%
DEM 159,700,000 DEM Call/BEF Put, Expires 7/08/98, Strike 20.6 184,797
DEM 72,000,000 DEM Call/ITL Put, Expires 9/22/98, Strike 993.00 293,586
----------------
478,383
----------------
Options on Bonds -- 0.2%
SEK 119,000,000 Sweden Government Bond, Expires 4/30/98, Strike 100.677 457,783
----------------
Options on Currency -- 1.5%
USD 64,100,000 German Mark, Expires 9/17/98, Strike 1.725 3,339,610
USD 80,000,000 Japanese Yen, Expires 6/15/98, Strike 140.00 136,000
----------------
3,475,610
----------------
Options on Futures -- 0.0%
USD 750,000 Eurodollar, Expires 3/16/98, Strike 94.25 60,000
----------------
TOTAL CALL OPTIONS PURCHASED (COST $4,811,458) 4,471,776
----------------
PUT OPTIONS PURCHASED -- 0.5%
Cross Currency Options -- 0.1%
DEM 72,000,000 DEM Put/ITL Call, Expires 9/22/98, Strike 993.00 182,499
USD 834,568 TRL Put/1.00 USD + 1.50 DEM Basket Call, Expires 5/12/98,
Strike 545,000 4,307
----------------
186,806
----------------
Options on Currency -- 0.4%
USD 64,100,000 German Mark, Expires 9/17/98, Strike 1.725 897,400
----------------
Options on Futures -- 0.0%
USD 750,000 Eurodollar, Expires 3/16/98, Strike 94.00 3,750
----------------
TOTAL PUT OPTIONS PURCHASED (COST $2,896,984)
1,087,956
----------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value/Shares Description Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RIGHTS AND WARRANTS -- 0.0%
Mexico -- 0.0%
2,740,000 United Mexican States Warrants, Expires 6/30/03 * --
---------------
Venezuela -- 0.0%
1,000,000 Republic of Venezuela Recovery Warrants,
Expires 04/15/20 * --
---------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
---------------
SHORT-TERM INVESTMENTS -- 1.4%
Commercial Paper -- 1.3%
USD 3,000,000 GE Capital Corp, 5.68% due 3/02/98 3,000,000
---------------
Repurchase Agreement -- 0.1%
USD 109,124 Salomon Smith Barney Repurchase Agreement, dated 2/27/98,
due 3/2/98, with a maturity value of $109,170 and an
effective yield of 5.07%, collateralized by a U.S. Treasury
Obligation with a rate of 8.125%, with a maturity date of
8/15/21 and with a market value of $111,306. 109,124
---------------
TOTAL SHORT-TERM INVESTMENTS (COST
$3,109,124) 3,109,124
---------------
TOTAL INVESTMENTS -- 102.4%
(COST $233,359,510) 233,770,534
Other Assets and Liabilities (net)-- (2.4)% (5,384,508)
---------------
TOTAL NET ASSETS-- 100% $ 228,386,026
===============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Notes to the Schedule of Investments:
PIK -- Payment In Kind
144A-- Securities exempt from registration under
Rule 144A of the Securities Act of 1933.
These securities may be resold in
transactions exempt from registration,
normally to qualified institutional buyers.
Variable and Step up rates -- The rates shown on
variable and step up rate notes are the
current interest rates at February 28, 1998,
which are subject to change based on the
terms of the security, including varying
reset dates.
Currency Abbreviations
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
DEM - German Mark
DKK - Danish Krone
ECU - European Currency Unit
ESP - Spanish Peseta
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
MYR - Malaysian Ringgit
NLG - Netherlands Guilder
NZD - New Zealand Dollar
SEK - Swedish Krona
THB - Thailand Baht
TRL - Turkish Lira
USD - United States Dollar
(a) All or a portion of this security has been segregated to
cover margin requirements on open financial futures contracts.
* Non-income producing security.
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at value (cost $233,359,510) (Note 1) $ 233,770,534
Cash (Note 1) 332,831
Interest receivable 931,154
Receivable for variation margin on open futures contracts (Notes 1 and 6) 219,183
Receivable for open forward foreign currency contracts (Notes 1 and 6) 4,987,427
Receivable for expenses waived or borne by Manager (Note 2) 32,595
Miscellaneous receivable 659
---------------
Total assets 240,274,383
---------------
Liabilities:
Written options outstanding, at value (premiums $7,739,490) (Notes 1 and 6) 7,325,310
Payable for open forward foreign currency contracts (Notes 1 and 6) 4,399,850
Payable to affiliate for (Note 2):
Management fee 69,582
Shareholder service fee 25,378
Payable for open swap contracts (Notes 1 and 6) 1,989
Accrued expenses 66,248
---------------
Total liabilities 11,888,357
---------------
Net assets $ 228,386,026
===============
Net assets consist of:
Paid-in capital $ 223,718,576
Accumulated undistributed net investment income 2,266,216
Accumulated undistributed net realized gain 2,354,269
Net unrealized appreciation 46,965
---------------
$ 228,386,026
===============
Net assets attributable to:
Class III shares $ 228,386,026
===============
Shares outstanding:
Class III 21,548,708
===============
Net asset value per share:
Class III $ 10.60
===============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Statement of Operations --
Period from April 30, 1997 (commencement of operations) to February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest $ 8,807,383
Dividends 398,100
-------------
Total income 9,205,483
-------------
Expenses:
Management fee (Note 2) 571,318
Custodian and transfer agent fees 94,825
Audit fees 46,512
Legal fees 2,925
Registration fees 1,291
Trustees fees (Note 2) 1,194
Miscellaneous 1,488
Fees waived or borne by Manager (Note 2) (361,139)
-------------
358,414
Shareholder service fee (Note 2)
Class III 213,529
-------------
Net expenses 571,943
-------------
Net investment income 8,633,540
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 2,668,168
Closed futures contracts 3,241,938
Closed swap contracts 506,400
Written options 938,687
Foreign currency, forward contracts and foreign currency related transactions 1,606,930
-------------
Net realized gain 8,962,123
-------------
Change in net unrealized appreciation (depreciation) on:
Investments 411,024
Open futures contracts (1,358,005)
Open swap contracts (1,989)
Written options 414,180
Foreign currency, forward contracts and foreign currency related transactions 581,755
-------------
Net unrealized gain 46,965
-------------
Net realized and unrealized gain 9,009,088
-------------
Net increase in net assets resulting from operations $ 17,642,628
=============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 30, 1997
(commencement of operations)
to February 28, 1998
-----------------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 8,633,540
Net realized gain 8,962,123
Change in net unrealized appreciation (depreciation) 46,965
-------------
Net increase in net assets resulting from operations 17,642,628
-------------
Distributions to shareholders from:
Net investment income
Class III (5,715,005)
-------------
Net realized gains
Class III (7,260,173)
-------------
(12,975,178)
-------------
Net share transactions: (Note 5)
Class III 223,718,576
-------------
Increase in net assets resulting from net share transactions 223,718,576
-------------
Total increase in net assets 228,386,026
Net assets:
Beginning of period --
-------------
End of period (including accumulated undistributed net
investment income of $2,266,216) $ 228,386,026
=============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 30, 1997
(commencement of operations)
to February 28, 1998
-------------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
---------
Income from investment operations:
Net investment income 0.55+
Net realized and unrealized gain 0.66
---------
Total from investment operations 1.21
---------
Less distributions to shareholders:
From net investment income (0.27)
From net realized gains (0.34)
---------
Total distributions (0.61)
---------
Net asset value, end of period $ 10.60
=========
Total Return /(a)/ 12.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 228,386
Net expenses to average daily net assets 0.40%*
Net investment income to average daily net assets 6.05%*
Portfolio turnover rate 58%
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amount: $ 0.02
</TABLE>
+ Computed using average shares outstanding throughout the period.
/(a)/ Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
* Annualized.
See accompanying notes to the financial statements. 9
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Bond/Global Alpha A Fund (the "Fund"), which commenced operations
on April 30, 1997, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks a high total return primarily through investing in
investment-grade bonds.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II, and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. 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 by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
10
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. At February 28, 1998, the
total value of these securities represented 19% of net assets. These prices
may differ from the value that would have been used had a broader market
for the securities existed and the differences could be material to the
financial statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1998.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency
11
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
contract fluctuates with changes in forward currency exchange rates.
Forward currency contracts are marked to market daily and the change in
value is recorded by the Fund as an unrealized gain or loss. Realized gains
or losses equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed are recorded
upon delivery or receipt of the currency or, if a forward currency contract
is offset by entering into another forward currency contract with the same
broker, upon settlement of the net gain or loss. These contracts may
involve market risk in excess of the unrealized gain or loss reflected in
the Fund's Statement of Assets and Liabilities. In addition, the Fund could
be exposed to risk if the counterparties are unable to meet the terms of
the contracts or if the value of the currency changes unfavorably to the
U.S. dollar. The U.S. dollar value of the currencies the Fund has committed
to buy or sell is shown under Note 6 and represents the currency exposure
the Fund has acquired or hedged through currency contracts as of February
28, 1998.
Options
The Fund may write call and put options on securities or currencies it owns
or in which it may invest. When the Fund writes a call or put option, an
amount equal to the premium received is recorded as a liability and
subsequently marked to market to reflect the current value of the option
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised
or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1998.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments
12
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
for fixed rate payments with respect to a notional amount of principal.
Total return swap agreements involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. In connection with these agreements, cash may
be set aside as collateral by the Fund's custodian in accordance with the
terms of the swap agreement. At February 28, 1998, $332,831 in cash has
been set aside. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1998, the Fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
13
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments for foreign currency
transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Undistributed Net Accumulated Net
Investment Income Realized Gain Paid-in Capital
--------------------- ----------------------- ------------------
$(652,319) $652,319 -
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on the U.S. Treasury inflation indexed securities is accrued daily based
upon an inflation adjusted principal. Additionally, any increase in the
principal or face amount of the securities adjusted for inflation is
recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
14
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium may be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. This fee is allocated relative to each class' net assets
on the share transaction date. Purchase premiums are included as part of
each class' "shares sold" as summarized in Note 5. For the period ended
February 28, 1998, the Fund received $321,656 in purchase premiums. There
is no premium for cash redemptions, reinvested distributions or in-kind
transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
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.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, and .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .25% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 28, 1998 was $1,194. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
15
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the period ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
------------- -------------
U.S. Government securities $ 30,827,812 $ 13,030,781
Investments (non-U.S. Government securities) 287,066,083 79,054,934
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ------------------ ----------------
$233,440,608 $4,504,544 $4,174,618 $329,926
4. Principal shareholders
At February 28, 1998, 66% of the outstanding shares of the Fund were held
by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums received by the Fund, were as follows:
Period from April 30, 1997
(commencement of operations)
Class III: to February 28, 1998
--------------------------------
Shares Amount
------------ ----------------
Shares sold 23,536,230 $ 245,381,956
Shares issued to shareholders
in reinvestment of
distributions 906,550 9,564,099
Shares repurchased (2,894,072) (31,227,479)
------------ ----------------
Net increase 21,548,708 $ 223,718,576
============ ================
16
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
<TABLE>
<CAPTION>
Forward currency contracts
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Buys
5/07/98 AUD 5,400,000 $ 3,684,004 $ 50,612
3/27/98 CAD 44,900,000 31,569,946 276,068
3/06/98 DEM 4,900,000 2,701,186 4,773
3/23/98 DEM 43,000,000 23,729,114 290,036
4/09/98 DEM 96,000,000 53,030,998 (256,692)
4/30/98 DEM 24,190,950 13,379,940 (141,156)
5/22/98 DEM 106,400,000 58,924,318 7,008
7/10/98 DEM 68,500,000 38,041,397 (1,641,920)
4/17/98 GBP 11,200,000 18,393,220 845
3/20/98 ITL 41,548,010,000 23,211,550 (590,815)
4/03/98 JPY 5,850,000,000 46,545,428 151,829
3/06/98 SEK 17,566,200 2,194,509 (71,121)
3/23/98 THB 60,000,000 1,384,786 (195,201)
6/22/98 THB 30,000,000 677,413 (99,080)
----------------
$ (2,214,814)
================
Sales
5/07/98 AUD 15,200,000 $ 10,369,790 $ (209,502)
7/10/98 BEF 1,415,997,750 38,082,769 1,600,548
3/27/98 CAD 10,400,000 7,312,415 (43,534)
3/06/98 DEM 4,000,000 2,205,049 60,581
3/20/98 DEM 42,200,000 23,283,338 519,024
4/09/98 DEM 47,600,000 26,294,537 (43,513)
3/23/98 DKK 163,890,200 23,718,859 (279,781)
4/30/98 ECU 12,300,000 13,423,966 97,231
5/22/98 FRF 356,644,288 58,860,450 56,861
4/17/98 GBP 3,000,000 4,926,755 (70,955)
4/03/98 JPY 8,910,000,000 70,892,268 (285,125)
</TABLE>
17
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Forward currency contracts - continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Sales
3/20/98 MYR 9,913,750 2,694,411 (194,411)
4/17/98 MYR 18,702,500 5,072,403 (8,092)
3/12/98 NZD 13,000,000 7,618,481 111,449
3/06/98 SEK 21,829,647 2,727,133 (30,720)
3/23/98 THB 60,000,000 1,384,786 694,937
6/22/98 THB 30,000,000 677,413 344,733
----------------
$ 2,319,731
================
Forward cross currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
------------- ----------------------------- ----------------------------- -------------------
7/10/98 BEF 299,083,090 DEM 14,500,000 $ 8,822
5/14/98 CHF 10,056,000 DEM 12,500,000 (1,895)
3/20/98 DEM 10,500,000 ITL 10,334,650,000 (19,608)
3/06/98 DEM 43,800,000 SEK 192,765,750 (63,464)
5/14/98 DEM 1,300,000 CHF 1,044,680 (590)
4/23/98 DEM 10,671,300 GBP 3,600,000 10,378
4/24/98 DEM 16,700,000 ESP 1,418,748,500 (6,943)
4/30/98 DEM 332,226,300 ECU 168,900,000 580,622
4/30/98 ECU 76,900,000 DEM 151,476,773 (145,732)
3/05/98 NLG 29,412,090 DEM 26,100,000 12,480
3/06/98 SEK 229,470,742 DEM 52,200,000 108,590
------------------
$ 482,660
==================
</TABLE>
18
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Appreciation
Contracts Type Date Contract Value (Depreciation)
------------ ---------------------------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Buys
66 MATIF FRF Bond June 1998 $ 5,601,974 $ (12,828)
9 U.K. Gilt June 1998 791,631 (9,087)
5 German Government Bond March 1998 741,060 30,270
87 German Government Bond June 1998 12,823,727 (11,830)
86 Australian Government Bond 10 yr. March 1998 8,488,220 138,424
26 Australian Government Bond 3 yr. March 1998 2,096,069 59,113
207 U.S. Treasury Note 5 yr. June 1998 22,575,938 (174,385)
82 U.S. Treasury Note 10 yr. March 1998 9,240,375 100,342
89 U.S. Treasury Note 10 yr. June 1998 10,023,625 (8,672)
23 U.S. Treasury Bond 30 yr. March 1998 2,777,969 40,913
257 U.S. Treasury Bond 30 yr. June 1998 30,960,469 (266,210)
---------------
$ (113,950)
===============
Sales
192 Spanish Government Bond 10 yr. March 1998 $ 13,557,121 $ (548,280)
144 Spanish Government Bond 10 yr. June 1998 10,128,572 24,848
127 Swiss Government Bond March 1998 10,834,287 (609,770)
83 Swiss Government Bond June 1998 7,102,732 50,186
42 Japanese Government Bond 10 yr. June 1998 43,014,011 (100,097)
1 Canadian Government Bond June 1998 87,500 (1)
111 MSE 3 Mo. Bankers Acceptance March 1998 18,527,298 (77,986)
212 Italian Government Bond 10 yr. June 1998 27,987,862 17,045
---------------
$ (1,244,055)
===============
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
19
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Written option transactions
<TABLE>
<CAPTION>
Puts Calls
Principal Principal
Amount of Amount of
Contracts Contracts
(000's omitted) Premiums (000's omitted) Premiums
----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period -- $ -- -- $ --
Options written 178,295 4,337,858 253,622 4,668,333
Options exercised -- -- (3,019) (298,020)
Options expired (5,225) (406,350) (157,603) (499,348)
Options sold (70) (62,983) -- --
----------------- ------------ ----------------- ------------
Outstanding, end
of period 173,000 $ 3,868,525 93,000 $ 3,870,965
================= ============ ================= ============
Summary of written options outstanding
Principal Amount
of Contracts Expiration
(000's omitted) Exercise Price Date Value
------------------ --------------------------------- ------------------
Calls
Canadian Dollar 28,900 1.4294 CAD 05/08/98 $ 205,190
Japanese Yen 64,100 113.65 JPY 09/17/98 5,339,530
Puts
Canadian Dollar 28,900 1.4294 CAD 05/08/98 326,570
Japanese Yen 80,000 117.18 JPY 06/15/98 672,000
Japanese Yen 64,100 113.65 JPY 09/17/98 782,020
------------------
$ 7,325,310
==================
</TABLE>
20
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
--------------------- ----------- ------------------------------------------- --------------
<S> <C> <C> <C>
USD 4,000,000/ 5/04/98 Agreement with Morgan Guaranty Trust $ 80,105
2,358,877 Company dated 2/10/98 to receive the
notional amount multiplied by the change
in market value (including accrued
interest) on the Russia Principal
Floating Rate Note due 12/15/20 and to
pay the counterparty's notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread.
USD 2,000,000/ 5/11/98 Agreement with Morgan Guaranty Trust 48,900
2,029,375 Company dated 2/03/98 to receive the
notional amount multiplied by the change
in market value (including accrued
interest) on the Republic of Argentina
9.75%, 9/19/27 and to pay the
counterparty's notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread.
USD 599,672/ 5/14/99 Agreement with Bank of America dated (231,904)
TRL 80,250,000,000 5/29/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Index Linked Bond due 5/14/99 and to pay
the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
USD 30,000,000 11/11/98 Agreement with Morgan Guaranty Trust 1,263
Company dated 11/07/97 to receive (pay)
the notional amount multiplied by the
return on the Lehman Aggregate Index and
to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified
spread.*
</TABLE>
21
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements (continued)
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
--------------------- ----------- ------------------------------------------- --------------
<S> <C> <C> <C>
USD 234,896/ 6/04/99 Agreement with Bank of America dated $ 43,599
TRL 51,273,017,332 6/20/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Index Linked Bond due 6/04/99 and to pay
the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
USD 79,153/ 6/04/99 Agreement with Bank of America dated 56,048
TRL 24,802,803,728 11/13/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Index Linked Bond due 6/04/99 and to pay
the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
--------------
Net unrealized depreciation $ (1,989)
==============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
* This swap agreement is valued by management (Note 1).
22
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 19.25% of distributions as net capital gain dividends.
23
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the U.S. Bond/Global Alpha A Fund returned 12.2%
for the period from the Fund's inception on April 30, 1997 through the
fiscal year ended February 28, 1998, compared to 10.0% for the Lehman
Brothers Aggregate Bond Index. Consistent with the Fund's investment
objectives and policies, the Fund was substantially invested in
investment-grade, foreign and domestic, fixed income instruments throughout
the period. Although the Fund is benchmarked against a domestic bond index,
the value added is derived from global bond and currency strategies.
Many of the strategies implemented in the Fund were successful during the
fiscal year. It outperformed its benchmark by 2.2%, though absolute returns
were reduced somewhat due to the strength of the U.S. dollar. During the
partial year since the fund's inception bond market selection was positive,
however currency selection was successful only in the second and third
fiscal quarters. Although foreign interest rates generally declined during
the year, the strength of the U.S. dollar meant that many foreign bond
markets performed poorly when measured in U.S. dollar terms. Exceptions to
this occurred in Italy and the U.K. whose bond markets had double-digit
U.S. dollar returns. Strong returns were shown as well in Australia, Sweden
and the U.K. The Canadian dollar was the only currency that produced a
positive return versus the U.S. dollar for the year ended February 28,
1998. Value was added during the year by overweighting the Canadian,
Swedish and U.K. bond markets, as well as the Italian lira, Spanish peseta
and the ECU. Additionally, the Fund gained versus the benchmark as a result
of underweighting the French, Japanese, and Swiss bond markets, as well as
the Belgian franc and the Dutch guilder.
During the year the Fund held a position in emerging country sovereign
debt, emphasizing undervalued issues. This market had a somewhat volatile
year, buffeted by the financial problems in Asia. Returns came mainly from
bond yields as prices changed little from beginning to end. Our decision to
include emerging country debt exposure in the portfolio added value in all
but the third fiscal quarter.
Outlook
The Fund is structured to benefit from outperformance in the Australian,
Danish, French, German, Swedish and emerging bond markets. We expect
underperformance from the Italian, Japanese, Spanish and Swiss bond
markets. Our strategy maintains a market duration in each country. Strong
relative performance is expected from the Canadian dollar, Deutsche mark,
Italian lira, Spanish peseta and U.K. pound. The Belgian franc, Danish
krone, French franc, Japanese yen and U.S. dollar are expected to
underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in GMO U.S. Bond/Global
Alpha A Fund Class III Shares and the Lehman Brothers Aggregate
Bond Index
As of February 28, 1998
Average Annual Total Return
---------------------------
Since
Inception
1 Year 4/30/97
---------------------------
Class
III n/a 12.0%
---------------------------
[LINE GRAPH APPEARS HERE]
GMO U.S. Bond/Global Lehman Brothers Aggregate
Alpha A Fund Bond Index
4/30/97 $ 9,985 $10,000
2/28/98 $11,199 $10,996
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Bond/Global Alpha B Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
U.S. Bond/Global Alpha B Fund at February 28, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for
the period July 29, 1997 (commencement of operations) through February 28,
1998, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 20, 1998
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 97.6%
Australia -- 1.2%
GBP 2,500,000 Commonwealth Bank Australia Series EMTN, 8.13%, due
12/07/06 4,480,538
-------------
Brazil -- 1.0%
USD 20,000,000 Brazil Discount Bond, Principal Strip, due 4/15/24 3,820,000
-------------
Cayman Islands -- 0.8%
CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 6/01/08 3,083,193
-------------
Denmark -- 2.3%
DKK 52,500,000 Kingdom of Denmark Bullet, 7.00%, due 11/15/07 8,578,878
-------------
France -- 1.6%
ECU 4,000,000 Government of France, 8.25%, due 4/25/22 5,910,006
-------------
Germany -- 0.3%
DEM 2,000,000 Deutsche Siedlungs LB, 6.75%, due 10/02/23 1,220,079
-------------
Japan -- 1.4%
GBP 3,000,000 Export Import Bank of Japan, 10.75%, due 5/15/01 5,443,329
-------------
New Zealand -- 1.7%
NZD 11,700,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 6,517,052
-------------
Supra National -- 0.2%
AUD 8,600,000 European Bank Recon and Development, Zero Coupon,
due 2/10/28 882,393
-------------
Sweden -- 1.7%
SEK 48,400,000 Kingdom of Sweden, 6.00%, due 2/09/05 6,279,716
-------------
United Kingdom -- 2.2%
GBP 4,160,000 Guaranteed Export Financial Corp, 12.88%, due 9/29/02 8,441,935
-------------
United States -- 83.2%
Asset Backed Securities -- 56.5%
USD 10,000,000 Anfield Road I Ltd.,
Variable Rate, 6 mo. LIBOR + .25%, 5.88%, due 9,972,000
11/06/06
USD 11,503,428 Banc One Student Loan Trust 94-A Class A2,
Variable Rate, 1 mo. LIBOR + .30%, 5.93%, due 11,549,442
10/25/16
USD 5,000,000 Big Flower Receivables Master Trust 96-2 Class A,
Variable Rate, LIBOR +.25%, 5.88%, due 4/25/03 5,000,000
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 5,000,000 Bombardier Receivables Master Trust I 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .12%, 5.75%, due
4/15/04 5,000,000
USD 4,635,000 Brazos Student Loan Finance Corp Series 96-A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%,
5.78%, due 12/01/02 4,616,895
USD 15,000,000 Chevy Chase Master Credit Card Trust 95-C Class A,
Variable Rate, 1 mo. LIBOR + .26%, 5.89%, due
5/15/06 15,030,000
USD 7,500,000 Chevy Chase Master Credit Card Trust Series 96-A,
Variable Rate, 1 mo. LIBOR + .15%, 5.78%, due
2/15/05 7,495,313
USD 10,000,000 Chyps CBO 97-1, Class A2, 144A, 6.72%, due 1/15/10 9,862,500
USD 10,000,000 Circuit City Credit Card Master Trust 96-1 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 5.80%, due
10/15/06 9,984,375
USD 22,500,000 Discover Card Master Trust I 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 5.98%, due
10/16/04 22,696,874
USD 5,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.81%, due
10/15/06 5,000,000
USD 5,000,000 European Sovereign Investments,
Variable Rate, 6 mo. LIBOR + .40%, 6.03%, due
1/20/99 5,020,000
USD 4,000,000 First Chicago Master Trust II 95-0 Class A,
Variable Rate, 1 mo. LIBOR + .23%, 5.86%, due
2/15/04 4,015,000
USD 5,000,000 First Deposit Master Trust Series 96-1 Class A,
Variable Rate, 1 mo. LIBOR +.17%, 5.76%, due
8/15/07 5,012,500
USD 10,000,000 First North American National Bank 97-2 Class A,
Variable Rate, 1 mo. LIBOR +.21%, 5.84%, due
3/15/06 10,004,000
USD 10,000,000 First USA Credit Card Master Trust 97-2 Class A,
Variable Rate, 1 mo LIBOR + .13%, 5.76%, due
1/17/07 9,987,500
USD 10,000,000 Keycorp Student Loan Trust 95-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 6.38%, due
10/27/21 10,000,000
USD 5,034,531 Keystone Auto Grantor Trust Series 1996-A Class A,
144A, 6.60%, due 12/15/02 5,115,084
USD 11,000,000 Navistar Financial Dealer Note Master Trust 97-1
Class A,
Variable Rate, 1 mo. LIBOR + .15%, 5.81%,
due 8/25/03 11,003,300
USD 3,300,000 Northstar CBO Series 97-2 Class A2, 6.62%, due
7/15/09 3,616,077
USD 8,000,000 PARMA Food Corp BV,
Variable Rate, 3 mo. LIBOR + .25%, 6.16%, due
12/20/00 8,024,000
USD 5,000,000 Premier Auto Trust 95-1 Certificates, 8.10%, due
3/04/01 5,072,656
USD 2,495,824 Resolution Trust Corp 94-C1 Class A1,
Variable Rate, 1 mo. LIBOR + .45%, 6.14%, due
6/25/26 2,499,724
USD 10,000,000 Rhyno CBO Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 0.00% due 9/15/09 10,645,313
USD 16,276,671 Signet Student Loan Trust Series 96-A Class A-1,
Variable Rate, 1 mo. LIBOR + .09%, 5.72%, due
1/25/05 16,271,585
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 2,620,000 SMS Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 6.38%, due
10/25/23 2,620,000
-------------
215,114,138
-------------
Structured Notes -- 6.0%
USD 2,900,000 Federal Home Loan Bank,
Variable Rate, (10.00% - 6 mo. LIBOR), 4.16%, due
3/03/98 2,891,300
USD 20,000,000 Student Loan Marketing Association Series 95-1 Class
A2, Variable Rate, 3 mo. U.S. Treasury Bill + .75%,
6.03%, due 10/25/07 19,920,000
-------------
22,811,300
-------------
U.S. Government -- 11.9%
USD 8,057,920 U.S. Treasury Inflation Indexed Note, 3.63%, due
7/15/02/(a)/ 8,015,108
USD 5,090,850 U.S. Treasury Inflation Indexed Note, 3.38%, due
1/15/07 4,966,761
USD 31,600,000 U.S. Treasury Note, 6.38%, due 8/15/02 32,547,998
-------------
45,529,867
-------------
U.S. Government Agency -- 8.8%
USD 5,000,000 Agency for International Development Floater
(Support of C.A.B.E.I.),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%,
5.64%, due 10/01/12 4,982,031
USD 8,333,333 Agency for International Development Floater
(Support of India),
Variable Rate, 3 mo. U.S. Treasury Bill + .45%,
5.63%, due 2/01/99 8,321,615
USD 20,000,000 Federal National Mortgage Association, 6.49%, due
1/19/06 20,070,000
-------------
33,373,646
-------------
Total United States 316,828,951
-------------
TOTAL DEBT OBLIGATIONS (COST $369,205,999) 371,486,070
-------------
<CAPTION>
Principal Amount
- -----------------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 1.1%
Cross Currency Options -- 0.1%
DEM 140,500,000 DEM Call/BEF Put, Expires 7/8/98, Strike 20.6 162,580
DEM 64,000,000 DEM Call/ITL Put, Expires 9/22/98, Strike 993 260,965
-------------
423,545
-------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Principal Amount Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options on Bonds -- 0.2%
SEK 143,000,000 Sweden Government Bond, Expires 4/30/98, Strike
100.677 550,110
-------------
Options on Currency -- 0.8%
USD 57,100,000 German Mark, Expires 9/17/98, Strike 1.725 2,974,910
USD 65,000,000 Japanese Yen, Expires 6/15/98, Strike 140 110,500
-------------
3,085,410
-------------
Options on Futures -- 0.0%
USD 500,000 Eurodollar, Expires 3/16/98, Strike 94.25 40,000
-------------
TOTAL CALL OPTIONS PURCHASED
(COST $4,306,764) 4,099,065
-------------
PUT OPTIONS PURCHASED -- 0.3%
Cross Currency Options -- 0.1%
DEM 64,000,000 DEM Put/ITL Call, Expires 9/22/98, Strike 993 162,221
-------------
Options on Currency -- 0.2%
USD 57,100,000 German Mark, Expires 9/17/98, Strike 1.725 799,400
-------------
Options on Futures -- 0.0%
USD 500,000 Eurodollar, Expires 3/16/98, Strike 94.00 2,500
-------------
TOTAL PUT OPTIONS PURCHASED
(COST $2,556,172) 964,121
-------------
<CAPTION>
Par Value/Shares
- ----------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 7.0%
Cash Equivalents -- 4.4%
USD 12,430,145 BankBoston Eurodollar Time Deposit, 5.7875% due
3/2/98/(b)/ 12,430,145
4,549,855 Merrimac Cash Fund Premium Class/(b)/ 4,549,855
-------------
16,980,000
-------------
Commercial Paper -- 2.5%
USD 9,500,000 GE Capital Corp, 5.68% due 3/02/98 9,500,000
-------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement -- 0.1%
USD 302,122 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/27/98, due 3/2/98, with a maturity value of
$302,250 and an effective yield of 5.07%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, with a maturity date of 8/15/21 and
with a market value of $308,164. 302,122
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $26,782,122) 26,782,122
-------------
TOTAL INVESTMENTS -- 106.0%
(Cost $402,851,057) 403,331,378
Other Assets and Liabilities (net) -- (6.0)% (22,726,797)
-------------
TOTAL NET ASSETS -- 100% $ 380,604,581
=============
Notes to the Schedule of Investments:
EMTN -- Euromarket Medium Term Note
144A -- Securities exempt from registration under Rule
144A of the Securities Act of 1933. These securities
may be resold in transactions exempt from
registration, normally to qualified institutional
buyers.
Variable rates -- The rates shown on variable rate
notes are the current interest rates at February 28,
1998, which are subject to change based on the terms
of the security, including varying reset dates.
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1998
Notes to the Schedule of Investments -- (continued)
Currency Abbreviations
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
DEM - German Mark
DKK - Danish Krone
ECU - European Currency Unit
ESP - Spanish Peseta
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NLG - Netherlands Guilder
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
/(a)/ All or a portion of this security has been segregated to
cover margin requirements on open financial futures
contracts.
/(b)/ Represents investments of security lending collateral
(Note 1).
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $402,851,057) (Note 1) $403,331,378
Interest receivable 2,882,964
Receivable for open swap contracts (Notes 1 and 6) 431,038
Receivable for variation margin on open futures
contracts (Notes 1 and 6) 325,382
Receivable for open forward foreign currency
contracts (Notes 1 and 6) 1,945,111
Receivable for expenses waived or borne by Manager (Note 2) 78,300
------------
Total assets 408,994,173
------------
Liabilities:
Payable for investments purchased 3,099,114
Payable upon return of securities loaned (Note 1) 16,980,000
Written options outstanding, at value (premiums $6,810,350)
(Notes 1 and 6) 6,453,530
Payable for open forward foreign currency contracts
(Notes 1 and 6) 1,607,423
Payable to affiliate for (Note 2):
Management fee 117,156
Shareholder service fee 42,446
Accrued expenses 89,923
------------
Total liabilities 28,389,592
------------
Net assets $380,604,581
============
Net assets consist of:
Paid-in capital $375,106,837
Accumulated undistributed net investment income 1,144,792
Accumulated undistributed net realized gain 3,450,365
Net unrealized appreciation 902,587
------------
$380,604,581
============
Net assets attributable to:
Class III shares $380,604,581
============
Shares outstanding:
Class III 37,541,918
============
Net asset value per share:
Class III $ 10.14
============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Statement of Operations --
Period from July 29, 1997 (commencement of operations) to February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest (including securities lending income
of $8,378) $13,470,922
-----------
Total income 13,470,922
-----------
Expenses:
Management fee (Note 2) 865,631
Custodian and transfer agent fees 126,786
Audit fees 42,541
Legal fees 3,313
Trustees fees (Note 2) 1,847
Registration fees 690
Miscellaneous 1,609
Fees waived or borne by Manager (Note 2) (609,605)
-----------
432,812
Shareholder service fee (Note 2)
Class III 323,124
-----------
Net expenses 755,936
-----------
Net investment income 12,714,986
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 797,753
Closed futures contracts 1,476,027
Closed swap contracts 769,882
Written options 439,267
Foreign currency, forward contracts and foreign
currency related transactions (1,660,755)
-----------
Net realized gain 1,822,174
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 480,321
Open futures contracts (708,914)
Open swap contracts 431,038
Written options 356,820
Foreign currency, forward contracts and foreign
currency related transactions 343,322
-----------
Net unrealized gain 902,587
-----------
Net realized and unrealized gain 2,724,761
-----------
Net increase in net assets resulting from operations $15,439,747
===========
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from July 29, 1997
(commencement of operations)
to February 28, 1998
--------------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $12,714,986
Net realized gain 1,822,174
Change in net unrealized appreciation
(depreciation) 902,587
-----------
Net increase in net assets resulting from
operations 15,439,747
-----------
Distributions to shareholders from:
Net investment income
Class III (7,602,708)
-----------
Net realized gains
Class III (2,339,295)
-----------
(9,942,003)
-----------
Net share transactions: (Note 5)
Class III 375,106,837
-----------
Total increase in net assets 380,604,581
Net assets:
Beginning of period --
-----------
End of period (including accumulated
undistributed net investment
income of $1,144,792) $380,604,581
============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from July 29, 1997
(commencement of operations)
to February 28, 1998
--------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
--------
Income from investment operations:
Net investment income 0.35+
Net realized and unrealized gain 0.06
--------
Total from investment operations 0.41
--------
Less distributions to shareholders:
From net investment income (0.21)
From net realized gains (0.06)
--------
Total distributions (0.27)
--------
Net asset value, end of period $ 10.14
========
Total Return /(a)/ 4.15%
Ratios/Supplemental Data:
Net assets, end of period (000's) $380,605
Net expenses to average daily net assets 0.35%*
Net investment income to average daily net assets 5.88%*
Portfolio turnover rate 27%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amount: $ 0.02
</TABLE>
+ Computed using average shares outstanding throughout the period.
/(a)/ Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
* Annualized.
10 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Bond/Global Alpha B Fund (the "Fund"), which commenced operations
on July 29, 1997, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks a high total return primarily through investing in
investment-grade bonds.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II, and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
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. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. 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 other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. 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 by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
11
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. At February 28, 1998, the
total value of these securities represented 10% of net assets. These prices
may differ from the value that would have been used had a broader market
for the securities existed and the differences could be material to the
financial statements.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1998.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency
12
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
contract fluctuates with changes in forward currency exchange rates.
Forward currency contracts are marked to market daily and the change in
value is recorded by the Fund as an unrealized gain or loss. Realized gains
or losses equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed are recorded
upon delivery or receipt of the currency or, if a forward currency contract
is offset by entering into another forward currency contract with the same
broker, upon settlement of the net gain or loss. These contracts may
involve market risk in excess of the unrealized gain or loss reflected in
the Fund's Statement of Assets and Liabilities. In addition, the Fund could
be exposed to risk if the counterparties are unable to meet the terms of
the contracts or if the value of the currency changes unfavorably to the
U.S. dollar. The U.S. dollar value of the currencies the Fund has committed
to buy or sell is shown under Note 6 and represents the currency exposure
the Fund has acquired or hedged through currency contracts as of February
28, 1998.
Options
The Fund may write call and put options on securities or currencies it owns
or in which it may invest. When the Fund writes a call or put option, an
amount equal to the premium received is recorded as a liability and
subsequently marked to market to reflect the current value of the option
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised
or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1998.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund entered into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments
13
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
for fixed rate payments with respect to a notional amount of principal.
Total return swap agreements involve commitments to pay interest in
exchange for a market linked return based on a notional amount. To the
extent the total return of the security or index underlying the transaction
exceeds or falls short of the offsetting interest rate obligation, the Fund
will receive a payment from or make a payment to the counterparty,
respectively. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there is no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 28, 1998.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1998, the Fund loaned securities having a market value of $16,522,638,
collateralized by cash in the amount of $16,980,000, which was invested in
short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid
14
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
in shares of the Fund, at net asset value, unless the shareholder elects to
receive cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
----------------------- ------------------------ ------------------------
$(3,967,486) $3,967,486 --
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on U.S. Treasury inflation indexed securities is accrued daily based upon
an inflation adjusted principal. Additionally, any increase in principal or
face amount of the securities adjusted for inflation is recorded as income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the Funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated pro-
rata among the classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
15
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium may be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. This fee is allocated relative to each class' net assets
on the share transaction date. Purchase premiums are included as part of
each class' "shares sold", as summarized in Note 5. For the period ended
February 28, 1998, the Fund received $191,161 in purchase premiums. There
is no premium for cash redemptions, reinvested distributions or in-kind
transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .28%
for Class I shares, .22% for Class II shares, and .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses until
further notice to the extent that the Fund's annual expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .20% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 28, 1998 was $1,847. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
16
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the period ended February 28, 1998, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
Purchases Proceeds
---------------- ----------------
<S> <C> <C>
U.S. Government securities $ 139,068,275 $ 29,487,109
Investments (non-U.S. Government securities) 340,549,352 66,799,430
</TABLE>
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
--------------------- ----------------------- ----------------------- --------------------
<S> <C> <C> <C>
$402,858,668 $4,430,095 $3,957,385 $472,710
</TABLE>
4. Principal shareholder
At February 28, 1998, 99.9% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including purchase premiums received by the Fund, were as follows:
<TABLE>
Period from July 29, 1997
(commencement of operations)
Class III: to February 28, 1998
--------------------------------
Shares Amount
--------------- ----------------
<S> <C> <C>
Shares sold 37,287,695 $ 372,664,834
Shares issued to shareholders
in reinvestment of
distributions 990,239 9,942,003
Shares repurchased (736,016) (7,500,000)
--------------- ----------------
Net increase 37,541,918 $ 375,106,837
=============== ================
</TABLE>
17
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1998 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units of Currency Appreciation
Date Deliver/Receive Value (Depreciation)
------------- ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Buys
5/07/98 AUD 2,500,000 $ 1,705,558 $ 23,433
3/27/98 CAD 94,100,000 66,163,292 766,264
4/09/98 DEM 94,300,000 52,091,909 (241,986)
4/17/98 GBP 7,800,000 12,809,563 15,098
3/20/98 ITL 33,474,700,000 19,177,260 (476,011)
4/03/98 JPY 4,960,000,000 39,464,157 75,317
-----------------
$ 162,115
==================
Sales
5/07/98 AUD 1,900,000 $ 1,296,224 $ (26,188)
3/27/98 CAD 62,200,000 43,733,866 (242,222)
3/20/98 DEM 34,000,000 18,759,087 418,171
4/09/98 DEM 56,300,000 31,100,470 (65,312)
4/17/98 GBP 12,500,000 20,528,147 (32,736)
4/03/98 JPY 7,550,000,000 60,071,450 (162,531)
3/12/98 NZD 11,700,000 6,856,633 100,304
------------------
$ (10,514)
==================
</TABLE>
18
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Forward cross currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
------------- --------------------------- -------------------------- ---------------------
<S> <C> <C> <C> <C>
7/10/98 BEF 1,246,491,450 DEM 60,300,000 $ (36,419)
5/14/98 CHF 10,855,904 DEM 13,500,000 1,103
7/10/98 DEM 5,600,000 BEF 115,507,952 (3,407)
4/24/98 DEM 22,200,000 ESP 1,886,001,000 (9,229)
4/23/98 DEM 9,485,600 GBP 3,200,000 9,225
3/20/98 DEM 8,800,000 ITL 8,675,000,000 (8,848)
3/06/98 DEM 55,400,000 SEK 243,627,034 (104,112)
4/30/98 DEM 266,331,800 ECU 135,400,000 465,460
3/23/98 DKK 161,984,500 DEM 42,500,000 10,136
5/22/98 FRF 261,449,760 DEM 78,000,000 46,821
3/20/98 ITL 2,562,170,000 DEM 2,600,000 3,116
3/05/98 NLG 25,129,870 DEM 22,300,000 10,663
3/06/98 SEK 271,281,334 DEM 61,400,000 (43,108)
4/30/98 ECU 74,700,000 DEM 147,118,376 (155,314)
-------------------
$ 186,087
===================
<CAPTION>
Futures contracts
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
----------- --------------------------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
Buys
59 Australian Government Bond 10 yr March 1998 $ 5,823,314 $ 51,673
5 Canadian Government Bond June 1998 437,500 (72)
49 German Government Bond June 1998 7,222,559 (12,624)
59 MATIF FRF Bond June 1998 5,007,825 (11,467)
447 U.S. Treasury Note 5 yr. June 1998 48,750,938 (376,570)
138 U.S. Treasury Note 10 yr. March 1998 15,550,875 168,509
115 U.S. Treasury Note 10 yr. June 1998 12,951,875 10,627
182 U.S. Treasury Bond 30 yr. March 1998 21,982,187 308,320
141 U.S. Treasury Bond 30 yr. June 1998 16,986,094 (153,706)
---------------
$ (15,310)
===============
</TABLE>
19
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts -- continued
Sales
<S> <C> <C> <C> <C>
88 MSE 3mo. Bankers Acceptance March 1998 $ 14,688,308 $ (61,860)
104 Italian Government Bond 10 yr. June 1998 13,729,895 (305)
57 Japanese Government Bond 10 yr. June 1998 58,376,158 (136,289)
67 Spanish Government Bond 10 yr. March 1998 4,730,870 (173,155)
50 Spanish Government Bond 10 yr. June 1998 3,516,865 8,662
105 Swiss Government Bond March 1998 8,957,482 (508,374)
71 Swiss Government Bond June 1998 6,075,831 42,450
136 U.K Gilt June 1998 11,962,419 135,267
---------------
$ (693,604)
===============
</TABLE>
At February 28, 1998, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
Written option transactions
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period -- $ -- -- $ --
Options written 146,800 3,372,860 222,800 3,876,757
Options exercised -- -- (141,000) (359,550)
Options expired -- -- -- (79,717)
----------------- --------------- ----------------- ---------------
Outstanding, end
of period 146,800 $ 3,372,860 81,800 $ 3,437,490
================= =============== ================= ===============
</TABLE>
20
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Summary of written options outstanding
<TABLE>
<CAPTION>
Principal Amount Expiration
of Contracts Exercise Price Date Value
(000's omitted)
------------------ --------------- ------------------ ----------------
Calls
<S> <C> <C> <C> <C>
Canadian Dollar 24,700 1.4294 CAD 05/08/98 $ 175,370
Japanese Yen 57,100 113.65 JPY 09/17/98 4,756,430
Puts
Canadian Dollar 24,700 1.4294 CAD 05/08/98 279,110
Japanese Yen 65,000 117.18 JPY 06/15/98 546,000
Japanese Yen 57,100 113.65 JPY 09/17/98 696,620
----------------
$ 6,453,530
================
</TABLE>
21
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements-- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net
Expiration Unrealized
Notional Amount Date Description Appreciation
------------------- ----------- --------------------------------------------- ---------------
<S> <C> <C> <C>
USD 70,000,000 11/11/98 Agreement with Morgan Guaranty Trust Company $ 2,947
dated 11/07/97 to receive (pay) the notional
amount multiplied by the return on the Lehman
Aggregate Index and to pay the notional
amount multiplied by 3 month LIBOR adjusted
by a specified spread. +
USD 50,000,000 11/30/98 Agreement with Morgan Guaranty Trust Company 428,091
dated 12/05/97 to receive (pay) the notional
amount multiplied by the return on the Lehman
Aggregate Index and to pay the notional
amount multiplied by 3 month LIBOR adjusted
by a specified spread. +
--------------
Net unrealized appreciation $ 431,038
==============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
22
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 23.53% of distributions as net capital gain dividends.
23
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo
& Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
The Class III shares of the U.S. Bond/Global Alpha B Fund returned 4.2% for
the period from the Fund's inception on July 29, 1997 through the fiscal
year ended February 28, 1998, compared to 5.2% for the Lehman Brothers
Aggregate Bond Index. Consistent with the Fund's investment objectives and
policies, the Fund was substantially invested in foreign and domestic fixed
income instruments throughout the period. Although the Fund is benchmarked
against a domestic bond index, the value added is derived from global bond
and currency strategies.
The fund underperformed its benchmark by 1.0%. During the seven months of
the fiscal year, beginning with the fund's inception, bond market selection
was negative, but currency selection was mixed. Although foreign interest
rates generally declined during the year, the strength of the U.S. dollar
meant that many foreign bond markets performed poorly when measured in U.S.
dollar terms. Exceptions to this occurred in Italy and the U.K. whose bond
markets had strong U.S. dollar returns. Good returns were shown as well in
Australia, Sweden and the U.K. The Canadian dollar was the only currency
that produced a positive return versus the U.S. dollar for the year ended
February 28, 1998. Value was added during the year by overweighting the
Italian lira and the ECU. These contributions to performance were offset by
losses due to overweighting German and Swedish bonds, as well as the
Italian lira and Canadian dollar.
Outlook
The Fund is structured to benefit from outperformance in the Australian,
Danish, French, German and Swedish bond markets. We expect underperformance
from the Italian, Japanese, Spanish and Swiss bond markets. Our strategy
maintains a market duration in each country. Strong relative performance is
expected from the Canadian dollar, Deutsche mark, Italian lira, Spanish
peseta and U.K. pound. The Belgian franc, Danish krone, French franc,
Japanese yen and U.S. dollar are expected to underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO U.S. Bond/Global Alpah B Fund Class III Shares and the Lehman Brothers
Aggregate
Bond Index
As of February 28, 1998
---------------------------
Average Annual Total Return
---------------------------
Since
Inception
1 Year 7/29/97
---------------------------
Class
III n/a 4.0%
---------------------------
[LINE GRAPH APPEARS HERE]
GMO U.S. Bond/ Lehman Brothers
Date Global Alpha B Aggregate Bond Index
- ------- -------------- --------------------
7/29/97 $9,985 $10,000
2/28/98 $10,520 $10,399
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1998
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO World Equity
Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
World Equity Allocation Fund at February 28, 1998, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at February 28, 1998
by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1998
<TABLE>
<CAPTION>
Par Value
($)/ Value
Shares Description ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS -- 100.0%
355,758 GMO Core Fund (Class III Shares) 7,111,593
176,763 GMO Currency Hedged International Core Fund (Class III
Shares) 2,107,014
175,579 GMO Emerging Country Debt Fund (Class III Shares) 2,043,737
604,090 GMO Emerging Markets Fund (Class III Shares) 5,775,101
302,667 GMO Evolving Countries Fund (Class III Shares) 2,605,963
64,014 GMO Growth Fund (Class III Shares) 280,381
81,383 GMO Inflation Indexed Bond Fund (Class III Shares) 817,086
50,591 GMO International Bond Fund (Class III Shares) 528,681
821,206 GMO International Core Fund (Class III Shares) 19,051,969
118,086 GMO International Small Companies Fund (Class III Shares) 1,443,008
197,771 GMO REIT Fund (Class III Shares) 2,555,197
167,314 GMO Small Cap Growth Fund (Class III Shares) 2,054,613
113,151 GMO Small Cap Value Fund (Class III Shares) 2,068,393
98,893 GMO U.S. Bond/Global Alpha A Fund (Class III Shares) 1,048,261
101,780 GMO Value Fund (Class III Shares) 1,458,506
-------------
TOTAL MUTUAL FUNDS (COST $52,569,517) 50,949,503
-------------
SHORT-TERM INVESTMENT -- 0.0%
Repurchase Agreement -- 0.0%
$ 15,247 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/27/98, due 3/2/98, with a maturity value of $15,254 and an
effective yield of 5.07%, collateralized by a U.S. Treasury
Obligation with a rate of 8.875%, with a maturity date of 15,247
8/15/17 and with a market value of $15,552. -------------
TOTAL SHORT-TERM INVESTMENT (COST $15,247) 15,247
-------------
TOTAL INVESTMENTS -- 100.0%
(Cost $52,584,764) 50,964,750
Other Assets and Liabilities (net) -- 0.0% (13,095)
-------------
TOTAL NET ASSETS -- 100% $50,951,655
=============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at value (cost $52,584,764) (Note 1) $50,964,750
Receivable for expenses waived or borne by Manager (Note 2) 5,079
------------
Total assets 50,969,829
------------
Liabilities:
Accrued expenses 18,174
------------
Net assets $50,951,655
============
Net assets consist of:
Paid-in capital $50,308,786
Accumulated undistributed net realized gain 2,262,883
Net unrealized depreciation (1,620,014)
------------
$50,951,655
============
Net assets attributable to:
Class III shares $50,951,655
============
Shares outstanding:
Class III 4,904,301
============
Net asset value per share:
Class III $ 10.39
============
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends from investment company shares $1,345,199
Interest 603
-----------
Total income 1,345,802
-----------
Expenses:
Custodian and transfer agent fees 24,661
Audit fees 15,380
Registration fees 11,856
Legal fees 1,389
Trustees fees (Note 2) 452
Miscellaneous 284
Fees waived or borne by Manager (Note 2) (54,022)
-----------
--
Shareholder service fee (Note 2)
Class I 11,172
-----------
Net expenses 11,172
-----------
Net investment income 1,334,630
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 395,076
Realized gain distributions from investment company shares 7,238,083
-----------
Net realized gain 7,633,159
-----------
Change in net unrealized appreciation (depreciation) on investments (2,989,836)
-----------
Net realized and unrealized gain 4,643,323
-----------
Net increase in net assets resulting from operations $5,977,953
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period from June 28, 1996
February 28, (commencement of operations)
1998 to February 28, 1997
---------------- ---------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $1,334,630 $ 159,870
Net realized gain 7,633,159 634,574
Change in net unrealized appreciation
(depreciation) (2,989,836) 1,369,822
----------- -----------
Net increase in net assets resulting from
operations 5,977,953 2,164,266
----------- -----------
Distributions to shareholders from:
Net investment income
Class I (239,456) (95,107)
Class III (1,095,174) (64,763)
----------- -----------
Total distributions from net
investment income (1,334,630) (159,870)
----------- -----------
In excess of net investment income
Class I (318) (702)
Class III (1,455) (478)
----------- -----------
Total distributions in excess of net
investment income (1,773) (1,180)
----------- -----------
Net realized gains
Class I (1,057,705) (157,650)
Class III (4,579,052) (104,501)
----------- -----------
Total distributions from net realized
gains (5,636,757) (262,151)
----------- -----------
(6,973,160) (423,201)
----------- -----------
Net share transactions: (Note 5)
Class I (8,356,794) 9,038,695
Class II -- (24,488)
Class III 14,133,364 35,415,020
----------- -----------
Increase in net assets resulting from net
share transactions 5,776,570 44,429,227
----------- -----------
Total increase in net assets 4,781,363 46,170,292
Net assets:
Beginning of period 46,170,292 --
----------- -----------
End of period (including accumulated
undistributed net investment income of $50,951,655 $46,170,292
$0 and $0, respectively) =========== ===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
March 1, 1997 Period from June 28, 1996
to January 9, (commencement of operations)
1998 to February 28, 1997
---------------- --------------------------
<S> <C> <C>
Net asset value, beginning of period $10.52 $10.00
------- -------
Income from investment operations:
Net investment income/(b)/ 0.28+ 0.09
Net realized and unrealized gain 0.02 0.72
------- -------
Total from investment operations 0.30 0.81
------- -------
Less distributions to shareholders:
From net investment income (0.27) (0.11)
In excess of net investment income --/(d)/ 0.00
From net realized gains (1.17) (0.18)
------- -------
Total distributions (1.44) (0.29)
------- -------
Net asset value, end of period $ 9.38/(c)/ $10.52
======= =======
Total Return/(a)/ 2.41% 8.23%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $9,424
Net expenses to average daily net assets 0.13%* 0.16%*
Net investment income to average daily net
assets/(b)/ 2.88%* 1.80%*
Portfolio turnover rate 49% 31%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.01 $ 0.01
</TABLE>
/(a)/Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
/(c)/All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
/(d)/The per share distribution in excess of net investment income was $0.0003.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from June 28, 1996
(commencement of operations)
October 16, 1996
--------------------------
<S> <C>
Net asset value, beginning of period $10.00
-------
Income from investment operations:
Net investment income 0.04/(b)/
Net realized and unrealized gain 0.02
-------
Total from investment operations 0.06
-------
Net asset value, end of period $10.06
=======
Total Return/(a)/ 0.60%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ --
Net expenses to average daily net assets 0.12%*
Net investment income to average daily net
assets 1.55%*/(b)/
Portfolio turnover rate 31%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amount: $ 0.01
</TABLE>
/(a)/Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
/(b)/Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period from October 22, 1996
February 28, (commencement of operations)
1998 to February 28, 1997
---------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period $10.52 $ 10.07
------- --------
Income from investment operations:
Net investment income/(b)/ 0.29+ 0.11
Net realized and unrealized gain 1.03 0.63
------- --------
Total from investment operations 1.32 0.74
------- --------
Less distributions to shareholders:
From net investment income (0.28) (0.11)
In excess of net investment income --/(c)/ 0.00
From net realized gains (1.17) (0.18)
------- --------
Total distributions (1.45) (0.29)
------- --------
Net asset value, end of period $10.39 $ 10.52
======= ========
Total Return/(a)/ 13.56% 7.51%
Ratios/Supplemental Data:
Net assets, end of period (000's) $50,952 $36,746
Net expenses to average daily net assets 0.00% 0.00%*
Net investment income to average daily net
assets/(b)/ 2.65% 0.91%*
Portfolio turnover rate 49% 31%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.01 $ 0.03
</TABLE>
/(a)/Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
/(b)/Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
/(c)/The per share distribution in excess of net investment income was $0.0004.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 7
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1998
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO World Equity Allocation Fund (the "Fund"), which commenced operations
on June 28, 1996, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO World-Lite Extended Index, a benchmark developed by the Manager.
The Fund will pursue its objective by investing primarily in Class III
shares of equity funds of the Trust.
At the beginning of the fiscal year, the Fund offered three classes of
shares: Class I, Class II and Class III. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
Effective January 9, 1998, Class I shares ceased operations and all shares
were exchanged for Class III shares, and Class II shares ceased to be
offered.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
8
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
classification of distribution from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1998. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
--------------------- --------------------------- -----------------
$1,773 $(104,762) $102,989
9
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable by the Trustees,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds. Investment income, common
expenses and realized and unrealized gains and losses are allocated
pro-rata among classes of shares of the Fund based on the relative net
assets of each class. Shareholder service fees, which are directly
attributable to a class of shares, are charged to that class' operations.
In addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions of
underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .66% of the amount
invested. In the case of cash redemptions, the fee is .15% of the amount
redeemed. Prior to June 30, 1997, the premium on cash purchases was .69%
and the fee on cash redemptions was .09%. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
These fees are allocated relative to each class' net assets on the share
transaction date. Purchase premiums are included as part of each class'
"shares sold" and redemption fees are included as part of each class'
"shares repurchased", respectively, as summarized in Note 5. For the year
ended February 28, 1998, the Fund received $49,696 in purchase premiums and
$23,227 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
fees from the underlying funds in which the Fund invests. The Fund has
adopted a Shareholder Service Plan under which the Fund pays GMO a
shareholder service fee for client and
10
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1998
- --------------------------------------------------------------------------------
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .13%
for Class I shares and .07% for Class II shares. No shareholder service fee
is charged for Class III shares.
GMO has agreed to reimburse all expenses until further notice (excluding
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses). Prior to
November 25, 1996, GMO had agreed to reimburse these expenses to the extent
that the Fund's annual expenses exceeded .05% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1998 was $452. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1998, aggregated
$31,697,981 and $24,330,821, respectively.
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C>
$ 52,862,325 $ 732,093 $ 2,629,668 $ 1,897,575
</TABLE>
4. Principal shareholders
At February 28, 1998, 91.7% of the outstanding shares of the Fund were held
by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
11
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements--(Continued)
February 28, 1998
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from June 28, 1996
Period from March 1, 1997 (commencement of operations)
Class I: to January 9, 1998 to February 28, 1997
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 204 $ 11,513 870,993 $ 8,785,236
Shares issued to shareholders in
reinvestment of distributions 88,972 869,785 25,095 253,459
Shares repurchased (985,264) (9,238,092) -- --
------------- ------------- ------------- -------------
Net increase/(decrease) (896,088) $ (8,356,794) 896,088 $ 9,038,695
============= ============= ============= =============
<CAPTION>
Period from June 28, 1996
(commencement of operations)
Class II: to October 16, 1996
------------------------------
Shares Amount
------------- -------------
<S> <C> <C>
Shares sold 412,344 $ 4,123,441
Shares issued to shareholders in
reinvestment of distributions -- --
Shares repurchased (412,344) (4,147,929)
============= =============
Net decrease -- $ (24,488)
============= =============
<CAPTION>
Period from October 22, 1996
Year Ended (commencement of operations)
Class III: February 28, 1998 to February 28, 1997
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 2,510,385 $ 26,539,533 3,482,496 $ 35,298,804
Shares issued to shareholders in
reinvestment of distributions 564,648 5,513,999 11,507 116,216
Shares repurchased (1,664,735) (17,920,168) -- --
============= ============= ============= =============
Net increase 1,410,298 $ 14,133,364 3,494,003 $ 35,415,020
============= ============= ============= =============
</TABLE>
12
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1998, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
34.27% of distributions as net capital gain dividends.
13
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a
portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
twenty years. Mr. Inker has been with the firm for six years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO World Equity Allocation Fund returned 13.6%
for the twelve months ended February 28, 1998. During that period the
Fund's benchmark (GMO World-Lite Extended Index) returned 24.3%.
We use GMO's long-term asset class forecasts to allocate the World Equity
Allocation Fund among various GMO mutual funds. In our view, the U.S. stock
market is significantly overvalued. It is notoriously difficult to call the
top of a major stock market bubble like the one that exists in the U.S.
today. We believe, however, that our key analysis has been correct, having
done a far more complete analysis of bullish competitive data on the U.S.
market and "new era" thinking than we have ever done. Our research suggests
that from the market's current valuation level prospective returns for
large capitalization U.S. stocks over the next 10 years will be very
disappointing.
During the fiscal year, the Fund was underweight in U.S. stocks by 19%
relative to the benchmark. This allocation hurt the Fund's overall
performance due to the continuing rally of U.S. equities. Within U.S.
stocks, we tilted the portfolio towards the most attractively valued
sectors including small stocks, where we were 7% overweight, and real
estate investment trusts (REITs), where we were 5% overweight. For the
fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund
underperformed the S&P 500 Index by 21%. Although small stocks as measured
by the Russell 2000 underperformed the S&P 500, performance of the GMO
Small Cap Growth Fund and the GMO Small Cap Value Fund was strong,
providing returns comparable to that of the S&P 500. In addition, return
from our holding of the GMO Core Fund exceeded that of the S&P 500
benchmark.
Our overweight of international stocks was unsuccessful in adding value.
Performance of the GMO International Core Fund lagged the benchmark as the
rally in expensive multinationals continued. The GMO International Core
Fund returned 11.7%, underperforming the GMO EAFE-Lite Index by 7.2%. The
emerging markets as measured by the IFC Investable Index performed poorly,
down 21.8%, due to the crisis in Asian economies. However, performance of
the GMO Emerging Markets Fund was better at -12.9%.
The Fund had a 7% weight in fixed income. The allocation was 3% to U.S.
bonds and 4% to international bonds. While this allocation away from
equities was detrimental to overall Fund performance, performance of the
underlying bond funds was strong relative to their benchmarks.
Until we see a significant correction in U.S. equities, it is likely that
the Fund will maintain its bearish stance. The diversification of the Fund
into fixed income and international equities should benefit performance in
the current fiscal year. We also expect our U.S. portfolio to perform
better this year. Small stocks are poised to outperform, and REITs should
do well in the current market environment, providing more attractive yields
and valuations than those available from large cap U.S. equities.
The views expressed here are exclusively those of Grantham, Mayo, Van
Otterloo & Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO World Equity Allocation Fund "WEAF" Class III Shares
and the MSCI World Index
As of February 28, 1998
Average Annual Total Return
Since
Inception
Class 1 Year 5 Year 6/28/96*
III 12.6% n/a 12.6%
[LINE GRAPH APPEARS HERE]
GMO World Equity GMD World Lite MSCI World
Date Allocation Fund Extended Index Index
---- ---------------- ---------------- -----------
6/28/96 $9,934 $10,000 $10,000
2/28/97 $10,738 $11,132 $11,132
2/28/98 $12,195 $13,456 $13,836
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower bad certain expenses not been
waived during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 66 bp on the purchase and 15 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
* Performance is linked to Class I shares (originating share class) and is
converted to Class III shares on October 22, 1996 (commencement date of Class
III shares).
