<PAGE> 1
File Nos. 2-98772
811-4347
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JUNE 26, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
Post-Effective Amendment No. / /
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 47 / X /
GMO TRUST
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(Exact Name of Registrant as Specified in Charter)
40 Rowes Wharf, Boston, Massachusetts 02110
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(Address of principal executive offices)
617-330-7500
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(Registrant's telephone number, including area code)
with a copy to:
R. Jeremy Grantham J.B. Kittredge, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
(Name and address of agents for service)
It is proposed that this filing will become effective:
On June 30, 1998 pursuant to Section 8 of the Investment Company Act of 1940.
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<PAGE> 2
GMO TRUST
(For GMO Asia Fund only)
CROSS REFERENCE SHEET
N-1A Item No. Location
PART A
Item 1. Cover Page . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . . Schedule of Fees and
Expenses
Item 3. Condensed Financial
Information. . . . . . . . . . . . . . . Financial Highlights
Item 4. General Description of
Registrant . . . . . . . . . . . . . . . Organization and
Capitalization of the
Trust; Investment
Objectives and Policies;
Description and Risks of
Fund Investments; Cover
Page
Item 5. Management of the Fund . . . . . . . . . Management of the Trust
Item 5A. Management's Discussion
of Fund Performance . . . . . . . . . . .Financial Highlights
(referencing the Trust's
Annual Report)
Item 6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . Organization and
Capitalization of the
Trust; Back Cover
(Shareholder Inquiries)
Item 7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . . .Purchase of Shares;
Determination of Net
Asset Value
Item 8. Redemption or Repurchase . . . . . . . . Redemption of Shares;
Determination of Net
Asset Value
Item 9. Pending Legal Proceedings . . . . . . . .None
Part B
Item 10. Cover Page . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . .Table of Contents
Item 12. General Information and
History . . . . . . . . . . . . . Not Applicable
Item 13. Investment Objectives
and Policies . . . . . . . . . . Investment Objectives
and Policies;
Miscellaneous
Investment Practices
<PAGE> 3
Item 14. Management of the Fund . . . . . . . . . Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities . . . . . . Description of the Trust
and Ownership of Shares
Item 16. Investment Advisory and Other
Services . . . . . . . . . . . . Investment Advisory and
Other Services
Item 17. Brokerage Allocation and Other
Practices . . . . . . . . . . . Portfolio Transactions
Item 18. Capital Stock and Other
Securities . . . . . . . . . . . Description of the Trust
and Ownership of Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered . . . See in Part A Purchase
of Shares; Redemption of
Shares; Determination of
Net Asset Value
Item 20. Tax Status . . . . . . . . . . . . . . . See in Part A
Distributions and Taxes
Item 21. Underwriters . . . . . . . . . . . . . . Not Applicable
Item 22. Calculation of Performance
Data . . . . . . . . . . . . . . Not Applicable
Item 23. Financial Statements . . . . . . . . . . Financial Statements
Part C
Information to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
This Post-Effective Amendment relates solely to the GMO Asia Fund. No
information relating to any other series of the registrant is amended or
superseded hereby.
<PAGE> 4
GMO ASIA FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO ASIA FUND (THE "ASIA FUND" OR THE "FUND") is one of thirty-six
separate investment portfolios of GMO Trust (the "Trust"), an open-end
management investment company. The other portfolios are offered pursuant to
separate prospectuses. The Fund's investment manager is GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO"). The Manager has entered into a
Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect
to the management of the Fund.
The Asia Fund seeks long-term capital appreciation through investment
primarily in equity securities and equity-related securities of issuers in
countries in Asia. The Fund is a "non-diversified" portfolio, as defined in the
Investment Company Act of 1940 (the "1940 Act"). See "Description and Risks of
Fund Investments--Non-Diversified Portfolio." A TABLE OF CONTENTS APPEARS ON
PAGE I OF THIS PRIVATE PLACEMENT MEMORANDUM.
The Fund has four classes of shares: Class I, Class II, Class III and
Class IV. The Fund is currently offering Class III Shares only. Eligibility for
the classes is generally based on the total amount of assets that a client has
invested with GMO (with Class I requiring the least total assets and Class IV
the most), as described more fully herein. See "Multiple Classes--Eligibility
for Classes."
The classes differ solely with regard to the level of SHAREHOLDER
SERVICE FEE borne by the class. This difference is described briefly below and
in more detail elsewhere in this Private Placement Memorandum. ALL CLASSES OF
THE FUND HAVE AN INTEREST IN THE SAME UNDERLYING ASSETS, ARE MANAGED BY GMO, AND
PAY THE SAME INVESTMENT MANAGEMENT FEE.
<TABLE>
<CAPTION>
INVESTMENT MANAGER
Grantham, Mayo, Van Otterloo & Co. LLC ("GMO")
<S> <C>
CLIENT SERVICE PROVIDER SHAREHOLDER SERVICE FEE
GMO The level of Shareholder Service Fee for each class is set
Tel: (617) 330-7500 forth on the following page and described more fully
Fax: (617) 439-4192 under "Multiple Classes--Shareholder Service Fee."
- ---------------------------
</TABLE>
This Private Placement Memorandum concisely describes the information
which investors ought to know about the Fund before investing. Please read this
memorandum carefully and keep it for further reference. A Statement of
Additional Information dated June 30, 1998, as revised from time to time, is
available free of charge by writing to GMO, 40 Rowes Wharf, Boston,
Massachusetts 02110 or by calling (617) 330-7500. The Statement, which contains
more detailed information about the Fund, has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated by reference into this Private
Placement Memorandum.
In making an investment decision, investors must rely on their own
examination of the issuer and the terms of the offering, including the merits
and risks involved. These securities have not been recommended by any Federal or
State Securities Commission or Regulatory Authority. Furthermore, the foregoing
authorities have not confirmed the accuracy or determined the adequacy of this
document. Any representation to the contrary is a criminal offense.
The securities offered hereby have not been registered under the
Securities Act of 1933, as amended, or the securities laws of any state, and may
not be transferred or resold unless so registered or exempt therefrom. However,
the securities are redeemable as described in this Private Placement Memorandum.
In certain cases investors may be redeemed "in kind" and receive portfolio
securities held by the Fund in lieu of cash upon redemption. In such case, an
investor will incur costs when the investor sells the securities so distributed.
No person has been authorized to make any representations or provide
any information with respect to the shares except such information as is
contained in this Memorandum, the Statement of Additional Information or other
materials approved by the Trust. No sales made hereunder shall under any
circumstances create an implication that there has been no change in matters
discussed herein since the date hereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PRIVATE PLACEMENT MEMORANDUM. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PRIVATE PLACEMENT MEMORANDUM JUNE 30, 1998
<PAGE> 5
CLASSES AND FEES
ELIGIBILITY
REQUIREMENT* SHAREHOLDER SERVICE FEE**
ASIA FUND
Class I N/A 0.28%
Class II N/A 0.22%
Class III $1 million 0.15%
Class IV N/A 0.105%
- ------------------
* More detailed explanation of eligibility criteria is provided below
and under "Multiple Classes -- Eligibility for Classes."
** As noted above, all classes of shares of the Fund pay the same
investment management fee.
CLASS ELIGIBILITY
For full details of the class eligibility criteria summarized below
and an explanation of how conversions between classes will occur, see "Multiple
Classes - Eligibility for Classes" and "Multiple Classes - Conversions Between
Classes."
Class I Shares. Class I Shares are not currently being offered by the Trust, but
may be offered by the Trust in the future. Class I Shares bear a Shareholder
Service Fee of 0.28%.
Class II Shares. Class II Shares are not currently being offered by the Trust,
but may be offered by the Trust in the future. Class II Shares bear a
Shareholder Service Fee of 0.22%.
Class III Shares. Class III Shares are available to any investor who commits
assets to GMO management to establish a "Total Investment" (as defined) with GMO
of at least $1 million. Class III Shares bear a Shareholder Service Fee of 0.15%
of average net assets.
Class IV Shares. Class IV Shares are not currently being offered by the Trust,
but may be offered by the Trust in the future. Class IV Shares bear a
Shareholder Service Fee of 0.105%. See "Multiple Classes--Eligibility for
Classes" and "Multiple Classes--Conversions Between Classes" for full details of
the eligibility criteria for the Class IV Shares (which work differently than
that for Class I, II and III Shares) and an explanation of how conversions
between classes will occur.
Purchasers of all classes of shares should follow purchase
instructions described under "Purchase of Shares" and direct questions to the
Trust at (617) 330-7500.
<PAGE> 6
TABLE OF CONTENTS
SCHEDULE OF FEES AND EXPENSES 1
INVESTMENT OBJECTIVE AND POLICIES 4
DESCRIPTION AND RISKS OF FUND INVESTMENTS 5
Portfolio Turnover 5
Non-Diversified Portfolios 5
Certain Risks of Foreign Investments 5
General 5
Emerging Markets 5
Investments in Asia 6
Securities Lending 6
Depository Receipts 6
Convertible Securities 7
Futures and Options 7
Options 7
Writing Covered Options 7
Futures 8
Index Futures 9
Interest Rate Futures 9
Options on Futures Contracts 10
Uses of Options, Futures and Options on Futures 10
Risk Management 10
Hedging 10
Investment Purposes 10
Synthetic Sales and Purchases 11
Swap Contracts and Other Two-Party Contracts 11
Swap Contracts 11
Interest Rate and Currency Swap Contracts 11
Equity Swap Contracts and Contracts for Differences 11
Interest Rate Caps, Floors and Collars 12
Foreign Currency Transactions 12
Repurchase Agreements 13
Debt and Other Fixed Income Securities Generally 14
Temporary High Quality Cash Items 14
U.S. Government Securities and Foreign Government Securities 14
Lower Rated Securities 15
Indexed Securities 15
Firm Commitments 15
Reverse Repurchase Agreements and Dollar Roll Agreements 16
Illiquid Securities 16
Special Year 2000 Risk Considerations 16
ADDITIONAL INVESTMENT RESTRICTIONS 16
MULTIPLE CLASSES 18
Shareholder Service Fees 18
Eligibility for Classes 18
Conversions Between Classes 19
PURCHASE OF SHARES 20
Purchase Procedures 21
REDEMPTION OF SHARES 21
DETERMINATION OF NET ASSET VALUE 22
DISTRIBUTIONS 23
i
<PAGE> 7
TAXES 23
Withholding on Distributions to Foreign Investors 24
Foreign Tax Credits 24
Tax Implications of Certain Investments 25
Loss of Regulated Investment Company Status 25
MANAGEMENT OF THE TRUST 25
ORGANIZATION AND CAPITALIZATION OF THE TRUST 26
Appendix A: RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS 27
Limitations on the Use of Options and Futures Portfolio
Strategies 27
Risk Factors in Options Transactions 27
Risk Factors in Futures Transactions 27
Risk Factors in Swap Contracts, OTC Options and other
Two-Party Contracts 28
Additional Regulatory Limitations on the Use of Futures and
Related Options, Interest Rate Floors, Caps and
Collars and Interest Rate and Currency Swap Contracts 28
Appendix B: COMMERCIAL PAPER AND CORPORATE DEBT RATINGS 30
Commercial Paper Ratings 30
Corporate Debt Ratings 30
Standard & Poor's Corporation 30
Moody's Investors Service, Inc. 30
ii
<PAGE> 8
<TABLE>
<CAPTION>
SCHEDULE OF FEES AND EXPENSES
----------------- ------------------------ ------------------------------------ --------------------------------------
GMO Shareholder
Fund Name Transaction Expenses Annual Operating Expenses Examples
----------------- ------------ ----------- --------- -------- -------- -------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Redemption Inv. Share- Other Total You would pay You would pay the
Purchase Fees (as Mgmt. holder Ex- Operat- the following following
Premium a Fees Service penses ing expenses on a expenses on the
(as a percentage after Fee2 Expens- $1,000 same investment
percentage of amount Fee ses3 investment assuming no
of amount redeemed)1 Waiver3 assuming 5% redemption:
invested)1 annual return
with redemption
at the end of
each time period:
----------------- ------------ ----------- --------- -------- -------- -------- -------- --------- ---------- --------
ASIA FUND 1 Yr. 3 Yr. 1 Yr. 3 Yr.
----- ----- ----- -----
----------------- ------------ ----------- --------- -------- -------- -------- -------- --------- ---------- --------
Class I 1.20%5 .40%5 .74% .28% .31% 1.34% $29 $58 $25 $54
----------------- ------------ ----------- --------- -------- -------- -------- -------- --------- ---------- --------
Class II 1.20%5 .40%5 .74% .22% .31% 1.28% $29 $56 $25 $52
----------------- ------------ ----------- --------- -------- -------- -------- -------- --------- ---------- --------
Class III 1.20%5 .40%5 .74% .15% .31% 1.21% $28 $54 $24 $50
----------------- ------------ ----------- --------- -------- -------- -------- -------- --------- ---------- --------
Class IV 1.20%5 .40%5 .74% .105% .31% 1.165% $28 $53 $24 $48
----------------- ------------ ----------- --------- -------- -------- -------- -------- --------- ---------- --------
The footnotes set forth below are important to understanding this table.
</TABLE>
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses of the Fund that are borne by holders of Fund shares.
THE FIVE PERCENT ANNUAL RETURN AND EXPENSE NUMBERS USED ARE NOT REPRESENTATIONS
OF FUTURE PERFORMANCE OR EXPENSES. SUBJECT TO THE MANAGER'S UNDERTAKING TO WAIVE
ITS FEE AND/OR BEAR CERTAIN EXPENSES FOR THE FUND AS DESCRIBED IN THE TABLE,
ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. Where a
purchase premium and/or redemption fee is indicated as being charged by the Fund
in certain instances, the foregoing examples assume the payment of such purchase
premium and/or redemption fee even though such purchase premium and/or
redemption fee is not applicable in all cases. (See "Purchase of Shares" and
"Redemption of Shares").
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums and redemption fees apply only to cash transactions as
set forth under "Purchase of Shares" and "Redemption of Shares"
respectively. These fees are paid to and retained by the Fund itself and
are designed to allocate transaction costs caused by shareholder activity
to the shareholder generating the activity, rather than to the Fund as a
whole. As described in greater detail in the footnotes below, the Manager
may reduce purchase premiums and/or redemption fees if the Manager
determines there are minimal brokerage and/or other transaction costs
caused by a particular purchase or redemption. However, the instances in
which such fees may be properly waived are extremely limited.
Normally no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases
involving transfers of large positions in markets where the cost of
re-registration and/or transfer expenses are high, the Fund may charge a
premium of up to 0.20% on in-kind purchases.
2. Shareholder Service Fee ("SSF") paid to GMO for providing client
services and reporting services.
The level of SSF is the sole economic distinction between the various
classes of Fund shares. A lower SSF for larger investments reflects that
the cost of servicing client accounts is lower for larger accounts when
expressed as a percentage of the account. See "Multiple Classes -
Shareholder Service Fees" for more information.
3. The Manager has voluntarily undertaken to reduce its management fees and
to bear certain expenses with respect to the Fund until further notice to
the extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses, transfer taxes and custodial fees)
would otherwise exceed the percentage of the Fund's daily net assets
specified below. Therefore, so long as the Manager agrees to reduce its
fees and bear certain expenses, total annual operating expenses (subject to
such exclusions) of the Fund will not exceed these stated limitations.
Absent such undertakings, management fees for each Fund and the annual
operating expenses for each class would be as shown below.
1
<PAGE> 9
<TABLE>
<CAPTION>
--------------------------------- -------------- ----------------- ---------------------------------------------
Management Fee
Voluntary (Absent Waiver)
Fund Expense Limit Total Class
Operating Expenses (Absent Waiver)
--------------------------------- -------------- ----------------- ---------------------------------------------
--------------------------------- -------------- ----------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class I Class II Class III Class IV
--------------------------------- -------------- ----------------- ---------- ---------- ----------- -----------
Asia Fund .81% 1.00% 1.59% 1.53% 1.46% 1.415%
--------------------------------- -------------- ----------------- ---------- ---------- ----------- -----------
</TABLE>
4. Based on estimated amounts for the Fund's first fiscal year.
5. The stated purchase premium and/or redemption fee for the Fund will
always be charged in full except that the relevant purchase premium or
redemption fee will be reduced by 50% with respect to any portion of a
purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. The Manager examines
each purchase and redemption of shares eligible for such treatment to
determine if circumstances warrant waiving a portion of the purchase
premium or redemption fee. Absent a clear determination that transaction
costs will be reduced or absent for the purchase or redemption, the full
premium or fee will be charged. In addition, the purchase premium or
redemption fee for the Fund will be reduced by 50% if the purchaser makes
an in-kind purchase of Fund shares or if the purchase or redemption is part
of a transfer from or to another Fund where the Manager is able to transfer
securities among the Funds to effect the transaction.
2
<PAGE> 10
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout the period)
ASIA FUND Class III Shares
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.
The above information has been audited by Price Waterhouse LLP, independent
accountants. This statement should be read in conjunction with the other audited
financial statements and related notes which are included in the Fund's Annual
Report, which is incorporated by reference in the Trust's Statement of
Additional Information. Information is presented for each class of shares of the
Fund which had investment operations during the reporting periods and is
currently being offered.
The Manager's discussion of the Fund's performance in fiscal 1998, as well
as a comparison of the Fund's performance over the life of the Fund with that
of a benchmark securities index selected by the Manager, is included in the
Fund's Annual Report for the fiscal year ended February 28, 1998. Copies of
the Fund's Annual Report are available upon request without charge.
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
The Asia 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 was established to take advantage of increased market
volatility and declines in foreign currency rates in the Asian region that began
in the latter half of 1997. Consequently, the Fund's investment program involves
substantial risks associated with the instability in this region, and is
designed for investors who are willing to accept such risks. Prospective
investors should carefully read this Prospectus, particularly "Description and
Risks of Fund Investments -- Certain Risks of Foreign Investments -- Investments
in Asia" below.
The Manager has appointed Dancing Elephant, Ltd. to serve as Consultant
to the Fund. The Consultant's efforts focus on asset allocation and stock
selection among the selected Asian markets. (See "Description and Risks of Fund
Investments -- Certain Risks of Foreign Investments.") In addition to
considerations relating to a particular market's investment restrictions and tax
barriers, asset allocation and stock selection are based on certain other
relevant factors including the outlook for economic growth, currency exchange
rates, commodity prices, interest rates, political factors and the stage of the
local market cycle in such Asian market. The Consultant expects to allocate the
Fund's investments over geographic as well as economic sectors.
Asian markets in which the Fund intends to invest may include the
following markets:
Bangladesh, China, Hong Kong, India, Indonesia, Republic
of Korea, Malaysia, Mauritius, Myanmar, Mongolia, Pakistan,
Philippines, Singapore, Sri Lanka, Republic of China (Taiwan),
Thailand, Vietnam
The Asia Fund has a fundamental policy that, under normal conditions,
at least 65% of its total assets will be invested in or exposed to equity and
equity-related securities of issuers that are organized under the laws of an
Asian country, that have a principal office in an Asian country, or whose
securities are predominantly traded on Asian market exchanges ("Asian
Securities"). The Fund invests in individual stocks listed on Asian stock
exchanges or in depository receipts of such stocks listed on markets in
industrialized countries or traded in the international equity market. The Fund
may also invest in shares of companies which are not presently listed but are in
the process of being privatized by the government and, subject to a maximum
aggregate investment equal to 25% of the total assets of the Fund, shares of
companies that are traded in unregulated over-the-counter markets or other types
of unlisted securities markets. The Fund may also invest through investment
funds, pooled accounts or other investment vehicles designed to permit
investments in a portfolio of stocks listed in a particular Asian country,
subject to obtaining any necessary local regulatory approvals, particularly in
the case of countries in which such an investment vehicle is the exclusive or
main vehicle for foreign portfolio investment. Such investments may result in
additional costs, as the Fund may be required to bear a pro rata share of the
expenses of each such fund in which it invests. The Fund may also invest in
companies listed on major markets outside of the Asian markets that, based on
information obtained by the Consultant, derive at least half of their revenues
from trade with or production in Asian countries. Such investments will not be
deemed to count towards the Fund's fundamental policy of investing at least 65%
of its total assets in equity and equity-related securities predominantly traded
on Asian market exchanges. In addition, the Fund's assets may be invested on a
temporary basis in debt securities issued by companies or governments in Asian
countries or money market securities of high-grade issuers in industrialized
countries denominated in various currencies.
The Fund may also invest in bonds and money market instruments in
Canada, the United States and other markets of industrialized nations, as well
as all Asian securities markets, and, for temporary defensive purposes, may
invest without limit in cash and high quality money market instruments such as
securities issued by the U.S. government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit. The Fund
expects that, not including the margin deposits or the segregated accounts
created in connection with index futures and other derivatives, less than 5% of
its total assets will be exposed to such high quality cash items. The Fund may
also invest in indexed securities, the redemption value and/or coupons of which
are indexed to the prices of other securities, securities indexes, currencies,
precious metal, or other commodities, as well as other technical indicators.
The Fund may also invest up to 10% of its total assets through
debt-equity conversion funds established to exchange foreign bank debt of
countries whose principal repayments are in arrears into a portfolio of listed
and unlisted equities, subject to certain repatriation restrictions. The Fund
may also invest in convertible securities, enter into repurchase agreements and
lend portfolio securities valued at up to one-third of total assets. The Fund
may invest up to 15% of its net assets in illiquid securities.
The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.
4
<PAGE> 12
The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management.
The put and call options on currency futures written by the Fund will always be
covered.
For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."
DESCRIPTION AND RISKS OF FUND
INVESTMENTS
The following is a detailed description of the various investment
practices in which the Fund may engage and the risks associated with their use.
Please refer to "Investment Objectives and Policies" above for additional
information regarding the extent to which the Fund may engage in a particular
practice.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment
decisions for the Fund. The portfolio turnover rate for the Asia Fund is not
expected to exceed 150%.
In any particular year, market conditions may well result in greater
rates than are presently anticipated. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund, and may well involve realization of capital
gains that would be taxable when distributed to shareholders of the Fund unless
such shareholders are themselves exempt. See "Taxes" below.
NON-DIVERSIFIED PORTFOLIOS
The Fund is a "non-diversified" fund under the 1940 Act, and as such is
not required to satisfy the "diversified" requirements set forth in the 1940
Act. As a non-diversified fund, the Fund is permitted to (but not required to)
invest a higher percentage of its assets in the securities of fewer issuers
relative to diversified funds. Such concentration could increase the risk of
loss to the Fund should there be a decline in the market value of any one
portfolio security relative to diversified funds. Investment in a
non-diversified fund may therefore entail greater risks than an investment in a
diversified fund.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL . Investment in foreign issuers or securities principally
traded overseas may involve certain special risks due to foreign economic,
political and legal developments, including favorable or unfavorable changes in
currency exchange rates, exchange control regulations (including currency
blockage), expropriation or nationalization of assets, imposition of withholding
taxes on dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located in these
foreign countries. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded overseas.
Investors should also be aware that under certain circumstances, markets which
are perceived to have similar characteristics to troubled markets may be
adversely affected whether or not similarities actually exist.
EMERGING MARKETS . The risks described above apply to an even greater
extent to the Fund's investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and more
volatile than the securities markets of the U.S. and developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent than in
the U.S. and developed foreign markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce the
Fund's income from such securities. Finally, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation
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in the world debt markets, there is little historical data or related market
experience concerning the attributes of such instruments under all economic,
market and political conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause the Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA . In addition to the foregoing risks of foreign
investments and risks specific to emerging markets, the Fund's investments in
Asia involve additional risks specific to investment in the region. The Fund's
focus on Asia makes it more susceptible to investment factors affecting the
region than a more geographically diverse fund. The region encompasses countries
at varying levels of economic development--ranging from emerging market to more
developed economies. Each country provides unique investment risks, yet the
political and economic prospects of one country or group of countries may impact
other countries in the region. For example, some Asian economies are directly
affected by Japanese capital investment in the region and by Japanese consumer
demands. In addition, a recession, a debt-crisis or a decline in currency
valuation in one country can spread to other countries.
The Fund is susceptible to political and social factors affecting
issuers in Asian countries. Some countries have authoritarian or relatively
unstable governments. Certain governments in the region provide less supervision
and regulation of financial markets then is typical of other emerging markets,
and less financial information is available. Restrictions on direct foreign
investments in securities markets also exist in some countries. For example,
Taiwan permits foreign investment only through authorized qualified foreign
institutional investors. The recent return of Hong Kong to China will continue
to affect the region.
Some countries in the region are heavily dependent upon foreign trade.
The economies of some Asian countries are not diversified and are based upon
only a few commodities or industries. Markets in some of these countries are in
the early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
In the latter half of 1997, the region began experiencing increased
market volatility and declines in foreign currency exchange rates. Fluctuation
in currency exchange rates can affect a country's ability to service its debt.
Currency fluctuation will affect the value of the securities in the Fund's
portfolio because the prices of these securities are generally denominated or
quoted in currencies other than the U.S. dollar.
SECURITIES LENDING
The Fund may make secured loans of portfolio securities amounting to
not more than one-third of the Fund's total assets. The risks in lending
portfolio securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Manager to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or U.S.
Government Securities at least equal at all times to the market value of the
securities lent. The borrower pays to the lending Fund an amount equal to any
dividends or interest the Fund would have received had the securities not been
lent. If the loan is collateralized by U.S. Government Securities, the Fund will
receive a fee from the borrower. In the case of loans collateralized by cash,
the Fund typically invests the cash collateral for its own account in
interest-bearing, short-term securities and pays a fee to the borrower. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. The Fund may also call such
loans in order to sell the securities involved. The Manager has retained lending
agents on behalf of the Fund that are compensated based on a percentage of the
Fund's return on the securities lending activity. The Fund also pays various
fees in connection with such loans including shipping fees and reasonable
custodian fees approved by the Trustees of the Trust or persons acting pursuant
to direction of the Board.
DEPOSITORY RECEIPTS
The Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with the Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
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CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature, an
opportunity to participate in capital appreciation resulting from a market price
advance in a convertible security's underlying common stock. The price of a
convertible security is influenced by the market value of the underlying common
stock and tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. The Manager regards convertible securities as a form of equity
security.
FUTURES AND OPTIONS
As described under "Investment Objectives and Policies" above, the Fund
may use futures and options for various purposes. Such transactions may involve
options, futures and related options on futures contracts, and those instruments
may relate to particular equity and fixed income securities, equity and fixed
income indexes, and foreign currencies. The Fund may also enter into a
combination of long and short positions (including spreads and straddles) for a
variety of investment strategies, including protecting against changes in
certain yield relationships.
The use of futures contracts and options on futures contracts involves
risk. Thus, while the Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices, or currency
exchange rates may result in poorer overall performance for the Fund than if it
had not entered into any futures contracts or options transactions. Losses
incurred in transactions in futures and options on futures and the costs of
these transactions will affect the Fund's performance. See Appendix A, "Risks
and Limitations of Options, Futures and Swaps" for a more detailed discussion of
the limits, conditions and risks of the Fund's investments in futures contracts
and related options.
OPTIONS . As has been noted above, the Fund may use options and (1) may
enter into contracts giving third parties the right to buy the Fund's portfolio
securities for a fixed price at a future date (writing "covered call options");
(2) may enter into contracts giving third parties the right to sell securities
to the Fund for a fixed price at a future date (writing "covered put options");
and (3) may buy the right to purchase securities from third parties ("call
options") or the right to sell securities to third parties ("put options") for a
fixed price at a future date.
WRITING COVERED OPTIONS . The Fund may seek to increase its return by
writing covered call or put options on optionable securities or indexes. A call
option written by the Fund on a security gives the holder the right to buy the
underlying security from the Fund at a stated exercise price; a put option gives
the holder the right to sell the underlying security to the Fund at a stated
exercise price. In the case of options on indexes, the options are usually cash
settled based on the difference between the strike price and the value of the
index.
The Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if the Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if the Fund owns the
underlying security or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same security
as the call written where the exercise price of the call held is equal to or
less than the exercise price of the call written or greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government Securities or other high grade debt obligations in a segregated
account with its custodian. A put option is "covered" if the Fund maintains
cash, U.S. Government Securities or other high grade debt obligations with a
value equal to the exercise price in a segregated account with its custodian, or
else holds on a share-for-share basis a put on the same security as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the writer of an option wishes to terminate its obligation, it may
effect a "closing purchase transaction." This is accomplished, in the case of
exchange traded options, by buying an option of the same series as the option
previously written. The
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effect of the purchase is that the writer's position will be canceled by the
clearing corporation. The writer of an option may not effect a closing purchase
transaction after it has been notified of the exercise of an option. Likewise,
an investor who is the holder of an option may liquidate its position by
effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that the Fund will be able to effect a closing purchase or a closing
sale transaction at any particular time. Also, an over-the-counter option may be
closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security or securities owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a call
option against that security. The exercise price of the call the Fund determines
to write will depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period.
Buy-and-write transactions using out-of-the-money call options may be used when
it is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upward or downward by the difference between the Fund's purchase price
of the security and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which the Fund will be able to write and purchase call
and put options may be restricted by the Fund's intention to qualify as a
regulated investment company under the Internal Revenue Code.
FUTURES . A financial futures contract sale creates an obligation by
the seller to deliver the type of financial instrument called for in the
contract in a specified delivery month for a stated price. A financial futures
contract purchase creates an obligation by the purchaser to pay for and take
delivery of the type of financial instrument called for in the contract in a
specified delivery month, at a stated price. In some cases, the specific
instruments delivered or taken, respectively, at settlement date are not
determined until on or near that date. The determination is made in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made. Some futures contracts are "cash settled" (rather than "physically
settled," as described above) which means that the purchase price is subtracted
from the current market value of the instrument and the net amount if positive
is paid to the purchaser, and if negative is paid by the purchaser. Futures
contracts are traded in the United States only on commodity exchanges or boards
of trade -- known as "contract markets" -- approved for such trading by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through a
futures commission merchant or brokerage firm which is a member of the relevant
contract market. Under U.S. law, futures contracts on individual equity
securities are not permitted. See Appendix A, "Risks and Limitations of Options,
Futures and Swaps" for more information concerning these practices and their
accompanying risks.
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The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES . The Fund may purchase futures contracts on various
securities indexes ("Index Futures"). The Fund's purchase and sale of Index
Futures is limited to contracts and exchanges which have been approved by the
CFTC.
An Index Future may call for "physical delivery" or be "cash settled."
An Index Future that calls for physical delivery is a contract to buy an
integral number of units of the particular securities index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. While the Fund that purchases an
Index Future that calls for physical delivery is obligated to pay the face
amount on the stated date, such an Index Future may be closed out on that date
or any earlier date by selling an Index Future with the same face amount and
contract date. This will terminate the Fund's position and the Fund will realize
a profit or a loss based on the difference between the cost of purchasing the
original Index Future and the price obtained from selling the closing Index
Future. The amount of the profit or loss is determined by the change in the
value of the relevant index while the Index Future was held.
Index Futures that are "cash settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.
The Fund may close open positions on the futures exchange on which
Index Futures are then traded at any time up to and including the expiration
day. All positions which remain open at the close of the last business day of
the contract's life are required to settle on the next business day (based upon
the value of the relevant index on the expiration day). Because the specific
procedures for trading foreign stock Index Futures on futures exchanges are
still under development, additional or different margin requirements as well as
settlement procedures may be applicable to foreign stock Index Futures at the
time the Fund purchases foreign stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the S&P 500 Index and futures markets. Secondly, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
The use of Index Futures involves risk. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Fund's investment in futures contracts.
INTEREST RATE FUTURES . For the purposes previously described, the Fund
may engage in a variety of transactions involving the use of futures with
respect to U.S. Government Securities and other fixed income securities. The use
of interest rate futures involves risk. See Appendix A, "Risks and Limitations
of Options, Futures and Swaps" for a more detailed discussion of the limits,
conditions and risks of the Fund's investment in futures contracts.
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<PAGE> 17
OPTIONS ON FUTURES CONTRACTS . Options on futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. The Fund may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, the Fund may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, the Fund may purchase call options or
write put options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Fund expects to purchase. Such options generally operate in
the same manner as options purchased or written directly on the underlying
investments. See "Description and Risks of Fund Investment Practices -- Foreign
Currency Transactions" for a description of the Fund's use of options on
currency futures.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT . When futures and options on futures are used for risk
management, the Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. In the case
of futures and options on futures, the Fund is only required to deposit the
initial and variation margin as required by relevant CFTC regulations and the
rules of the contract markets. Because the Fund will then be obligated to
purchase the security or index at a set price on a future date, the Fund's net
asset value will fluctuate with the value of the security as if it were already
included in the Fund's portfolio. Risk management transactions have the effect
of providing a degree of investment leverage, particularly when the Fund does
not segregate assets equal to the face amount of the contract (i.e., in cash
settled futures contracts) since the futures contract (and related options) will
increase or decrease in value at a rate which is a multiple of the rate of
increase or decrease in the value of the initial and variable margin that the
Fund is required to deposit. As a result, the value of the Fund's portfolio will
generally be more volatile than the value of comparable portfolios which do not
engage in risk management transactions. The Fund will not, however, use futures
and options on futures to obtain greater volatility than it could obtain through
direct investment in securities; that is, the Fund will not normally engage in
risk management to increase the average volatility (beta) of that Fund's
portfolio above 1.00, the level of risk (as measured by volatility) that would
be present if the Fund were fully invested in the securities comprising the
relevant index. However, the Fund may invest in futures and options on futures
without regard to this limitation if the face value of such investments, when
aggregated with the Index Futures equity swaps and contracts for differences as
described below does not exceed 10% of the Fund's assets.
HEDGING . To the extent indicated elsewhere, the Fund may also enter
into options, futures contracts and buy and sell options thereon for hedging.
For example, if the Fund wants to hedge certain of its fixed income securities
against a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indexes of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. The Fund may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that the Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in the Fund's portfolio is expected to decline as a
result of an increase in rates, the Fund might purchase put options or write
call options on futures contracts rather than selling futures contracts.
Similarly, for anticipatory hedging, the Fund may purchase call options or write
put options as a substitute for the purchase of futures contracts. See
"Description and Risks of Fund Investment Practices -- Foreign Currency
Transactions" for more information regarding the currency hedging practices of
the Fund.
INVESTMENT PURPOSES . To the extent indicated elsewhere, the Fund may
also enter into futures contracts and buy and sell options thereon for
investment. For example, the Fund may invest in futures when its Manager
believes that there are not enough attractive securities available to maintain
the standards of diversity and liquidity set for the Fund pending investment in
such securities if or when they do become available. Through this use of futures
and related options, the Fund may diversify risk in its portfolio without
incurring the substantial brokerage costs which may be associated with
investment in the securities of multiple issuers. This use may also permit the
Fund to avoid potential market and liquidity problems (e.g., driving up the
price of a security by purchasing additional shares of a portfolio security or
owning so much of a particular issuer's stock that the sale of such stock
depresses that stock's price) which may result from increases in positions
already held by the Fund.
When the Fund purchases futures contracts for investment, it will
maintain cash, U.S. Government Securities or other high grade debt obligations
in a segregated account with its custodian in an amount which, together with the
initial and variation margin deposited on the futures contracts, is equal to the
face value of the futures contracts at all times while the futures contracts are
held.
Incidental to other transactions in fixed income securities, for
investment purposes the Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
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having the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). The Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When the Fund creates a "synthetic" bond with a futures contract, it will
maintain cash, U.S. Government securities or other high grade debt obligations
in a segregated account with its custodian with a value at least equal to the
face amount of the futures contract (less the amount of any initial or variation
margin on deposit).
SYNTHETIC SALES AND PURCHASES . Futures contracts may also be used to
reduce transaction costs associated with short-term restructuring of the Fund's
portfolio. For example, if the Fund's portfolio includes stocks of companies
with medium-sized equity capitalization (e.g., between $300 million and $5.2
billion) and, in the opinion of the Manager, such stocks are likely to
underperform larger capitalization stocks, the Fund might sell some or all of
its mid-capitalization stocks, buy large capitalization stocks with the proceeds
and then, when the expected trend had played out, sell the large capitalization
stocks and repurchase the mid-capitalization stocks with the proceeds. In the
alternative, the Fund may use futures to achieve a similar result with reduced
transaction costs. In that case, the Fund might simultaneously enter into short
futures positions on an appropriate index (e.g., the S&P Mid Cap 400 Index) (to
synthetically "sell" the stocks in the Fund) and long futures positions on
another index (e.g., the S&P 500) (to synthetically buy the larger
capitalization stocks). When the expected trend has played out, the Fund would
then close out both futures contract positions. The Fund will only enter into
these combined positions if (1) the short position (adjusted for historic
volatility) operates as a hedge of existing portfolio holdings, (2) the face
amount of the long futures position is less than or equal to the value of the
portfolio securities that the Fund would like to dispose of, (3) the contract
settlement date for the short futures position is approximately the same as that
for the long futures position and (4) the Fund segregates an amount of cash,
U.S. Government Securities and other high-quality debt obligations whose value,
marked-to-market daily, is equal to the Fund's current obligations in respect of
the long futures contract positions. If the Fund uses such combined short and
long positions, in addition to possible declines in the values of its investment
securities, the Fund may also suffer losses associated with a securities index
underlying the long futures position underperforming the securities index
underlying the short futures position. However, the Manager will enter into
these combined positions only if the Manager expects that, overall, the Fund
will perform as if it had sold the securities hedged by the short position and
purchased the securities underlying the long position. The Fund may also use
swaps and options on futures to achieve the same objective. For more
information, see Appendix A, "Risks and Limitations of Options, Futures and
Swaps."
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
As has been described in the "Investment Objectives and Policies"
section above, the Fund may use swap contracts and other two-party contracts for
the same or similar purposes as they may use options, futures and related
options. The use of swap contracts and other two-party contracts involves risk.
See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more
detailed discussion of the limits, conditions and risks of the Fund's
investments in swaps and other two-party contracts.
SWAP CONTRACTS . Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
Fund will usually enter into swaps on a net basis, i.e., the two returns are
netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS . Interest rate swaps involve
the exchange of the two parties' respective commitments to pay or receive
interest on a notional principal amount (e.g., an exchange of floating rate
payments for fixed rate payments). Currency swaps involve the exchange of the
two parties' respective commitments to pay or receive fluctuations with respect
to a notional amount of two different currencies (e.g., an exchange of payments
with respect to fluctuations in the value of the U.S. dollar relative to the
Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES . Equity swap
contracts involve the exchange of one party's obligation to pay the loss, if
any, with respect to a notional amount of a particular equity index (e.g., the
S&P 500 Index) plus interest on such notional amount at a designated rate (e.g.,
the London Inter-Bank Offered Rate) in exchange for the other party's obligation
to pay the gain, if any, with respect to the notional amount of such index.
If the Fund enters into a long equity swap contract, the Fund's net
asset value will fluctuate as a result of changes in the value of the equity
index on which the equity swap is based as if it had purchased the notional
amount of securities comprising the index. The Fund will not use long equity
swap contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, the Fund will not normally enter an equity
swap contract to increase the volatility (beta) of the Fund's portfolio above
1.00, the volatility that would be present in the stocks comprising the Fund's
benchmark index. However, the Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated
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with the Index Futures as described above and the contracts for differences as
described below, does not exceed 10% of the Fund's net assets.
Contracts for differences are swap arrangements in which the Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. The Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. The Fund will only enter into contracts for differences where
payment obligations of the two legs of the contract are netted and thus based on
changes in the relative value of the baskets of securities rather than on the
aggregate change in the value of the two legs. The Fund will only enter into
contracts for differences (and analogous futures positions) when the Manager
believes that the basket of securities constituting the long leg will outperform
the basket constituting the short leg. However, it is possible that the short
basket will outperform the long basket - resulting in a loss to the Fund, even
in circumstances where the securities in both the long and short baskets
appreciate in value.
Except for instances in which the Fund elects to obtain leverage up to
the 10% limitation mentioned above, the Fund will maintain cash, U.S. Government
Securities or other high grade debt obligations in a segregated account with its
custodian in an amount equal to the aggregate of net payment obligations on its
swap contracts and contracts for differences, marked to market daily.
The Fund may enter into swaps and contracts for differences for
hedging, investment and risk management. When using swaps for hedging, the Fund
may enter into an interest rate, currency or equity swap, as the case may be, on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities. For risk management or investment
purposes the Fund may also enter into a contract for differences in which the
notional amount of the theoretical long position is greater than the notional
amount of the theoretical short position. The Fund will not normally enter into
a contract for differences to increase the volatility (beta) of the Fund's
portfolio above 1.00. However, the Fund may invest in contracts for differences
without regard to this limitation if the aggregate amount by which the
theoretical long positions of such contracts exceed the theoretical short
positions of such contacts, when aggregated with the Index Futures and equity
swaps contracts as described above, does not exceed 10% of the Fund's net
assets.
INTEREST RATE CAPS, FLOORS AND COLLARS . The Fund may use interest rate
caps, floors and collars for the same purposes or similar purposes as for which
they use interest rate futures contracts and related options. Interest rate
caps, floors and collars are similar to interest rate swap contracts because the
payment obligations are measured by changes in interest rates as applied to a
notional amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, the Fund will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount at least equal to its
obligations, if any, under interest rate cap, floor and collar arrangements. As
with futures contracts, when the Fund uses notional amount contracts for risk
management it is only required to segregate assets equal to its net payment
obligation, not the notional amount of the contract. In those cases, the
notional amount contract will have the effect of providing a degree of
investment leverage similar to the leverage associated with non-segregated
futures contracts. The Fund's use of interest rate caps, floors and collars for
the same or similar purposes as those for which they use futures contracts and
related options present the same risks and similar opportunities to those
associated with futures and related options. For a description of certain
limitations on the Fund's use of caps, floors and collars, see Appendix A,
"Risks and Limitations of Options, Futures and Swaps -- Additional Regulatory
Limitations on the Use of Futures, Related Options, Interest Rate Floors, Caps
and Collars and Interest Rate and Currency Swap Contracts." Because caps, floors
and collars are recent innovations for which standardized documentation has not
yet been developed they are deemed by the SEC to be relatively illiquid
investments which are subject to the Fund's limitation on investment in illiquid
securities. See "Description and Risks of Fund Investments -- Illiquid
Securities."
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or perceived changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, significant uncertainty surrounds the proposed
introduction of the "euro" (a common currency unit for the European Union) in
January 1999. These and other currencies in which the Fund's assets are
denominated may be devalued against the U.S. dollar, resulting in a loss to the
Fund.
The Fund is permitted to invest in securities denominated in foreign
currencies and may buy or sell foreign currencies, deal in forward foreign
currency contracts, currency futures contracts and related options and options
on currencies. The Fund may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active currency positions relative to both the securities portfolio of
the Fund and the Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quantity of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are
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contracts to buy or sell a standard quantity of a particular currency at a
specified future date and price. Options on currency futures contracts give
their owner the right, but not the obligation, to buy (in the case of a call
option) or sell (in the case of a put option) a specified currency futures
contract at a fixed price during a specified period. Options on currencies give
their owner the right, but not the obligation, to buy (in the case of a call
option) or sell (in the case of a put option) a specified quantity of a
particular currency at a fixed price during a specified period.
The Fund may enter into forward contracts for hedging under three
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, the Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps."
The Fund is not required to enter into hedging transactions with regard
to its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
The Fund may also enter foreign currency forward contracts for
investment and currency risk management. When the Fund uses currency instruments
for such purposes, the foreign currency exposure of the Fund may differ
substantially from the currencies in which the Fund's investment securities are
denominated. However, the Fund's aggregate foreign currency exposure will not
normally exceed 100% of the value of the Fund's securities, except that the Fund
may use currency instruments without regard to this limitation if the amount of
such excess, when aggregated with futures contracts, equity swap contracts and
contracts for differences used in similar ways, does not exceed 10% of the
Fund's net assets.
Except to the extent that the Fund may use such contracts for risk
management, whenever the Fund enters into a foreign currency forward contract,
other than a forward contract entered into for hedging, it will maintain cash,
U.S. Government securities or other high grade debt obligations in a segregated
account with its custodian with a value, marked to market daily, equal to the
amount of the currency required to be delivered. The Fund's ability to engage in
forward contracts may be limited by tax considerations.
The Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which they use currency forwards.
Except to the extent that the Fund may use futures contracts and related options
for risk management, the Fund will, so long as it is obligated as the writer of
a call option on currency futures, own on a contract-for-contract basis an equal
long position in currency futures with the same delivery date or a call option
on currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, U.S. Government securities or other high grade
debt obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by the Fund falls
below 100% of the market value of the call written by the Fund, the Fund will
maintain an amount of cash, U.S. Government securities or other high grade debt
obligations in a segregated account with its custodian equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and
broker-dealers by which the Fund acquires a security (usually an obligation of
the Government where the transaction is initiated or in whose currency the
agreement is denominated) for a
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relatively short period (usually not more than a week) for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-on price and date. The resale price is in excess of the acquisition price
and reflects an agreed-upon market rate unrelated to the coupon rate on the
purchased security. Such transactions afford an opportunity for the Fund to earn
a return on temporarily available cash at no market risk, although there is a
risk that the seller may default in its obligation to pay the agreed-upon sum on
the redelivery date. Such a default may subject the Fund to expenses, delays and
risks of loss including: (a) possible declines in the value of the underlying
security during the period while the Fund seeks to enforce its rights thereto,
(b) possible reduced levels of income and lack of access to income during this
period and (c) inability to enforce rights and the expenses involved in
attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities
of any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future
income of the Fund investing in such securities. The net asset value of the
Fund's shares will vary as a result of changes in the value of the securities in
its portfolio and will be affected by the absence and/or success of hedging
strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
As described under "Investment Objectives and Policies" above, the Fund
may temporarily invest a portion of its assets in cash or cash items pending
other investments or in connection with the maintenance of a segregated account.
These cash items must be of high quality and may include a number of money
market instruments such as securities issued by the United States government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. By investing only in high quality money market securities the Fund
will seek to minimize credit risk with respect to such investments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by
the U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political instability in such countries and the possible
inability of the Fund to enforce its rights against the foreign government
issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in the Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, the Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or
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both, in U.S. Government Securities and Foreign Government Securities. These
certificates of accrual and similar instruments may be more volatile than other
government securities.
LOWER RATED SECURITIES
The Fund may invest some or all of its assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). The
Fund will not necessarily dispose of a security when its rating is reduced below
its rating at the time of purchase, although the Manager will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject
to greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of the Fund investing in Lower Rated Securities may
be more dependent on the Manager's own credit analysis than is the case with
higher quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See Appendix B for more information concerning commercial paper
and corporate debt ratings.
INDEXED SECURITIES
Indexed Securities are securities the redemption values and/or the
coupons of which are indexed to the prices of a specific instrument or
statistic. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which the Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage, since they will generally increase
or decrease in value in response to changes in market interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.
The Fund's investment in indexed securities may also create taxable
income in excess of the cash such investments generate. See "Taxes - Tax
Implications of Certain Investments" in this Private Placement Memorandum.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. The Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. The Fund will only enter into firm commitment
arrangements with banks and broker-dealers which the Manager determines present
minimal credit risks. The Fund will maintain in a segregated
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account with its custodian cash, U.S. Government Securities or other liquid high
grade debt obligations in an amount equal to the Fund's obligations under firm
commitment agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by the Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
The Fund which makes such investments will establish segregated
accounts with its custodian in which the Fund will maintain cash, U.S.
Government Securities or other liquid high grade debt obligations equal in value
to its obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party or its trustee or receiver whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and dollar rolls are
not considered borrowings by the Fund for purposes of the Fund's fundamental
investment restriction with respect to borrowings.
ILLIQUID SECURITIES
The Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps,
floors and collars to be illiquid securities. Consequently, while the staff
maintains this position, the Fund will not enter into an equity swap contract or
a reverse equity swap contract or purchase a cap, floor or collar if, as a
result of the investment, the total value (i.e., marked-to-market value) of such
investments (without regard to their notional amount) together with that of all
other illiquid securities which the Fund owns would exceed 15% of the Fund's
total assets.
SPECIAL YEAR 2000 RISK CONSIDERATIONS
Many of the services provided to the Fund depend on the proper
functioning of computer systems. Many systems in use today cannot distinguish
between the year 1900 and the year 2000. Should any of the Fund's service
systems fail to process information properly, that could have an adverse impact
on the Fund's operations and services provided to shareholders. GMO and Dancing
Elephant, Ltd., as well as the Fund's administrator, transfer agent, custodian
and other service providers, have reported that each is working toward
mitigating the risks associated with the so-called "Year 2000 problem." However,
there can be no assurance that the problems will be corrected in all respects
and that the Fund's operations and services provided to shareholders will not be
adversely affected.
ADDITIONAL INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of
the Fund, the Trust will not take any of the following actions with respect to
the Fund as indicated:
(1) Borrow money except under the following circumstances: (i) The Fund
may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300%
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of outstanding debt obligations; (ii) The Fund may also borrow amounts equal to
an additional 5% of its total assets without regard to the foregoing limitation
for temporary purposes, such as for the clearance and settlement of portfolio
transactions and to meet shareholder redemption requests; (iii) The Fund may
enter into transactions that are technically borrowings under the 1940 Act
because they involve the sale of a security coupled with an agreement to
repurchase that security (e.g., reverse repurchase agreements, dollar rolls and
other similar investment techniques) without regard to the asset coverage
restriction described in (i) above, so long as and to the extent that the Fund
establishes a segregated account with its custodian in which it maintains cash
and/or high grade debt securities equal in value to its obligations in respect
of these transactions. Under current pronouncements of the SEC staff, such
transactions are not treated as senior securities so long as and to the extent
that the Fund establishes a segregated account with its custodian in which it
maintains liquid assets, such as cash, U.S. Government securities or other
appropriate high grade debt securities equal in value to its obligations in
respect of these transactions.
(2) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities. (For
this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of the Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Purchase or sell commodities or commodity contracts, except that
the Fund may purchase and sell financial futures contracts and options thereon.
(9) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the functional meaning
of the term "evidence of indebtedness", the issue of compliance with Section 18
of the 1940 Act will not be raised with the SEC by the Division of Investment
Management if the Fund covers such securities by maintaining certain "segregated
accounts." Similarly, so long as such segregated accounts are maintained, the
issue of compliance with Section 18 will not be raised with respect to any of
the following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (5) below; any
borrowing permitted by restriction 1 above; any collateral arrangements with
respect to initial and variational margin permitted by non-fundamental policy
(5) below; and the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts.
Non-Fundamental Restrictions:
It is contrary to the present policy of the Fund which may be changed
by the Trustees without shareholder approval, to:
(1) Invest in warrants or rights excluding options (other than warrants
or rights acquired by the Fund as a part of a unit or attached to securities at
the time of purchase), except that the Fund may invest in such warrants or
rights so long as the aggregate value thereof (taken at the lower of cost or
market) does not exceed 5% of the value of the fund's total net assets; provided
that within this 5%, not more than 2% of its net assets may be invested in
warrants that are not listed on the New York or American Stock Exchange or a
recognized foreign exchange.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) Make investments for the purpose of gaining control of a company's
management.
(4) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under
17
<PAGE> 25
Section 4(2) or Rule 144A under the Securities Act of 1933 are in fact liquid,
they will not be included in the 15% limit on investment in illiquid securities.
(5) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 33 % of the Fund's total assets (taken at cost). (For the purposes of
this restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)
Except as indicated above in Fundamental Restriction No. 1, all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to the Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
MULTIPLE CLASSES
The Asia Fund has four classes of shares, Class I, Class II, Class III
and Class IV Shares, but is currently offering only Class III Shares. See
"Eligibility for Classes" below.
SHAREHOLDER SERVICE FEES
The principal economic difference among the various classes of shares
is the level of Shareholder Service Fee which the classes bear for client and
shareholder service, reporting and other support. The existence of multiple
classes reflects the fact that, as the size of a client relationship increases,
the cost to service that client decreases as a percentage of the assets in that
account. Thus, the Shareholder Service Fee is lower for classes where
eligibility criteria require greater total assets under GMO's management.
The Trust has adopted a Shareholder Servicing Plan with respect to the
Fund's multiple classes of shares. Pursuant to the terms of the Shareholder
Servicing Plan, the Fund's classes will pay the following Shareholder Service
Fees, expressed as an annual percentage of the average daily net assets
attributable to that class of shares:
------------------------- ------------- ------------ ------------ ------------
Fund Class I Class II Class III Class IV
------------------------- ------------- ------------ ------------ ------------
Asia Fund 0.28% 0.22% 0.15% .105%
------------------------- ------------- ------------ ------------ ------------
ELIGIBILITY FOR CLASSES
Class I, Class II, and Class III Shares: With certain exceptions
described below, eligibility for Class I, Class II and Class III Shares depends
on a client's "Total Investment" with GMO.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater of (a) the market value of
assets managed by GMO and its affiliates for the client (whether in a pooled
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's Domestic Active Division as of the previous
Determination Date), plus contributions made to, and less Large Withdrawals
(defined below) from, any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) since the previous Determination Date
(plus the market value of any account managed by GMO's Domestic Active Division
as of the then current Determination Date). For these purposes, "Large
Withdrawals" means the total of all withdrawals made from any GMO-managed
product or account (other than any account managed by GMO's Domestic Active
Division) since the previous Determination Date if such total exceeds 7% of the
sum of the client's Total Investment as of the previous Determination Date and
any contributions to any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) made since the previous Determination
Date. For clients that have accounts with GMO as of November 30, 1997, their
initial Total Investment is the greater of the market value of assets managed by
GMO and its affiliates for the client as of the close of business on November
30, 1997 or on December 31, 1997. For clients establishing a relationship with
GMO on or after December 1, 1997, their Total Investment will be determined as
described above. Notwithstanding anything to the contrary in this Prospectus,
assets invested in the
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<PAGE> 26
Pelican Fund will not be considered when determining a client's Total
Investment. For purposes of this Private Placement Memorandum, accounts managed
by GMO's Domestic Active Division do not include any GMO Trust Funds (other than
the Pelican Fund), and include only certain separate accounts managed by GMO.
Clients with any questions regarding whether certain of their assets are deemed
to be managed by GMO's Domestic Active Division should call GMO at
(617) 330-7500.
Subject to the exceptions set forth following this table, the minimum
Total Investment for a new client (establishing a GMO Account after June 1,
1996) to be eligible for Class I, II or III Shares of the Fund is set forth in
the following table:
-------------------- -------------------------------------
CLASS OF SHARES MINIMUM TOTAL INVESTMENT
-------------------- -------------------------------------
Class I N/A*
-------------------- -------------------------------------
Class II N/A*
-------------------- -------------------------------------
Class III $1 Million
-------------------- -------------------------------------
*not presently being offered by the Fund
Investments by defined contribution pension plans (such as 401(k)
plans) will be accepted only in the Class of Shares with the highest Shareholder
Service Fee then available, regardless of the size of the investment, and will
not be eligible to convert to other classes with lower Shareholder Service Fees.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
Class IV Shares: Class IV Shares bear significantly lower Shareholder
Service Fees than other classes and are designed to accommodate clients making
very large investments in the Fund or that are making investments into the Fund
in conjunction with a very large commitment of assets to investment management
by GMO.
Eligibility for Class IV Shares is dependent upon the client meeting
either (i) a minimum "Total Fund Investment" requirement, which includes only a
client's total investment in the Asia Fund or (ii) a minimum "Total Investment"
requirement calculated as described above for Class I, Class II and Class III
Shares.
For clients that have accounts with GMO as of November 30, 1997, their
initial Total Investment or initial Total Fund Investment for purposes of
determining eligibility for Class IV Shares will be the greater of the market
value of all of their investments advised by GMO and its affiliates, or the
market value of their investment in the Fund, as the case may be, as of the
close of business on November 30, 1997 or December 31, 1997. For clients
establishing a relationship with GMO on or after December 1, 1997, their Total
Fund Investment and Total Investment will be determined as described above.
The minimum Total Fund Investment and/or Total Investment for a client
to be eligible for Class IV Shares is set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------- --------------------------------------------- -------------------------------------
CLASS OF SHARES Minimum Total Fund Investment Minimum Total Investment
- ----------------------- --------------------------------------------- -------------------------------------
Class IV N/A* N/A*
- ----------------------- --------------------------------------------- -------------------------------------
</TABLE>
*not presently being offered by the Fund
There is no minimum for subsequent investments into any class of shares
of the Fund.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
CONVERSIONS BETWEEN CLASSES
On December 31 of each year and on such other dates as may be
determined by GMO (each a "DETERMINATION DATE") the value of each client's Total
Investment and Total Fund Investment with GMO, as defined above, will be
determined. Based on that determination, each client's shares of the Fund will
be automatically converted to the class of shares of the Fund which is then
being
19
<PAGE> 27
offered with the lowest Shareholder Service Fee for which the client is eligible
based on the amount of their Total Investment or Total Fund Investment, as the
case may be, on the Determination Date. The conversion will occur within 15
business days following the Determination Date. Also, if a client makes an
investment in a GMO Fund (except for the Pelican Fund) or puts additional assets
under GMO's management (except for accounts managed by GMO Domestic Active
Division) so as to cause the client to be eligible for a new class of shares,
such determination will be made as of the close of business on the last day of
the calendar quarter in which the investment was made, and the conversion will
be effected within 15 business days of that quarter.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in the new class of shares immediately after the
conversion should equal the client's basis in the converted shares immediately
before conversion, and the holding period of the new class of shares should
include the holding period of the converted shares.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum), and such
conversion will not occur until on or after July 31, 1997. Notwithstanding the
foregoing special rules, clients shall always remain eligible to remain in
and/or to be converted to any class of shares of the Fund which the client would
be eligible to purchase pursuant to the eligibility requirements set forth
herein.
Investors should be aware that not all classes of the Fund are
available in all jurisdictions.
PURCHASE OF SHARES
Shares of the Fund are available only from the Trust and may be
purchased on any day when the New York Stock Exchange is open for business (a
"business day"). Shares may be purchased by calling (617) 330-7500. See
"Purchase Procedures" below.
The purchase price of a share of the Fund is (i) the net asset value
next determined after a Subscription Agreement is received in good order plus
(ii) a premium, if any, established from time to time by the Trust for the Fund.
All purchase premiums are paid to and retained by the Fund and are intended to
cover the brokerage and other costs associated with putting the investment to
work in the relevant markets. Each class of shares of the Fund has the same rate
of purchase premium.
The purchase premium currently in effect for the Asia Fund is 1.20%.
Purchase premiums generally apply only to cash transactions. These fees
are paid to and retained by the Fund itself and are designed to allocate
transaction costs caused by shareholder activity to the shareholder generating
the activity, rather than to the Fund as a whole. Purchase premiums are not
sales loads.
In certain limited circumstances, the purchase premiums and/or
redemption fees for the Fund may be waived in part or in full. The circumstances
are described in the footnotes to the Schedule of Fees and Expenses in this
Private Placement Memorandum.
Normally, no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases involving
transfers of large positions in markets where the costs of re-registration
and/or other transfer expenses are high, the Fund may charge a premium of 0.20%.
Shares may be purchased (i) in cash, (ii) in exchange for securities on
deposit at The Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be exchanged are acceptable, or (iii) by a combination of such
securities and cash. In all cases, the Manager reserves the right to reject any
particular investment. Securities acceptable to the Manager as consideration for
Fund shares will be valued as set forth under "Determination of Net Asset Value"
(generally the last quoted sale price) as of the time of the next determination
of net asset value after such acceptance. All dividends, subscription or other
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the Fund and must be delivered to the
Trust upon receipt by the investor from the issuer. A gain or loss for federal
income tax purposes may be realized by investors subject to federal income
taxation upon the exchange, depending upon the investor's basis in the
securities tendered.
The Manager will not approve securities as acceptable consideration for
Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; and
20
<PAGE> 28
(3) the securities may be acquired under the investment restrictions applicable
to the Fund. Investors interested in making in-kind purchases should telephone
the Manager at (617) 330-7500.
For purposes of calculating the purchase price of Trust shares, a
Subscription Agreement is received by the Trust on the day that it is in "good
order" and is accepted by the Trust. For a Subscription Agreement to be in "good
order" on a particular day, the investor's consideration must be received before
the relevant deadline on that day. If the investor makes a cash investment, the
deadline for wiring Federal funds to the Trust is 2:00 p.m.; if the investor
makes an investment in-kind, the investor's securities must be placed on deposit
at DTC (or such other depository as is acceptable to the Manager) and 2:00 p.m.
is the deadline for transferring those securities to the account designated by
the transfer agent, Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Investors should be aware that approval of the
securities to be used for purchase must be obtained from the Manager prior to
this time. When the consideration is received by the Trust after the relevant
deadline, the Subscription Agreement is not considered to be in good order and
is required to be resubmitted on the following business day. With the prior
consent of the Manager, in certain circumstances the Manager may, in its
discretion, permit purchases based on receiving adequate written assurances that
Federal Funds or securities, as the case may be, will be delivered to the Trust
by 2:00 p.m. on or prior to the fourth business day after such assurances are
received.
PURCHASE PROCEDURES :
(a) General: Investors should call the Trust at (617) 330-7500 before
attempting to place an order for Shares. The Trust reserves the right to reject
any order for Trust shares. DO NOT SEND CASH, CHECKS OR SECURITIES DIRECTLY TO
THE TRUST. Wire transfer and mailing instructions are contained in the
SUBSCRIPTION AGREEMENT which can be obtained from the Trust at the telephone
numbers set forth above.
Purchases will be made in full and fractional shares of the Fund
calculated to three decimal places. The Trust will send a written confirmation
(including a statement of shares owned) to shareholders at the time of each
transaction.
(b) Subscription Agreement: Investors must submit a Subscription
Agreement to the Trust and it must be accepted by the Trust before it will be
considered in "good order."
A Subscription Agreement for Shares may be obtained by calling the
Trust at (617) 330-7500. The Subscription Agreement may be submitted to the
Trust (i) By Mail to GMO Trust c/o Grantham, Mayo, Van Otterloo & Co. LLC, 40
Rowes Wharf, Boston, MA 02110; Attention: Shareholder Services, or (ii) By
Facsimile to (617) 439-4192; Attention: Shareholder Services.
(c) Acceptance of Order: No Subscription Agreement is in "good order"
until it has been accepted by the Trust. As noted above, investors should call
the Trust at the telephone number indicated before attempting to place an order.
If a Subscription Agreement is faxed to the Trust without first contacting the
Trust, investors should not consider their order acknowledged until they have
received notification from the Trust or have confirmed receipt of the order by
contacting the Trust. A shareholder may confirm acceptance of a mailed or faxed
Subscription Agreement by calling the Trust at (617) 330-7500. If a Subscription
Agreement is mailed to the Trust, it will be acted upon when received.
(d) Payment: All Federal funds must be transmitted to Investors Bank &
Trust Company for the account of the Fund. "Federal funds" are monies credited
to Investors Bank & Trust Company's account with the Federal Reserve Bank of
Boston.
Note: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above, but, in such cases, the
investor should carefully review confirmations sent by the Trust to verify that
the order was properly executed. The Trust cannot be held responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed on any business day in cash or in
kind. The redemption price is the net asset value per share next determined
after receipt of the redemption request in "good order" less any applicable
redemption fee. All redemption fees are paid to and retained by the Fund and are
intended to cover the brokerage and other Fund costs associated with
redemptions. All classes of the Fund bear the same redemption fee rate, if any.
The redemption fee currently in effect for the Asia Fund is .40%.
Redemption fees apply only to cash transactions. These fees are paid to
and retained by the Fund itself and are employed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity,
rather than to the Fund as a whole. Redemption fees are not sales loads or
contingent deferred sales charges.
21
<PAGE> 29
In certain limited circumstances, the purchase premiums and/or
redemption fees for the Fund may be waived in part or in full. The circumstances
are described in the footnotes to the Schedule of Fees and Expenses in this
Private Placement Memorandum.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Securities used to redeem Fund shares in-kind will be valued in
accordance with the Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by the Fund in-kind
will be selected by the Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Any in-kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
Payment on redemption will be made as promptly as possible and in any
event within seven days after the request for redemption is received by the
Trust in "good order." A redemption request is in "good order" if it includes
the exact name in which shares are registered, the investor's account number and
the number of shares or the dollar amount of shares to be redeemed and if it is
signed exactly in accordance with the form of registration. In addition, for a
redemption request to be in "good order" on a particular day, the investor's
request must be received by the Trust by 4:15 p.m. on a business day. When a
redemption request is received after 4:15 p.m., the redemption request will not
be considered to be in "good order" and is required to be resubmitted on the
following business day. Persons acting in a fiduciary capacity, or on behalf of
a corporation, partnership or trust must specify, in full, the capacity in which
they are acting. The redemption request will be considered "received" by the
Trust only after (i) it is mailed to, and received by, the Trust at the address
set forth above for purchase orders, or (ii) it is faxed to the Trust at the
facsimile number set forth above for purchase orders, and the investor has
confirmed receipt of the faxed request by calling the Trust at (617) 330-7500.
In-kind distributions will be transferred and delivered as directed by the
investor. Cash payments will be made by transfer of Federal funds for payment
into the investor's account.
When opening an account with the Trust, shareholders will be required
to designate the account(s) to which funds or securities may be transferred upon
redemption. Designation of additional accounts and any change in the accounts
originally designated must be made in writing.
The Fund may suspend the right of redemption and may postpone payment
for more than seven days when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because the Fund holds portfolio securities listed
on foreign exchanges which may trade on days on which the New York Stock
Exchange is closed, the net asset value of the Fund's shares may be
significantly affected on days when shareholders have no access to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for the Fund once on each
day on which the New York Stock Exchange is open as of 4:15 p.m., New York City
Time, except that the Fund may not determine its net asset value on days during
which no security is tendered for redemption and no order to purchase or sell
such security is received by the relevant Fund. The Fund's net asset value is
determined by dividing the total market value of the Fund's portfolio
investments and other assets, less any liabilities, by the total outstanding
shares of the Fund. Portfolio securities listed on a securities exchange for
which market quotations are available are valued at the last quoted sale price
on each business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken from
the closing price on the exchange where the security is primarily traded.
Unlisted securities for which market quotations are readily available are valued
at the most recent quoted bid price, except that debt obligations with sixty
days or less remaining until maturity may be valued at their amortized cost,
unless circumstances dictate otherwise. Circumstances may dictate otherwise,
among other times, when the issuer's creditworthiness has become impaired.
All other fixed income securities (which includes bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another source)
because of such price activity or because the Manager has other reasons to
suspect that a price supplied may not be reliable.
Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Trustees
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Trustees may determine in computing net asset value.
22
<PAGE> 30
Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the New York
Stock Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may occasionally
occur between the earlier closings of such exchanges and securities markets and
the closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the Fund. If an event materially affecting
the value of such foreign securities occurs during such period, then such
securities will be valued at fair value as determined in good faith by the
Trustees or persons acting at their direction.
Because foreign securities, options on foreign securities and foreign
futures are quoted in foreign currencies, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
shares of the Fund even though there has not been any change in the values of
such securities and options, measured in terms of the foreign currencies in
which they are denominated.
DISTRIBUTIONS
The Fund intends to pay out as dividends, at least annually,
substantially all of its net investment income (which is derived from dividends
and interest it receives from its portfolio investments and net short-term
capital gains). For these purposes and for federal income tax purposes, a
portion of the premiums from certain expired call or put options written by the
Fund, net gains from certain closing purchase and sale transactions with respect
to such options and a portion of net gains from other options and futures
transactions are treated as short-term capital gain. The Fund also intends to
distribute substantially all of its net long-term capital gains, if any, after
giving effect to any available capital loss carryovers. It is the policy of the
Fund to make distributions, at least annually, sufficient to avoid the
imposition of a non-deductible 4% excise tax on certain undistributed amounts of
taxable investment income and capital gains. The policy of the Fund is to
declare and pay distributions of its dividends, interest and foreign currency
gains semi-annually. The Fund also intends to distribute net short-term capital
gains and net long-term capital gains at least annually. Investors should be
aware that by purchasing shares shortly before the record date of a dividend or
capital gains distribution, they will pay the full price of the shares and
shortly thereafter will receive some portion of the price paid back as a taxable
dividend or taxable capital gains distribution.
All dividends and/or distributions will be paid in shares of the Fund,
at net asset value, unless the shareholder elects to receive cash. There is no
purchase premium on reinvested dividends or distributions. Shareholders may make
this election by marking the appropriate box on the Application or by writing to
the Trust.
Certain of the Fund's investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "indexed securities," will create taxable
income in excess of the cash they generate. In such cases, the Fund may be
required to sell assets (including when it is not advantageous to do so) to
generate the cash necessary to distribute as dividends to its shareholders all
of its income and gains and therefore to eliminate any tax liability at the Fund
level.
TAXES
The Fund is treated as a separate taxable entity for federal income tax
purposes. The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended, and
to meet all other requirements necessary for it to be relieved of federal taxes
on income and gains it distributes to shareholders. So long as the Fund so
qualifies, the Fund itself will not pay federal income taxes on the amounts
distributed.
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Distributions from the Fund will be taxable to
shareholders as ordinary income to the extent derived from the Fund's investment
income and net short-term gains. Pursuant to the Taxpayer Relief Act of 1997
(the "1997 Act"), two different tax rates apply to net capital gains (that is,
the excess of net gains from capital assets held for more than one year
("long-term capital assets") over net losses from capital assets held for not
more than one year ("short-term capital assets")). One rate (generally 28%)
applies to net gains on capital assets held for more than one year but not more
than 18 months ("28% gains") and a second, preferred rate (generally 20%)
applies to the balance of such net capital gains ("20% gains"). Distributions of
net capital gains will be treated in the hands of shareholders as 28% gains to
the extent designated by the Fund as deriving from net gains from assets held
for more than one year but not more than 18 months, and the balance will be
treated as 20% gains. Distributions of 28% gains and 20% gains will be taxable
to shareholders as such, regardless of how long a shareholder has held the
shares in the Fund. Any loss realized upon a taxable disposition of shares held
for six months or less will be treated as long-term capital loss to the extent
of any long-term capital gain distributions received by a shareholder with
respect to those shares. The recognition of certain losses upon the sale of
shares of the Fund may be limited to the extent shareholders dispose of shares
of one Fund and invest
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in shares of the same or another GMO Fund. A distribution paid to shareholders
by the Fund in January of a year generally is deemed to have been received by
shareholders on December 31 of the preceding year, if the distribution was
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. The Trust will provide federal tax information
annually, including information about dividends and distributions paid during
the preceding year to taxable investors and others requesting such information.
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the 1997
Act) to the Fund's dividends paid from investment income to the extent derived
from dividends received from U.S. corporations. However, any distributions
received by the Fund from REITs will not qualify for the corporate
dividends-received deduction. The Fund's investments in REIT equity securities,
if any, may require the Fund to accrue and distribute income not yet received.
In order to generate sufficient cash to make the requisite distributions, the
Fund may be required to sell securities in its portfolio that it otherwise would
have continued to hold (including when it is not advantageous to do so). The
Fund's investments in REIT equity securities may at other times result in the
Fund's receipt of cash in excess of the REIT's earnings; if the Fund distributes
such amounts, such distribution could constitute a return of capital to Fund
shareholders for federal income tax purposes.
The back-up withholding rules do not apply to tax exempt entities so
long as each such entity furnishes the Trust with an appropriate certification.
However, other shareholders are subject to back-up withholding at a rate of 31%
on all distributions of net investment income and capital gain, whether received
in cash or reinvested in shares of the Fund, and on the amount of the proceeds
of any redemption of Fund shares paid or credited to any shareholder account for
which an incorrect or no taxpayer identification number has been provided, where
appropriate certification has not been provided for a foreign shareholder, or
where the Trust is notified that the shareholder has underreported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding).
The foregoing is a general summary of the principal federal income tax
consequences of investing in the Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in the Fund in
light of each shareholder's particular tax situation. Shareholders should also
consult their own tax advisors about consequences under foreign, state, local or
other applicable tax laws (including possible liability for federal alternative
minimum tax).
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by the Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder will ordinarily not be subject to U.S.
taxation, unless the recipient or seller is a nonresident alien individual who
is present in the United States for more than 182 days during the taxable year.
However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Federal regulations generally require the Funds to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and gains realized upon a sale of securities
paid to a shareholder if such shareholder fails to certify either that the TIN
furnished in connection with opening an account is correct or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Also, the IRS may notify the
Fund to institute backup withholding if the IRS determines a shareholder's TIN
is incorrect or if a shareholder has failed to properly report taxable dividend
and interest income on a Federal income tax return. A TIN is either the Social
Security number or employer identification number of the record owner of the
account. Any tax withheld as a result of backup withholding does not constitute
an additional tax imposed on the record owner of the account, and may be claimed
as a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder will in
general be subject to U.S. federal income tax on the income derived from the
Fund at the graduated rates applicable to U.S. citizens, residents or domestic
corporations, whether received in cash or reinvested in shares, and, in the case
of a foreign corporation, may also be subject to a branch profits tax. Again,
foreign shareholders who are resident in a country with an income tax treaty
with the United States may obtain different tax results, and are urged to
consult their tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the total assets of
the Fund is represented by stock of foreign corporations, the Fund intends to
make an election which allows shareholders whose income from the Fund is subject
to U.S. taxation at the graduated rates applicable to U.S. citizens, residents
or domestic corporations to claim a foreign tax credit or deduction (but not
both) on their U.S. income tax return. In such case, the amounts of foreign
income taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their
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tax advisors for further information relating to the foreign tax credit and
deduction, which are subject to certain restrictions and limitations (including
a holding period requirement applied at both the Fund and shareholder level
imposed by the 1997 Act). Shareholders whose income from the Fund is not subject
to U.S. taxation at the graduated rates applicable to U.S. citizens, residents
or domestic corporations may receive substantially different tax treatment of
distributions by the Fund, and may be disadvantaged as a result of the election
described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
As described above under the heading "Distributions," certain of the
Fund's investments, including assets "marked to the market" for federal income
tax purposes, debt obligations issued or purchased at a discount and potentially
so-called "index securities," will create taxable income in excess of the cash
they generate. In such cases, the Fund may be required to sell assets (including
when it is not advantageous to do so) to generate the cash necessary to
distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Fund's
securities and convert short-term capital gains or losses into long-term capital
gains or losses. Qualification requirements noted above may restrict the Fund's
ability to engage in these transactions, and these transactions may affect the
amount, timing and character of distributions to shareholders. The tax
consequences of certain hedging transactions have been modified by the 1997 Act.
Investment by the Fund in certain "passive foreign investment
companies" could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, the Fund may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Fund will be required to include its share of the
company's income and net capital gain annually, regardless of whether it
receives any distributions from the company. The Fund may also make an election
to mark the gains (and to a limited extent losses) in such holdings "to the
market" as though it had sold and repurchased its holdings in those PFIC's on
the last day of the Fund's taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of cash)
and increase the amount required to be distributed for the Fund to avoid
taxation. Making either of these elections may therefore require the Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which may also accelerate the recognition of
gain and affect the Fund's total return.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
MANAGEMENT OF THE TRUST
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co.
LLC, 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO") which
provides investment advisory services to a substantial number of institutional
and other investors, including one other registered investment company.
Grantham, Mayo, Van Otterloo & Co. LLC converted from a general partnership to a
limited liability company on December 16, 1996. Each of the following four
members holds a greater than 5% interest in the Manager: R. Jeremy Grantham,
Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley Durant.
Under a Management Contract with the Fund, the Manager selects and
reviews the Fund's investments and provides executive and other personnel for
the management of the Trust. Pursuant to the Trust's Agreement and Declaration
of Trust, the Board of Trustees supervises the affairs of the Trust as conducted
by the Manager. In the event that the Manager ceases to be the manager of the
Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn.
The Manager has entered into a Consulting Agreement (the "Consulting
Agreement") with Dancing Elephant, Ltd., 1936 University Avenue, Berkeley,
California 94704 (the "Consultant"), with respect to the management of the
portfolio of the Asia Fund. The Consultant is wholly-owned by Mr. Arjun Divecha.
Under the Consulting Agreement, the Manager pays the Consultant a monthly fee at
an annual rate equal to the lesser of 0.50% of the Trust's average daily net
assets or $250,000. The Consultant may from time to time waive all or a portion
of its fee. Payments made by the Manager to the Consultant will not affect the
amounts
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<PAGE> 33
payable by the Fund to the Manager or the Fund's expense ratio. The Manager has
entered into similar separate Consulting Agreements with the Consultant with
respect to two other Funds of the Trust, the GMO Emerging Markets Fund and the
GMO Evolving Countries Fund.
The Management Contract provides for payment to the Manager of a
management fee at the stated annual rates set forth under Schedule of Fees and
Expenses. The management fee is computed and accrued daily, and paid monthly.
While the fee paid to the Manager by the Fund is higher than that paid by most
funds, each is comparable to the fees paid by many funds with similar investment
objectives. In addition, with respect to the Fund, the Manager has voluntarily
agreed to waive its fee and to bear certain expenses until further notice in
order to limit the Fund's annual expenses to specified limits (with certain
exclusions). These limits and the terms applicable to them are described under
the Schedule of Fees and Expenses.
Mr. Arjun Divecha will be primarily responsible for the day-to-day
management of the Fund.
During the period from February 18, 1998 (the inception of the Fund's
operations) to February 28, 1998, the Manager received, as compensation for
management services rendered in such year (after waiver), 0.00% of the
Fund's average daily net assets.
Pursuant to an Administrative Services Agreement with GMO, Investors
Bank & Trust Company provides administrative services to the Fund. GMO pays
Investors Bank & Trust Company an annual fee for its services to the Fund.
Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of each Fund of the Trust, Grantham, Mayo, Van Otterloo & Co.
LLC, in its capacity as the Trust's shareholder servicer (the "Shareholder
Servicer"), provides direct client service, maintenance and reporting to
shareholders of each class of shares. Such servicing and reporting services
include, without limitation, professional and informative reporting, client
account information, personal and electronic access to Fund information, access
to analysis and explanations of Fund reports, and assistance in the correction
and maintenance of client-related information.
ORGANIZATION AND CAPITALIZATION
OF THE TRUST
The Trust was established on June 24, 1985 as a business trust under
Massachusetts law. The Trust has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series and classes of such shares. The Trusts's shares are
presently divided into thirty-six series of shares, one for the Asia Fund, and
one for each of the International Core Plus Allocation Fund, Fundamental Value
Fund, Pelican Fund, U.S. Core Fund, Tobacco-Free Core Fund, Tax-Managed U.S.
Equities Fund, Tax-Managed International Equities Fund, Value Fund, Growth Fund,
U.S. Sector Fund, Small Cap Value Fund, Small Cap Growth Fund, REIT Fund,
International Core Fund, Currency Hedged International Core Fund, Foreign Fund,
International Small Companies Fund, Japan Fund, Emerging Markets Fund, Evolving
Countries Fund, Global Properties Fund, Domestic Bond Fund, U.S. Bond/Global
Alpha A Fund, U.S. Bond/Global Alpha B Fund, International Bond Fund, Currency
Hedged International Bond Fund, Global Bond Fund, Emerging Country Debt Fund,
Short-Term Income Fund, Global Hedged Equity Fund, Inflation Indexed Bond Fund,
International Equity Allocation Fund, World Equity Allocation Fund, Global
(U.S.+) Equity Allocation Fund, and Global Balanced Allocation Fund, and up to
eight classes of shares. All shares of all series are entitled to vote at any
meetings of shareholders. The Trust does not generally hold annual meetings of
shareholders and will do so only when required by law. All shares entitle their
holders to one vote per share. Matters submitted to shareholder vote must be
approved by each Fund separately except (i) when required by the 1940 Act shares
shall be voted together as a single class and (ii) when the Trustees have
determined that the matter does not affect the Fund, then only shareholders of
the Fund(s) affected shall be entitled to vote on the matter. Shareholders of a
particular class of shares do not have separate class voting rights except with
respect to matters that affect only that class of shares or as otherwise
required by law. Shares are freely transferable, are entitled to dividends as
declared by the Trustees, and, in liquidation of the Trust, are entitled to
receive the net assets of their Fund, but not of any other Fund. Shareholders
holding a majority of the outstanding shares of all series may remove Trustees
from office by votes cast in person or by proxy at a meeting of shareholders or
by written consent.
On June 1, 1998, the following shareholders held greater than 25% of
the outstanding shares of the Fund: Bankers Trust Company TR, GTE Service Corp.
Pension Trust; The Trustees of Princeton University International.
Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote since
it may arise only in very limited circumstances.
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Appendix A
RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS
Limitations on the Use of Options and Futures Portfolio Strategies . As
noted in "Descriptions and Risks of Fund Investment Practices--Futures and
Options" above, the Fund may use futures contracts and related options for
hedging and, in some circumstances, for risk management or investment but not
for speculation. Thus, except when used for risk management or investment, the
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that the Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, the
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
Risk Factors in Options Transactions . The option writer has no control
over when the underlying securities or futures contract must be sold, in the
case of a call option, or purchased, in the case of a put option, since the
writer may be assigned an exercise notice at any time prior to the termination
of the obligation. If an option expires unexercised, the writer realizes a gain
in the amount of the premium. Such a gain, of course, may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security or futures contract during the option period. If a call
option is exercised, the writer realizes a gain or loss from the sale of the
underlying security or futures contract. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security or
futures contract at the exercise price, which will usually exceed the then
market value of the underlying security or futures contract.
An exchange-traded option may be closed out only on a national
securities exchange ("Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular option
with the result that the Fund holding the option would have to exercise the
option in order to realize any profit. For example, in the case of a written
call option, if the Fund is unable to effect a closing purchase transaction in a
secondary market (in the case of a listed option) or with the purchaser of the
option (in the case of an over-the-counter-option), the Fund will not be able to
sell the underlying security (or futures contract) until the option expires or
it delivers the underlying security (or futures contract) upon exercise. Reasons
for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Fund, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
the Fund's ability to purchase or sell options on a particular security.
The amount of risk the Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
Risk Factors in Futures Transactions . Investment in futures contracts
involves risk. If the futures are used for hedging, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or currency being hedged. The correlation
is higher between price movements of futures contracts and the instrument
underlying that futures contract. The correlation is lower when futures are used
to hedge securities other than such underlying instrument, such as when a
futures contract on an index of securities is used to hedge a single security, a
futures contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency (e.g., the German Mark) is used to hedge a security denominated
in another currency (e.g., the Spanish Peseta). In the event of an imperfect
correlation between a futures position and a portfolio position (or anticipated
position) which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss. In addition, it is not
always possible to hedge fully or perfectly against currency fluctuations
affecting the value of the securities
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<PAGE> 35
denominated in foreign currencies because the value of such securities also is
likely to fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, the Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.
As noted in the Prospectus, the Fund may also purchase futures
contracts (or options thereon) as an anticipatory hedge against a possible
increase in the price of currency in which is denominated the securities the
Fund anticipates purchasing. In such instances, it is possible that the currency
may instead decline. If the Fund does not then invest in such securities because
of concern as to possible further market and/or currency decline or for other
reasons, the Fund may realize a loss on the futures contract that is not offset
by a reduction in the price of the securities purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
the Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that the Fund might realized in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a result of
those changes.
Risk Factors in Swap Contracts, OTC Options and other Two-Party
Contracts . The Fund may only close out a swap, contract for differences, cap
floor or collar or OTC option, with the particular counterparty. Also, if the
counterparty defaults, the Fund will have contractual remedies pursuant to the
agreement related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, the Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor subject to the oversight of the Trustees, the creditworthiness
of contract counterparties and the Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard and Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the counterparty may be adversely affected by larger-than-average
volatility in the markets, even if the counterparty's net market exposure is
small relative to its capital. The management of caps, floors, collars and swaps
may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.
Additional Regulatory Limitations on the Use of Futures and Related
Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency
Swap Contracts . In accordance with CFTC regulations, investments by the Fund as
provided in the Prospectus in futures contracts and related options for purposes
other than bona fide hedging are limited such that the aggregate amount that the
Fund may commit to initial margin on such contracts or time premiums on such
options may not exceed 5% of that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective
obligations under equity swap contracts, reverse equity swap contracts or Index
Futures are senior securities and, accordingly, the Fund will not treat them as
being subject to its borrowing restrictions. However, the net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each equity swap contract will be accrued on a daily basis and an amount of
cash, U.S. Government Securities or other high grade debt obligations having an
aggregate market value at least equal to the accrued excess will be maintained
in a segregated account by the Fund's custodian. Likewise, when the Fund takes a
short position with respect to an Index Futures contract the position must be
covered or the Fund must maintain at all times while that position is held by
the Fund, cash, U.S. government securities or other high grade debt obligations
in a segregated account with its custodian, in an amount which, together with
the initial margin deposit on the futures contract, is equal to the current
delivery or cash settlement value.
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<PAGE> 36
The use of unsegregated futures contracts, related written options,
interest rate floors, caps and collars and interest rate and currency swap
contracts for risk management by the Fund permitted to engage in any or all of
such practices is limited to no more than 10% of the Fund's total net assets
when aggregated with such Fund's traditional borrowings in accordance with SEC
pronouncements. This 10% limitation applies to the face amount of unsegregated
futures contracts and related options and to the amount of the Fund's net
payment obligation that is not segregated against in the case of interest rate
floors, caps and collars and interest rate and currency swap contracts.
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APPENDIX B
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's Corporation ("Standard &
Poor's") are current assessments of the likelihood of timely payment of debts
having original maturities of no more than 365 days. Commercial paper rated A-1
by Standard & Poor's indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Commercial paper
rated A-2 by Standard and Poor's indicates that capacity for timely payment on
issues is strong. However, the relative degree of safety is not as high as for
issues designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternate liquidity is maintained.
CORPORATE DEBT RATINGS
Standard & Poor's Corporation . A Standard & Poor's corporate debt
rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. The following is a summary of the ratings used
by Standard & Poor's for corporate debt:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc. The following is a summary of
the ratings used by Moody's Investor Services, Inc. for corporate debt:
AAA - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
30
<PAGE> 38
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.1
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.1
BAA - Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
BA - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols 1Aa1,
A1, Baa1, and B1.
31
<PAGE> 39
===============================================================================
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries
to Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
(1-617-330-7500)
===============================================================================
32
<PAGE> 40
GMO ASIA FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the GMO Asia Fund Private Placement Memorandum
dated June 30, 1998, as amended from time to time and should be read in
conjunction therewith. A copy of the Private Placement Memorandum may be
obtained from GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110.
<PAGE> 41
Table of Contents
Caption Page
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . 1
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . . 1
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . 3
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 5
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES . . . . . . . . . . . . 7
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 10
GMO TRUST SPECIMEN PRICE - MAKE-UP SHEET . . . . . . . . . . . . . . . . 10
-i-
<PAGE> 42
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of the GMO Asia Fund (the "Asia
Fund" or the "Fund") are described in the Fund's Private Placement Memorandum.
Unless otherwise indicated in the Private Placement Memorandum or this Statement
of Additional Information, the investment objective and policies of the Fund may
be changed without shareholder approval.
MISCELLANEOUS INVESTMENT PRACTICES
Index Futures. As stated in the Private Placement Memorandum under the
heading "Description and Risks of Fund Investments -- Futures and Options," the
Fund may purchase futures contracts on various securities indexes ("Index
Futures"). As indicated in the Private Placement Memorandum, an Index Future is
a contract to buy or sell an integral number of units of the particular stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the value from time to time of the relevant index. Entering into
a contract to buy units is commonly referred to as buying or purchasing a
contract or holding a long position in the relevant index.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if the Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
MANAGEMENT OF THE TRUST
The names and ages of the Trustees and officers of the Trust and their
principal occupations during the past five years are as follows:
R. Jeremy Grantham* (59). President-Quantitative and Chairman of
the Trustees of the Trust. Member, Grantham, Mayo, Van Otterloo
& Co. LLC
Harvey R. Margolis (55). Trustee of the Trust. Mathematics
Professor, Boston College.
Jay O. Light (56). Trustee of the Trust. Professor of Business
Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
<PAGE> 43
Eyk del Mol Van Otterloo (61). President-International of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
Richard Mayo (56). President-Domestic Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC
Kingsley Durant (66). Vice President and Secretary of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC
Susan Randall Harbert (41). Secretary and Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC
William R. Royer, Esq. (32). Vice President and Assistant
Treasurer of the Trust. General Counsel, Grantham, Mayo, Van
Otterloo & Co. LLC (January 1995 - Present). Associate, Ropes &
Gray, Boston, Massachusetts (September 1992 - January 1995).
Jui Lai (49). Secretary of the Trust. Member, Grantham, Mayo,
Van Otterloo & Co. LLC
Ann Spruill (44). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC
Alison E. Baur, Esq. (34). Clerk of the Trust. Associate General
Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (February 1997 -
Present). Attorney, Securities and Exchange Commission (April
1991 - January 1997).
Robert V. Brokaw, Jr. (54). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC
*Trustee is deemed to be an "interested person" of the Trust and the Manager, as
defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. The Trustees and officers of
the Trust as a group own 2.63% of the Class III Shares of the Fund.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
-2-
<PAGE> 44
---------------------------------------- --------------------------------------
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
---------------------------------------- --------------------------------------
Harvey R. Margolis, Trustee $70,000
---------------------------------------- --------------------------------------
Jay O. Light, Trustee $70,000
---------------------------------------- --------------------------------------
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai and Brokaw, and Mses.
Harbert and Spruill, as members of the Manager, will benefit from the management
fees paid by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contract
As disclosed in the Private Placement Memorandum under the heading
"Management of the Fund," under a separate Management Contract (the "Management
Contract") between the Trust and Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager"), subject to such policies as the Trustees of the Trust may determine,
the Manager will furnish continuously an investment program for the Fund and
will make investment decisions on behalf of the Fund and place all orders for
the purchase and sale of portfolio securities. Subject to the control of the
Trustees, the Manager also manages, supervises and conducts the other affairs
and business of the Trust, furnishes office space and equipment, provides
bookkeeping and certain clerical services and pays all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. As indicated under "Portfolio Transactions -- Brokerage and Research
Services," the Trust's portfolio transactions may be placed with broker-dealers
which furnish the Manager, at no cost, certain research, statistical and
quotation services of value to the Manager in advising the Trust or its other
clients.
The Manager has entered into a Consulting Agreement (the "Consulting
Agreement") with Dancing Elephant, Ltd., 1936 University Avenue, Berkeley,
California 94704 (the "Consultant"), with respect to the management of the
portfolio of the Asia Fund. The Consultant is wholly-owned by Mr. Arjun Divecha.
Under the Consulting Agreement, the Manager pays the Consultant a monthly fee at
an annual rate equal to the lesser of 0.50% of the Trust's average daily net
assets or $250,000. The Consultant may from time to time waive all or a portion
of its fee. Payments made by the Manager to the Consultant will not affect the
amounts payable by the Fund to the Manager or the Fund's expense ratio. The
Manager has entered into similar separate Consulting Agreements with the
Consultant with respect to two other Funds of the Trust, the GMO Emerging
Markets Fund and the GMO Evolving Countries Fund.
-3-
<PAGE> 45
As is disclosed in the Private Placement Memorandum, the Manager's
compensation will be reduced to the extent that the Fund's annual expenses
incurred in the operation of the Fund (including the management fee but
excluding Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses, transfer taxes and all custodial fees) would exceed the percentage
of the Fund's average daily net assets described therein. Because the Manager's
compensation is fixed at an annual rate equal to this expense limitation, it is
expected that the Manager will pay such expenses (with the exceptions noted) as
they arise. In addition, the Manager's compensation under each Management
Contract is subject to reduction to the extent that in any year the expenses of
the Fund exceed the limits on investment company expenses imposed by any statute
or regulatory authority of any jurisdiction in which shares of the Fund are
qualified for offer and sale. The term "expenses" is defined in the statutes or
regulations of such jurisdictions, and, generally speaking, excludes brokerage
commissions, taxes, interest and extraordinary expenses. The Fund is not
currently subject to any state imposed limit on expenses.
The Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager) and by the Fund's initial sole shareholder in connection with the
organization of the Trust and the establishment of the Fund. The Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) vote, cast in person at a meeting called for that purpose, of a majority
of those Trustees who are not "interested persons" of the Manager or the Trust,
and by (ii) the majority vote of either the full Board of Trustees or the vote
of a majority of the outstanding shares of the Fund. The Management Contract
automatically terminates on assignment, and is terminable on not more than 60
days' notice by the Trust to the Manager. In addition, the Management Contract
may be terminated on not more than 60 days' written notice by the Manager to the
Trust.
During the period from February 18, 1998 (the Fund's inception date) to
February 28, 1998, the Fund has paid the following amount as the Management Fee
to the Manager pursuant to the Management Contract:
Gross Reduction Net
Year ended 2/28/98 $3,209 $3,209 $0
-4-
<PAGE> 46
Custodial Arrangements. Brown Brothers Harriman & Co. ("BBH"), 40 Water
Street, Boston, Massachusetts 02109 serves as the Trust's custodian on behalf of
the Fund. As such, BBH holds in safekeeping certificated securities and cash
belonging to the Fund and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Fund. Upon instruction, BBH
receives and delivers cash and securities of the Fund in connection with the
Fund's transactions and collects all dividends and other distributions made with
respect to the Fund's portfolio securities. BBH also maintains certain accounts
and records of the Trust and calculates the total net asset value, total net
income and net asset value per share of the Fund on a daily basis.
Shareholder Service Arrangements. As disclosed in the Private Placement
Memorandum, pursuant to the terms of a single Servicing Agreement with each Fund
of the Trust, Grantham, Mayo, Van Otterloo & Co. LLC ("GMO") provides direct
client service, maintenance and reporting to shareholders of the Fund. The
Servicing Agreement was approved by the Trustees of the Trust (including a
majority of the Trustees who are not "interested persons" of the Manager or the
Trust). The Servicing Agreement will continue in effect for a period more than
one year from the date of its execution only so long as its continuance is
approved at least annually by (i) vote, cast in person at a meeting called for
the purpose, of a majority of those Trustees who are not "interested persons" of
the Manager or the Trust, and by (ii) the majority vote of the full Board of
Trustees. The Servicing Agreement automatically terminates on assignment (except
as specifically provided in the Servicing Agreement) and is terminable by either
party upon not more than 60 days written notice to the other party.
The Trust initially entered into the Servicing Agreement with GMO on
May 30, 1996.
During the period from February 18, 1998 (the Fund's inception date) to
February 28, 1998, the Fund paid $481 to GMO for services rendered pursuant to
the Servicing Agreement.
Independent Accountants. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts annual audits of the Trust's financial statements,
assists in the preparation of the Fund's federal and state income tax returns,
consults with the Trust as to matters of accounting and federal and state income
taxation and provides assistance in connection with the preparation of various
Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients
-5-
<PAGE> 47
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the security. In some
instances, therefore, one client may sell indirectly a particular security to
another client. It also happens that two or more clients may simultaneously buy
or sell the same security, in which event purchases or sales are effected on a
pro rata, rotating or other equitable basis so as to avoid any one account's
being preferred over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of the Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
Over-the-counter transactions often involve dealers acting for their
own account.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients
(including other Funds of the Trust) as well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of
-6-
<PAGE> 48
the amount of commission another broker or dealer would have charged for
effecting that transaction.
DURING THE PERIOD FROM FEBRUARY 18, 1998 (THE FUND'S INCEPTION DATE)
TO FEBRUARY 28, 1998, THE FUND PAID $154,375 IN BROKERAGE COMMISSIONS.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for the Fund
ends on February 28.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-six series: one for the Asia Fund, and one for each of the International
Core Plus Allocation Fund, Fundamental Value Fund, Pelican Fund, U.S. Core Fund,
Tobacco-Free Core Fund, Value Fund, Growth Fund, U.S. Sector Fund, Small Cap
Value Fund, Small Cap Growth Fund, REIT Fund, International Core Fund, Currency
Hedged International Core Fund, Foreign Fund, International Small Companies
Fund, Japan Fund, Emerging Markets Fund, Evolving Countries Fund, Global
Properties Fund, Domestic Bond Fund, U.S. Bond/Global Alpha A Fund, U.S.
Bond/Global Alpha B Fund, International Bond Fund, Currency Hedged International
Bond Fund, Global Bond Fund, Emerging Country Debt Fund, Short-Term Income Fund,
Global Hedged Equity Fund, Inflation Indexed Bond Fund, International Equity
Allocation Fund, World Equity Allocation Fund, Global (U.S.+) Equity Allocation
Fund, and Global Balanced Allocation Fund; Tax-Managed U.S. Equities Fund; and
Tax-Managed International Equities Fund. Interests in each portfolio (Fund) are
represented by shares of the corresponding series. Each share of each series
represents an equal proportionate interest, together with each other share, in
the corresponding Fund. The shares of such series do not have any preemptive
rights. Upon liquidation of a Fund, shareholders of the corresponding series are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders. The Declaration of Trust also permits the Trustees
to charge shareholders directly for custodial and transfer agency expenses, but
there is no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III
-7-
<PAGE> 49
Shares, Class IV Shares, Class V Shares, Class VI Shares, Class VII Shares and
Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the Investment Company Act of 1940 (the
"1940 Act") requires that the Trust receive the authorization of a majority of
its outstanding shares in order to change the nature of its business so as to
cease to be an investment company.
Voting Rights
As summarized in the Private Placement Memorandum, shareholders are
entitled to one vote for each full share held (with fractional votes for
fractional shares held) and will vote (to the extent provided herein) in the
election of Trustees and the termination of the Trust and on other matters
submitted to the vote of shareholders. Shareholders vote by individual Fund on
all matters except (i) when required by the 1940 Act, shares shall be voted in
the aggregate and not by individual Fund, and (ii) when the Trustees have
determined that the matter affects only the interests of one or more Funds, then
only shareholders of such affected Funds shall be entitled to vote thereon.
Shareholders of one Fund shall not be entitled to vote on matters exclusively
affecting another Fund, such matters including, without limitation, the adoption
of or change in the investment objectives, policies or restrictions of the other
Fund and the approval of the investment advisory contracts of the other Fund.
Shareholders of a particular class of shares do not have separate class voting
rights except with respect to matters that affect only that class of shares and
as otherwise required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such
-8-
<PAGE> 50
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Trust has undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Beneficial Owners of 5% or More of the Fund's Shares
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Asia Fund as of June 1, 1998:
-9-
<PAGE> 51
<TABLE>
<CAPTION>
Name Address %Ownership
<S> <C> <C>
Bankers Trust Company TR, GTE Service Attn: Marshall Jones 27.78%
Corp. Pension Trust GTE Investment Management
One Stamford Forum
Stamford, CT 06902
The Trustees of Princeton University
Attn: John D. Sweeney 25.24%
P.O. Box 35
Princeton, NJ 08544
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended
February 28, 1998 included in the Fund's Annual Report filed with the Securities
and Exchange Commission on May 8, 1998 pursuant to Section 30(d) of the
Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are hereby incorporated in this Statement of Additional Information
by reference.
-10-
<PAGE> 52
GMO TRUST - GMO ASIA FUND
SPECIMEN PRICE - MAKE-UP SHEET
Following are computations of the total offering price per share for
the Fund as of February 28, 1998, based upon the Fund's net asset value and
shares of beneficial interest outstanding at the close of business on February
28, 1998.
Asia Fund - Class III
Net Assets at Value (Equivalent to $10.44 per $40,160,885
share based on 3,845,283 shares of beneficial
interest outstanding)
Offering Price ($10.44 x 100/98.8)* $10.57
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Private Placement Memorandum.
-11-
<PAGE> 53
GMO TRUST
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: Not Applicable.
(b) Exhibits
1. Amended and Restated Agreement and Declaration of Trust2.
2. Amended and Restated By-laws of the Trust2.
3. None.
4. Not Applicable.
5. (a) Form of Management Contract between the Trust, on behalf
of its Asia Fund, and Grantham, Mayo, Van Otterloo & Co. LLC
("GMO")2;
(b) Form of Consulting Agreement between GMO and Dancing
Elephant, Ltd.2.
6. None.
7. None.
8. (a) Custodian Agreement (the "BBH Custodian Agreement")
among the Trust, on behalf of its GMO International Core and
GMO Japan Fund, GMO and Brown Brothers Harriman & Co.
("BBH")1;
(b) Form of Letter Agreement with respect to the BBH Custodian
Agreement among the Trust, on behalf of its Asia Fund, GMO
and BBH2.
9. (a) Transfer Agency Agreement among the Trust, on behalf of
its GMO Core Fund, GMO Currency Hedged International Bond
Fund, GMO Growth Fund (formerly "GMO Growth Allocation
Fund"), GMO Value Fund (formerly "GMO Growth Allocation
Fund"), GMO Short-Term Income Fund, GMO International Core
Fund and GMO Japan Fund, GMO and Investors Bank & Trust
Company ("IBT")1;
<PAGE> 54
(b) Form of Letter Agreement to the Transfer Agency Agreement
among the Trust, on behalf of its Asia Fund, GMO and IBT2;
(c) Form of Notification of Fee Waiver and Expense Limitation by
GMO to the Trust relating to all Funds of the Trust2;
(d) Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of the Funds, and GMO2.
10. Not Applicable
11. Not Applicable.
12. None.
13. None.
14. Prototype Retirement Plans1.
15. None.
16. Not Applicable.
17. Not Applicable.
18. Form of Rule 18f-3 Multiclass Plan2.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
Number of recorded holders of Class III Shares of the GMO Asia
Fund as of June 1,1998: 18
Item 27. Indemnification
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 28. Business and Other Connections of Investment Adviser
-2-
<PAGE> 55
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 29. Principal Underwriters
Not Applicable.
Item 30. Location of Accounts and Records
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Not Applicable.
- ----------------
1 =Previously manually filed with the Securities and Exchange
Commission and incorporated herein by reference.
2 =Previously electronically filed with the Securities and Exchange
Commission and incorporated herein by reference.
-3-
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940 (the
"1940 Act"), the Registrant has duly caused this Post-Effective Amendment No. 47
to the Trust's Registration Statement under the 1940 Act, to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts, on the 24th day of June, 1998.
GMO Trust
By: R. JEREMY GRANTHAM*
------------------------
R. Jeremy Grantham
President - Quantitative;
Principal Executive Officer;
Title: Trustee
Pursuant to the 1940 Act, this Post-Effective Amendment No. 47 to the
Trust's Registration Statement under the 1940 Act has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
- ---------- ----- ----
R. JEREMY GRANTHAM* President - Quantitative; Principal Executive June 24, 1998
- ------------------- Officer; Trustee
R. Jeremy Grantham
/s/ SUSAN RANDALL HARBERT Treasurer; Principal Financial and Accounting June 24, 1998
- ------------------------- Officer
Susan Randall Harbert
HARVEY R. MARGOLIS* Trustee June 24, 1998
- --------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee June 24, 1998
- -------------
Jay O. Light
</TABLE>
* By: /s/ WILLIAM R. ROYER
---------------------
William R. Royer
Attorney-in-Fact
<PAGE> 57
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
Signature Title Date
President-Domestic;
Principal Executive
/S/ R. Jeremy Grantham Officer; Trustee March 12, 1996
- --------------------------
R. Jeremy Grantham
/S/ Eyk H.A. Van Otterloo President-International March 12, 1996
- --------------------------
Eyk H.A. Van Otterloo
/S/ Harvey Margolis Trustee March 12, 1996
- --------------------------
Harvey Margolis
Treasurer; Principal
Financial and
/S/ Kingsley Durant Accounting Officer March 12, 1996
- --------------------------
Kingsley Durant
<PAGE> 58
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
/S/ JAY O. LIGHT Trustee May 23, 1996
- --------------------
Jay O. Light
<PAGE> 59
EXHIBIT INDEX
GMO TRUST
Exhibit No. Title of Exhibit
11 Price Waterhouse Consent
17 Financial Data Schedule
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 47 under the Investment Company Act of 1940 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated April
20, 1998 relating to the financial statements and the financial highlights of
the GMO Asia Fund, which appears in the February 28, 1998 Annual Report and
which are also incorporated by reference into the Registration Statement. We
also consent to the references to us under the headings "Independent
Accountants" in the Statement of Additional Information and in the Financial
Highlights in the Prospectus.
Price Waterhouse LLP
Boston, Massachusetts
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GMO TRUST,
FORM N-SAR FOR THE PERIOD ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 353
<NAME> ASIA FUND, CLASS III
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 43,463,408
<INVESTMENTS-AT-VALUE> 43,875,945
<RECEIVABLES> 10,265,584
<ASSETS-OTHER> 524,078
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 54,665,607
<PAYABLE-FOR-SECURITIES> 14,483,094
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,628
<TOTAL-LIABILITIES> 14,504,722
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,654,636
<SHARES-COMMON-STOCK> 3,845,283
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 110,171
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (17,997)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 414,075
<NET-ASSETS> 40,160,885
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,279
<OTHER-INCOME> 0
<EXPENSES-NET> 8,084
<NET-INVESTMENT-INCOME> 9,195
<REALIZED-GAINS-CURRENT> 82,979
<APPREC-INCREASE-CURRENT> 414,075
<NET-CHANGE-FROM-OPS> 506,249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,845,283
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 40,160,885
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,209
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 21,627
<AVERAGE-NET-ASSETS> 320,943
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 2.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
